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Tax System Design: Should Big Brother Act Like Big Business?

author photo of Annette Nellen

If a company planned to spend a chunk of money on a new advertising campaign, we'd expect that measurable goals would be set. Articulation of the goals would enable the company to determine if the campaign was successful. And we'd expect that data would be collected to enable the company to determine if the goals were met. If not met, the campaign would likely be canceled, or modified and retried.

We rarely see this approach used for tax incentives (special tax credits, deductions or exclusions). Sometimes even the goals are not specifically articulated.  California has done it both ways, usually without the goals specified or data required to be collected.  In 1993, the manufacturing investment credit (MIC) was enacted. The enacting legislation stated that the MIC would expire at some later point if there was not at least a 100,000 increase in manufacturing jobs. In contrast, in 2013, new incentives were enacted (such as the new employment credit) without specific goals set. While a lot of information on the use of these incentives will be made public, no specific goals were stated, so the information cannot be used to see if the incentives were successful.

I notice that a recent report from Maine on a review of its tax expenditures notes this problem - lack of data and useful measures.  Specifically:

"Lack of useful data. The Task Force did not have adequate data to evaluate most tax expenditures. While the biennial MRS tax expenditure report forms an excellent starting point for review of tax expenditures, it does not in many instances contain the kind of information necessary either to evaluate the effectiveness of a tax expenditure or to provide the kind of information necessary to determine the fiscal impact of the repeal or reduction of a particular tax expenditure. Estimates of fiscal impact in the report are frequently based on economic assumptions and modeling rather than specific experience. Identifying and gathering such information is an enormous task which awaits the development of a process for on-going evaluation." (Dec. 2013 report of the Tax Expenditures Review Task Force, page 10)

I believe the business approach for being strategic as to spending should also be used by governments (whether for new direct spending or spending through the tax system). That is, the goals for any incentives should be articulated and data needed to perform the measurements should be required to be collected.   What do you think?

Other recent “Sales Tax Policy - Tales & Trends” posts by Annette Nellen, CPA, ESQ:

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Comments

2 Responses to Tax System Design: Should Big Brother Act Like Big Business?

  • Posted by Tom on June 5, 2014 9:59am:

    When a tax expenditure is written into statute, there should be a number of things included: a purpose clause that describes the business or policy reason for the expenditure, anticipated goals of the expenditure and a way to measure attainment, and the expenditure should automatically be subject to a sunset clause after a specific period of time. All of these things will aid in evaluating the benefit of the expenditure and provide a way to end it if it is not performing as expected.

  • Posted by Ed on May 31, 2014 9:59pm:

    I agree wholeheartedly. The tagline on my email signature is- “If you cannot measure it, you cannot improve it” - Lord Kelvin. Having a goal is important, but if you lack useful measures, there are no protections from unintended consequences. You hit the goal, but at what cost? We see businesses do it all the time as well- You hit the goal and got your returns out the door on time, but did you fail to measure the accuracy?

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