More accountability needed for EDGE tax credit program: report

Aug 24, 2017

illinois

Illinois’ Economic Development for a Growing Economy (EDGE) tax incentive program is expected to be renewed, a spokeswoman for Gov. Bruce Rauner confirmed in mid-August. Originally implemented in 1999 under former Governor George Ryan, EDGE provides financial incentives for companies, with the goal of spurring job creation in Illinois.

Illinois has recently struggled to keep EDGE intact. The program has expired twice in this past year: first at the end of 2016, and then at the end of April this year. However, House Bill 162, which Governor Rauner is expected to sign, would extend EDGE until June 30, 2022.

HB 162 makes some changes to the EDGE program. For instance, a larger incentive would now be offered if a proposed facility is in an “underserved area” of the state. The bill also includes a stricter requirement of eligibility for the program. EDGE has long been a contentious topic in the Illinois political sphere, as the program has been criticized for its efficacy in creating jobs.

According to a report by the Illinois Department of Commerce & Economic Opportunity (DCEO), EDGE created over 37,000 jobs, and retained over 48,000 jobs, from the program’s beginning in 1999 to the end of 2016. The report also states that the DCEO has issued nearly $1.5 billion in tax credits through EDGE since its creation.

Competition Among Midwestern States
Efforts to renew EDGE coincide with Illinois’ failure to win a bid for a factory by technology manufacturing giant Foxconn. This factory was particularly attractive to Illinois for its significant job-creating potential. Illinois, along with Indiana, Michigan, Ohio, Pennsylvania, Texas, all vied for the Taiwan-based manufacturer’s factory. The ultimate victor was Wisconsin.

Foxconn is expected to invest $10 billion in the factory, which is expected to create up to 13,000 jobs for Wisconsin. On the other hand, Wisconsin is expected to payout up to $3 billion in various tax credits, directed infrastructure development, and other incentives.

There is a debate surrounding the potential benefits of Foxconn’s subsidies, which highlights the need to understand the effectiveness of economic incentives like Illinois‘ EDGE program. In May 2017, the Pew Charitable Trusts rated the evaluation practices and effectiveness of each state’s tax incentive programs.

Pew determined that Indiana and Iowa were deemed “leading” states for the evaluation processes of their tax incentive programs, while Ohio, Missouri and Wisconsin were deemed as “making progress.” Illinois was one of a few Midwestern states evaluated as “trailing,” meaning that they “lack a well-designed plan to regularly evaluate major tax incentives.”

A map depicting Pew ratings of state tax incentive programs. Photo from The Pew Charitable Trusts

A map depicting Pew ratings of state tax incentive programs. Photo from The Pew Charitable Trusts

“Leading” Methods for Evaluating Incentives
Indiana represents one of Illinois‘ constant competitors for jobs and businesses. According to Pew, Indiana’s process for evaluating incentive programs allows the state to maximize the program’s benefits, making them a national leader in this area. 

In 2014, Indiana’s legislature passed a law requiring all economic incentive programs to be evaluated on a five-year cycle. A review includes an analysis by Indiana’s Legislative Services Agency (LSA) to determine whether the incentives provided by a given program change taxpayer activity. LSA reviews have allowed Indiana to eliminate or modify costly incentive programs that fail to improve the economy.

Iowa, another Midwestern competitor to Illinois, is also “Leading” in its incentive evaluations, according to Pew. A key feature of the review process are thorough analyses conducted by Iowa’s Department of Revenue. These analyses include 50-state data on similar programs across the country, as well as input from advisory panels made up of government officials, academics, and industry representatives.

Programs That are “Making Progress”
In addition to “leading” evaluation programs in Iowa and Indiana, several other Midwest states are “making progress” in the ways they ensure incentive programs are worthwhile for their states.

For example, Ohio’s legislature created the Tax Expenditure Review Committee in December 2016. The committee, consisting of six legislators and a non-voting tax commissioner, conducts reviews on an eight-year cycle and will recommend to maintain, expand, or eliminate programs. While the measure is an import first step for Ohio, there is no process for formal, high quality evaluations to be made, as there is in Indiana and Iowa.

Additionally, Wisconsin’s Legislative Audit Bureau (LAB) shows potential for providing “robust measures of economic impact,” Pew stated in their analysis. As it operates now, LAB conducts audits of all incentive programs managed by the Wisconsin Economic Development Corp., Wisconsin’s version of the Department of Commerce. These audits mainly focus on efficient and proper administration of these programs, and not on the economic impact they have on the state. However, if LAB were to integrate effectiveness analyses into its audits, Wisconsin would become an even stronger competitor for Illinois.

Illinois Still “Trailing” in Reviewing Incentives
The recent study by the Pew Charitable Trust recommends a stable review process for all tax incentive programs at least every five years. Pew provides three main components to a successful review.

First, the state must institute a formal plan for reviewing every major incentive program. The reports produced must decide whether the programs truly incentivize behavior, or simply reward businesses for actions they would have taken anyway. Finally, policymakers must expand, change, or eliminate programs based on the results of these reviews.

Based on these standards, Illinois is “trailing,” and needs more comprehensive review and reporting procedures to be considered competitive with its neighboring states. While HB 162 asks for annual reports from the committee in charge of reviewing EDGE applications, and updates on the previous year’s projects, there is no requirement for long-term evaluation and reflection on the efficacy of the program overall.

Illinois has strong models in the region to create and improve its review standards. By analyzing the strengths and shortcomings of the review processes in Indiana, Iowa, Wisconsin, and Ohio, Illinois can and should determine the practices that will make an accountable system of tax incentives. With an accountable review process in place, Illinois can experience the economic benefits these programs intend to have.

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Jul 11, 2017

Included in the budget Illinois lawmakers approved on July 6th was a 1.2 percentage point increase in Illinois’ income tax rate. The 32-percent increase in the rate to 4.95 percent…

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