A State-Level Response to Ineffective Federal Place-Based Investment Tax Incentives

Abstract

Using tax expenditures, the federal government can deploy economic incentives to alter our choices in the service of public policy goals. Doing so reduces not only federal but also state tax revenue because state tax law often conforms to definitions of income contained in the Internal Revenue Code. State governments, however, may not have the same goals as Congress, so tax incentives implemented nationally may not always be a good fit for states. This Note focuses on tax expenditures directing private investments into low-income neighborhoods, known as federal place-based investment tax incentives. It argues that because their impact is ambiguous at best, state governments should scrutinize such incentives and decouple state tax law from these provisions when they hurt the local communities they purport to help. This Note then proposes a framework to assist states in evaluating the local impact of federal place-based investment tax incentives. The framework asks three questions: 1) whether the federal provisions allow states to measure their effects; 2) whether states have the administrative capabilities to establish rigorous evaluation procedures; and 3) whether measures are in place to minimize the costs of these incentives while promoting the equitable distribution of their benefits.