Are Special Tax Breaks Worthwhile? Rhode Island Intends to Find Out


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Rhode Island is about to put seventeen of its “economic development” tax breaks under the microscope, thanks to a new law (PDF) signed by Governor Chafee last week.  This reform is a welcome step forward in a national landscape where states often do nothing at all to figure out whether narrow tax breaks are really helping their economies.

Under Rhode Island’s new reform, state analysts must estimate how many new jobs were actually created as a “direct result” of the $45 million worth of tax breaks within the new law’s scope.  Those analysts must also make a bottom-line recommendation on whether each tax break should be allowed to continue, based on how cost-effective it’s been in achieving its intended goals.

Of course, it remains to be seen how rigorous Rhode Island’s analysts will be in conducting these evaluations, and whether their work will actually be used by lawmakers to inform policy.  After all, as the Pew Charitable Trusts has shown, not all tax break evaluations are of equal quality or influence.

But there are reasons to think that Rhode Island’s evaluations will make a difference.  For starters, the new law requires a much more systematic and rigorous evaluation than what most other states require.  Rhode Island’s evaluations, for example, must investigate whether the benefits of the tax break are flowing largely to businesses or investors outside of the state, and whether changes in data collection laws could allow for even better evaluations in the future.  Rhode Island’s reform also requires the Governor to provide their own recommendation on each newly evaluated tax break when she or he submits budget recommendations to the state legislature each year.

But Rhode Island’s new reform isn’t perfect.  Requiring the Governor’s budget to include recommendations is a good way to get lawmakers to acknowledge the evaluations, but a more effective check is attaching a “sunset” provision (or expiration date) to each break; that’s the best way to ensure these tax breaks come up for a vote after new evidence on their effectiveness is released.

Moreover, the Economic Progress Institute points out that Rhode Island offers a total of 235 different tax breaks, at an annual cost to the state of $1.7 billion.  Evaluating just seventeen tax breaks that cost $45 million leaves the vast majority of the state’s tax law unexamined.  Still, if these initial evaluations prove worthwhile, lawmakers and advocates will have a strong case for expanding this new reform to cover a much larger portion of Rhode Island’s tax code

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