IFO Report: Pa. Wastes $60 Million Per Year on Underperforming Programs

Fairness is such a simple concept. We’re born with it—when treated unfairly, we seek to right the wrong and restore a level playing field.

But for some reason, Pennsylvania politics doesn’t run on fairness, it runs on favoritism. Targeted tax breaks, subsidies, and grants are regularly handed out to specific businesses across Pennsylvania. In 2019, these handouts totaled over $730 million. Tax credits make up 34% of this amount—around $246 million.

In 2017, Act 48—known as Performance-Based Budgeting and Tax Credit Efficiency Act—required the Independent Fiscal Office (IFO) to complete reports on existing tax credits. Disappointing results from the first round of reports in 2019 resulted in the elimination of the New Jobs Tax Credit for the budget year 2019-20.1

Four new tax credit reports released last week revealed additional underperforming programs. These reports include:

  • Research and Development Tax Credit (RDTC): Like the New Jobs Tax Credit, this program underperforms. Firms with steady growth in R&D qualify for the credit, which makes it difficult to determine whether these expenditures were actually incentivized by the program or not. In fact, one study showed that Pennsylvania enacted tax credits after they experienced growth in the technology sector, making these credits a wasted expenditure. Additionally, a return on investment of only 16 cents on the dollar means the RDTC could be costing Pennsylvanians over $46 million a year. 
  • Keystone Innovation Zone Tax Credit (KIZT): Roughly 80–90% of these tax credits are sold or transferred to other entities. In other words, the businesses receiving the credits are expanding without them. This most likely contributes to the low return on investment, which could be robbing taxpayers of more than $10 million a year. 
  • Mobile Telecommunications Broadband Investment Tax Credit (MTBI): The IFO report assumed that most of the investments—85 to 95%—would have happened with or without the program. Translation: they aren’t working. Additionally, with a return on investment of 15 cents on the dollar, the programs are losing up to $4 million a year. 
  • Organ and Bone Marrow Donation Tax Credit (OBMD): Since its re-enactment in 2014, no firm has used this program. From its original enactment in 2006, only three firms have claimed the credit. The purpose of the program was to encourage living organ and bone marrow donations, but with such little use, there is no justification to continue.

It’s great that the IFO analyzes whether Pennsylvania’s tax credits are effective. Now, lawmakers must act on this analysis to protect fairness and end the favoritism.

This year, Harrisburg should work to eliminate underperforming programs and focus on broad tax reform and spending restraints like the Taxpayer Protection Act, to make Pennsylvania a better place for all businesses large and small.

1. Despite the program being eliminated the same credit is being offered through the Department of Community and Economic Development (DCED).