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Office of the State Auditor of Missouri
Claire McCaskill


April 29, 2002

Report No. 2002-33

State does not track tax credits outstanding causing inaccurate revenue projections; economic impact studies on credits still difficult to perform due to poor data 

State officials do not track the total dollar amount of tax credits issued but not yet redeemed. Not knowing this amount can lead to inaccurate state revenue projections.In addition, the data collected on many of the 35 tax credits administered by the Department of Economic Development is not complete enough to analyze a tax credit program�s economic impact. 

State law mandates the State Auditor�s office analyze the economic impact of each tax credit program.This report is the second such analysis and focuses on six programs.Auditors again found an impact study difficult, if not impossible in some cases, due to inadequate data.In addition, auditors question continuing the Qualified Research Expense tax credit and call for closer monitoring of residential projects using the Historic Preservation tax credit. 

State budget more accurate if departments cooperated 

Economic development officials track the number of tax credits issued, while the departments of Insurance and Revenue track the total tax credits redeemed.But no one matches the issued credits to the redeemed credits to calculate what is outstanding and could still be redeemed.This figure is vital to accurately project state revenues and quantify the state�s potential future liability.The revenue shortfall caused by the unexpected $60 million cost increase of the 2001 Pharmaceutical Tax Credit clearly showed the importance of tracking this figure. (See page 3) 

Overestimating credit redemption skews state budget 

Economic development officials have overestimated the amount of credits redeemed by $14 million in 2001 and $50 million in 2000.Inaccurate redemption estimates results in faulty revenue projections.Tight budgetary times magnify the need for the most accurate estimates.Tracking tax credits outstanding could improve these estimates.(See page 5) 

Cost-benefit studies question continuing one program 

Measuring true economic and fiscal impact of these programs will continue to be difficult until project-level data is captured.Auditors used the Regional Economic Models, Inc., Policy Insight Model to analyze total economic impact for four of the six selected programs.The following briefly summarizes our impact study results (years referred to below are fiscal):

Historic Preservation ($48.2 million redeemed through 2001):Analysis showed the residential-only projects do not produce as much state economic benefit as the commercial projects.It could not be determined if the economic benefits of residential projects justified the costs.As a result, residential-only projects should be more closely monitored, particularly the 39 percent of the residential projects located in middle- to upper-income areas. 

Results of the commercial project analysis showed significant economic impact on jobs and demands.But the incomplete jobs and housing unit data made it impossible to tell the types of jobs created or the businesses that benefited.(See page 7) 

Qualified Research Expense ($30.4 million redeemed through 2001):Analysis showedthere may be insufficient economic benefit to warrant continuing the program.If businesses primarily used this credit to reduce production costs, the state would see no positive impact for several years, if at all.Projections show only a negligible improvement to state revenues. In addition, the jobs and demand created do not justify the credit.(See page 15) 

Brownfield Remediation ($6.1 million redeemed through 2001):Results show the program had a positive economic impact.(See page 20) 

Brownfield Jobs/Investment ($17,000 redeemed through 2001):The total economic benefit could not be measured due to insufficient data.In addition, economic development staff estimated $85,000 in credits could be redeemed in 2002.This estimate triples the total redeemed so far and users only redeemed $5,000 in credits in 2001.(See page 25) 

Seed Capital ($3.6 million redeemed through 2001):These credits are no longer available since the program reached its $9 million statutory cap.Nevertheless, the analysis showed the credit having an immediate positive impact, with the exception of wage rates.(See page 29) 

Youth Opportunities and Violence Prevention ($8.3 million redeemed  through 2001):An economic impact analysis could not be completed because program data did not include quantifiable items such as jobs or economic investment.Our review focused on the administration of the program.Auditors found more than half the credits authorized went unused and credits issued for some projects exceeded those authorized.(See page 35) 

Department needs more authority to gather adequate project data 

Economic development officials have created a new system to improve data collection at the project level.But department staff also said state law does not require companies receiving credits to provide most information needed for a cost-benefit analysis.Although department officials ask for voluntary reporting on projects, they cannot force compliance.(See page 40) 

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Missouri State Auditor's Office