Chairman Wells and members of the Committees, thank you for the opportunity to speak today. My name is Ed Lazere, and I am the executive director of the DC Fiscal Policy Institute. DCFPI engages in research and public education on the fiscal and economic health of the District of Columbia, with a particular emphasis on policies that affect low- and moderate-income residents. I appreciate the opportunity to testify on this important issue.
The goal of expanding mentoring programs in the District – by encouraging employers to set up programs and by encouraging more DC residents to become mentors — is an important one. Helping children move successfully toward adulthood is a challenge for any parent and family, but especially for low-income and other vulnerable families. Mentoring can make a big difference. The DC Fiscal Policy Institute writes a monthly column for the Hill Rag, DC North, and East of the River publications, and our July 2008 column discusses community investments as a key way to reduce the stresses that lead to delinquency and crime. In that column, we cite research showing that youth assigned to a Big Brother or Big Sister were half as likely to start using illegal drugs as those who got put on a waiting list. This is powerful evidence of the impact mentors can have.
While we support the goal of encouraging more mentoring programs, we do not believe a tax incentive approach is the most effective one, and we encourage the Committee to consider alternate uses of the funds that would go to the tax incentives contemplated in this bill. This is because research shows that tax incentives generally do not work well to change behavior. DCFPI supports the provision of this bill that would allow DC government employees to use accumulated leave for mentoring purposes.
It is a common belief that tax incentives have dramatic effects, but the research findings are not very supportive of this claim. Even in the area of business attraction, where financial interests would seem to the most important, tax-based recruitment strategies do not work well. A review of research on local economic development strategies suggests that other factors – the cost and quality of labor, the quantity and quality of public services, the proximity to business markets, and the access to raw materials and supplies “tend to be more important than taxes in business location decisions.”[1]
Research on tax incentives that are intended to change business or individual behavior comes to similar conclusions. Consider these examples:
- The Federal Work Opportunity Tax Credit: This is a tax credit of up to $2,400 for businesses that hire welfare recipients. This incentive, which is intended to promote welfare-to-work efforts, has been “vastly underutilized” and has “not had a meaningful impact on employment rates among the disadvantaged,”[2] according to the Urban Institute. Some businesses screen job applicants to see if they might qualify, but this does not appear to affect their hiring decisions – presumably because the main interest of the business is hiring someone who is qualified.
- Sales Tax Holidays: The District, along with a number of states, offers short-term sales tax holidays for school supplies and clothing that are intended in part to encourage people to come to the District to shop. Yet research from New York and other jurisdictions suggests that at best sales tax holidays affect when purchases are made but do not increase total purchases.
The limited effectiveness of tax incentives reflects the fact that behavioral decisions are affected by many factors, with the tax incentive being just one. While a tax incentive may help make a particular location look more attractive as a place to locate a business, the quality of the labor force, the regulatory environment, and cultural amenities are likely to be more important. Similarly, a tax incentive will not be enough to encourage a business to hire a welfare recipient if that person is not otherwise qualified for the job.
The same logic applies to tax incentives for mentoring. For individuals, the decision to become a mentor reflects both altruism and the ability to devote a significant amount of time to a young person. It also takes someone who is comfortable with children and ready to be a role model. In short, it takes a special person. It seems likely these factors would outweigh the impact of a tax benefit for people who are considering becoming a mentor.
Similarly, businesses that offer mentoring programs are those willing to make a significant commitment to their community. Mentoring programs have a direct cost – in staff time spent on mentoring — as well as administrative costs. Bill 17-745 would offer a credit of up to 10 percent of direct costs to employers who set up mentoring programs. Unless the credit were made far larger – which would have a significant cost in lost tax revenue to the District – it seems unlikely that a credit program would encourage many employers to set up such programs if they were not already inclined to do so.
This raises another important issue regarding the efficiency of tax incentives. Unless they are designed very carefully, tax incentives tend to provide benefits to people and businesses that would have pursued the desired behavior anyway, in addition to the people who would be newly incentivized directly as a result of the tax incentive. If this mentoring bill results in a 10 percent increase in mentoring in DC, that probably would be a great success. Yet that would mean for every 10 new mentors, the District would provide tax benefits to 110 mentors – the current mentors plus the new ones. This is a challenge faced by all tax incentives and is a main reason that tax incentives often are not cost-effective.
Finally, this bill raises some administrative issues. It reasonably requires all applicants for the tax benefits to submit documentation to the Office of Tax and Revenue. To ensure that the credits are not abused, OTR would likely have to establish procedures to review applications and to audit some applicants. That could prove to be a substantial challenge for OTR.
Bill 17-545 has one provision that is not tax related – which would allow DC government employees to use their accumulated paid leave to serve in a mentoring program. This provision, if coupled with pro-active efforts to encourage employees to become mentors, could prove to be a useful way to expand mentorship in the District, and the DC Fiscal Policy Institute supports it.
Thank you for the opportunity to testify.
[1] Robert G. Lynch, “Rethinking Growth Strategies: How State and Local Taxes and Services Affect Economic Development,” Economic Policy Institute, 2004, http://www.epinet.org/books/rethinking_growth_(full).pdf.
[2] Sarah Hamersma, the Work Opportunity and Welfare-to-Work Tax Credits, Urban Institute, October 2005 (http://www.urban.org/url.cfm?ID=311233)