Tax policy can be a powerful tool for directing private investment.

But it works to create jobs, economic development or any other goal only when it is targeted to create specific results that can be measured. Too often in Rhode Island, tax breaks or other incentives are created without any follow-up analysis of whether they are working.

That leads to bad public policy choices that Rhode Island can ill afford, especially now with taxpayers staring at annual state budget deficits for the rest of the decade.

One small, targeted tax credit recently created by the General Assembly seems to meet the test for a specific measurable tax policy. It can serve as an example.

The tax credit is for Rhode Island businesses that make contributions to a fund that distributes scholarships to needy students to help pay tuition at private elementary, middle and high schools.

The idea is to give more kids a choice of where they could go to school and improve their education, without being hampered by financial constraints. The legislators capped the tax credits at $1 million for each of the first two years of the program. Any business that donated for one year could claim a credit of 75 percent of the donation; a business that made a two-year commitment could claim a 90-percent credit.

Here’s what happened:

For the fiscal year that ended June 30, 22 businesses applied to donate $1.3 million, totaling $1.2 million in tax credits. One applicant was denied. One had its contribution amount changed to meet the $1-million cap.

For the fiscal year that ends June 30, 2008, 21 businesses donated $1.3 million for $1.2 million in tax credits. One business was denied and one had its contribution amount changed to meet the cap.

The next round of tax credits won’t be available until after next July for the new fiscal year.

Donna McGowan, executive director of the Rhode Island Scholarship Alliance, said she was encouraged by the business support for school-choice opportunities for economically disadvantaged students. RISLA and four scholarship-granting organizations that represent 60 private schools administer the program.

Here’s where the donations went.

More than 250 Rhode Island families that meet income guidelines received private-school tuition scholarships. Eligible families have household income of 250 percent or less of the federal poverty level, about $50,000 for a family of four. Based on the criteria, about 90,000 families qualify.

The scholarships have averaged between $2,000 and $5,000 per student.

Lori Mariorenzi, of Cranston, is a recipient.

“With one son in second grade and another entering kindergarten next year, we weren’t sure we could consider sending them both to Barrington Christian Academy,” she said. “We applied for a scholarship and thank goodness we go it.”

Advocates call the Rhode Island Corporate Scholarship Tax Credit a success.

Detractors say only a small number of companies and families can participate, and that the companies would probably have made the donations anyway, even without the tax credit. That takes money out of the state treasury, leaving a hole for other taxpayers to fill.

Maybe.

But here’s the point.

The scholarship tax credit is defined to fill a specific need. It’s capped and there are measurable results.

Rhode Islanders can argue over whether taxpayers should support a tax credit for scholarships for needy families to private schools. But they have solid evidence and data to debate.

The Rhode Island tax code is loaded with tax credits and tax breaks that have been awarded over the years, but nobody is quite sure how well they are working. The high-profile ones — the historic-tax credit and the film-tax credit — get some attention, but many of the others get little scrutiny.

For years, there have been calls for a tax research and analysis office to scrutinize the state’s current tax structure and the incentives that have been granted. But so far, there’s been no comprehensive study to guide setting tax policy.

It’s time for a detailed review of tax breaks — especially with the state facing another $300-million budget deficit next year — to determine which ones are working and which ones are not.

John Kostrzewa is the Journal’s business editor