States Reforming the Economic Development "Candy Store"
by Greg LeRoy
Good Jobs First
Every year, states around the country hand out government subsidies to corporations with
few strings attached. It’s the candy store school of
economic development. Public outcry about the giveaways
has prompted some change for the better in recent
years. More states are starting to attach conditions to
tax incentives offered to big companies. Some are
asking for guaranteed wages, money-back guarantees,
and disclosure and monitoring safeguards to ensure
that taxpayers get a bang for their buck.
But corporations are still getting a lot of
sweet deals in America. Every year, states and cities spend an estimated
$40 billion on subsidies in the form of tax breaks, grants and low-interest
loans for American businesses in an effort to create jobs and stimulate
economic growth in an expedient matter. States have also
been engaged in a bidding war, offering an increasing number of incentives
to lure economic development away from other states. However,
businesses seldom make location decisions based on tax
incentives, rather, they follow the availability
of skilled labor.
Few mechanisms exist to monitor the cost-effectiveness of
tax expenditures, much less hold a business accountable for its
promises of job creation. Further, once granted, programs
begun in the name of economic development are
seldom revisited—many run for the life span of 30-year
bonds, while others operate in virtual perpetuity.
Studies find that state economies are getting a
very low return on their investment. The ratio of dollars
in tax subsidies to the actual number of jobs retained
or created as the result of tax expenditures is
often extraordinary. Focusing on tax spending is
especially critical because tax giveaways are debated only
once and seldom evaluated, audited or sunsetted. Giving
big breaks to one industry means shifting the tax
burden onto other sectors, or cutting vital public services
that benefit all employers.
Leading the reform parade is Minnesota.
Senator John Hottinger and Representative Karen
Clark established a 1995 disclosure law that mandates
annual, company-specific disclosure of costs, jobs and
wages. The resulting data prompted two more reforms
that greatly increased citizen participation and added
wage requirements to every deal. Under Minnesota’s
most significant reform, businesses receiving state
subsidies are prohibited from leaving the state for five
years without first receiving permission; if they do leave,
they must pay back their subsidies.
Next came Maine, which enacted a similar disclosure law in 1998, sponsored by
then-Senate Majority Leader Chellie Pingree (Flemming
Fellow `96). Based on that new data, the state passed additional
reforms including a new law specifying that companies failing to file their
subsidy disclosure reports jeopardize losing their business equipment tax refund.
As we document in The Policy Shift to Good
Jobs, at least 37 states now require companies to pay
a certain wage and/or health care in exchange for subsidies. A total of 11 states have debated subsidy reform this year alone (AR, CT, HI, IA, IL, KY, ND, NY, TX, WA, WI).
Although still awaiting signature by the Governor, Arkansas
legislators made an encouraging move by passing a bill requiring
corporate subsidy reporting. Bringing attention to the need for public awareness
in state spending, North Dakota and Hawaii
legislatures introduced fiscal accountability bills for the first
time this session.
States have the power to make unfair,
inefficient, illogical corporate subsidies a thing of the past.
The bottom line: watching the candy
store—promoting fiscal accountability for tax
expenditures—is good government and good for the business climate.
Thirty-seven states require
companies to pay certain wages or provide health care
in exchange for tax breaks. Eleven states in 2001 debated
fiscal accountability measures (AR, CT, HI, IA, IL, KY,
ND, NY, TX, WA, WI).
Good Jobs First tracks subsidy reforms and
provides testimony, research, consulting and other assistance to policymakers. Refer to www.goodjobsfirst.org, 202-737-4315 or [email protected] for more information.
Click here for CPA’s model legislation on fiscal accountability.
