State budgets can be described simply as "who pays and who gets." Most attention is paid to the expenditure side and little to the revenue side of the equation. As a general rule, social programs are funded through Appropriations Committees, on an annual or biennial basis, and business programs are funded through Taxation Committees on a continuing basis.
We hold social programs to strict accountability standards before renewing their appropriations. Are the welfare roles diminishing in numbers? Are students’ test scores improving? Are costs of health care rising? But few states currently apply the same strict accountability standards to economic development incentives like sales tax exemptions, tax abatements, tax credits and reduced interest bonds.
Programs to induce economic development are seldom revisited after they are granted. Many can run for the life span of 30-year bonds, while others operate in virtual perpetuity. It is customary for corporations requesting tax breaks or special treatment to extol the benefit of new jobs that will be created and the increased tax base the business will bring to the community.
But the question remains; do they live up to their rhetoric? In most states we simply don’t know. There are no accountability mechanisms in place to determine whether the community actually
benefits or whether the economic subsidy is simply corporate welfare. The public is forced to take such alleged benefits on faith.
States are beginning to demand more than just promises. In the 1999 legislative sessions Minnesota, Maine and Texas passed laws establishing a means of assessing the impact of tax subsidies and other economic incentives.
Minnesota’s Subsidy Reform law, an expansion of a 1995 law, is perhaps the most far reaching. It requires every recipient of an economic subsidy or tax break to file a public annual report specifying the amount of the tax break, the public purpose to be served, the number and quality of jobs to be generated, and any other special treatment received. The law requires that the agreement set measurable two-year goals and assess the corporation’s progress. Failure to meet the goals may result in the repayment of the tax break with interest.
Two CPA Flemming Fellows, Senator Chellie Pingree (ME) and Senator Rodney Ellis (TX), successfully engineered passage of bills that provide assessments of tax and subsidy benefits in their states. In Maine, Senator Pingree’s bill is entitled An Act to Encourage Accountability and Return on Investment for Maine Taxpayers from Economic Development Initiatives. Senator Ellis’ bill provides for similar accountability measures of the efficacy of some sales tax exemptions in Texas.
Other jurisdictions are beginning to get tough on corporate tax subsidies. According to Good Jobs First, 36 states, 26 cities and five counties have attached job quality standards—such as a "living wage," health care benefits, and full time hours—to tax abatements and credits, training programs, enterprise zones, loan programs and general economic grants. Among the reasons provided by public officials for wage standards, is to avoid the phenomena of taxpayers subsidizing poverty-level wages with food stamps, Medicaid and the Earned Income Tax Credit.
"True to their designation as the ‘laboratories of democracy,’ states are leading a movement back to basics in economic development. They are insisting that employees of subsidized companies earn wages that can sustain a family. That is true economic development," stated Greg Leroy, Director of Good Jobs First.
If you are interested in this policy area, please contact Bernie Horn, CPA’s Policy Director at (202) 387-6035.
The State of Texas Auditor’s Office evaluation of the $55 million a year grants program under the Texas Department of Economic Development recently found "gross fiscal mismanagement" of taxpayer money. Millions of dollars in state job-training contracts had been earmarked for companies on the basis of little more than a cursory promise to go forth and do good work, according to the Austin daily newspaper, the Austin American Statesman. Texas State Representative Garnet Coleman (Flemming Fellow ’95) will introduce a bill in the January 2001 session to increase accountability which requires that businesses that receive taxpayer assistance detail the public benefit of such grants and contracts. "I want to ensure that Texas taxpayers are getting what they pay for when it comes to economic development," states Coleman.
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