More State Economic Development Plays

State and local policymakers rely on tax incentives to attract and retain businesses and the jobs that come with them. But all too often companies pocket the incentives and fail to meet expectations. The $15 billion that states spend annually on firm-specific incentives should help secure greater economic growth and a higher standard of living, not low-wage jobs in no-growth industries. That's why it is vital to ensure that business incentives paid for by taxpayer dollars include features to make them accountable. Policymakers in states like Minnesota, Kansas, Indiana, and North Carolina are showing that accountability increases productivity and innovative capability. Currently, at least 29 states and 10 cities and counties have laws on the books that require accountability provisions for tax incentives.

Modernizing incentives to increase accountability in these states began from the premise that companies have a responsibility to taxpayers to use the public funds they receive for the benefit of the community. If government officials, taxpayers, and voters all knew the exact nature of incentive packages being offered, often entailing tens of millions of dollars over a dozen or more years, they would have the ability to challenge companies that slash jobs or relocate as having broken their side of the bargain. That is why Minnesota, for example, requires all companies that receive more than $25,000 in state aid to report the number of jobs actually created with the money, along with the wages paid. Companies are then held accountable to the standards set in the incentive agreement. Similarly, North Carolina responded to public pressure by intensifying the screening process and requiring extensive public reporting of tax credits, including the percentage of jobs created in development zones going to zone residents.

When information disclosure is not enough to make incentive recipients hold up their end of the bargain, companies should be made to return any incentives on which they did not deliver. Such "clawback laws" that require companies to repay incentives if they fail to meet the original objectives of the deal are already active in several states. In 2002, for example, Indiana received a $32 million payback from United Airlines, which failed to meet goals set out in their original incentives contract.

Policymakers should also raise accountability by fixing the way incentives are budgeted. The problem is that incentive plans are often made without a full budgetary accounting, leaving future generations of lawmakers to deal with revenue lost in decades-long tax break agreements. By requiring that a percentage of every incentive package be paid out of the administration's current budget, government dealmakers are forced to carefully consider whether government can actually afford the plan. This budget fix means that future legislators will be better able to adapt to changes in the economic climate since their budgets will not be held hostage by decades-old incentive agreements.

In the New Economy it is imperative that states focus not just on job creation, but on good-job creation. That is why Kansas reframed its approach to business incentives by granting its corporate income tax credit only to businesses that pay wages above the industry average. Rhode Island likewise ties investment tax credits to company wage levels, and Minnesota denies any incentives to companies paying below a predetermined wage floor. Without such restrictions, states paying to create below-average-wage jobs spend public money to keep standards of living down, which makes sense in no economic paradigm, new or old.

Finally, in aiming incentives at specific corporations, states should support their overall economic strategy. Since incentives are not an end unto themselves, but are a means to raise standards of living, states with skills alliances and other efforts that focus on building particular industries should consider those broader goals in picking and choosing which companies to entice. Leveraging other programs with industry-targeted incentives will increase the overall impact of the state's development strategy.

Resources for Action

Models of Business Incentives Reform
www.cfed.org/focus.m?parentid=34&siteid=46&id=46

Greg LeRoy and Sara Hinkley, "No More Secret Candy Store: A Grassroots Guide to Investing Development Subsidies," Good Jobs First, March, 2002
www.goodjobsfirst.org/pdf/nmscs.pdf

Additional Reading

Robert D. Atkinson, "Get Smart About Business Incentives," The 2002 State New Economy Index
www.neweconomyindex.org/states/2002/strategies.html#3

"United Airlines to Pay Indiana About $32 Million," Wall Street Journal, January 2, 2002
http://www.wsj.com

"Descriptive Statistics for Tax Incentive Programs,"
Washington State Department of Revenue
http://dor.wa.gov/docs/reports/2006/
DescriptiveStatistics2006.pdf

Contacts

Gregory LeRoy
Director
Good Jobs First
1311 L Street, NW
Washington, DC 20005
(202) 626-3780
goodjobs@ctj.org

Paul Weinstein
Chief Operating Officer
Progressive Policy Institute
600 Pennsylvania Ave, SE, Suite 400
Washington, DC 20003
(202) 547-0001
(202) 544-5014 (fax)
pweinstein@ppionline.org

Katie Campbell
Policy Analyst
Progressive Policy Institute
600 Pennsylvania Ave, SE, Suite 400
Washington, DC 20003
(202) 546-0007
(202) 544-5002 (fax)
kcampbell@ppionline.org