Tax Break

How well do states monitor the impact of corporate tax breaks?

By David Cay Johnston
January 20, 2012

The first study of how well states assess the performance of companies receiving taxpayer subsidies came out on Wednesday. The picture it paints is not a pretty one for taxpayers.

The good news in “Money-Back Guarantees for Taxpayers is that 215 of 238 state subsidy programs require some form of reporting on whether performance promises are met, while 23 do not. The programs are usually meant to create jobs or help states to retain them.

The bad news is that of the 215 programs with performance reporting requirements, 67 or nearly a third, do not require any verification of assertions that jobs were created or retained, or that some other promised action was taken.

Worse yet is that while 178 subsidy programs contain a penalty provision for falling short, nearly half of those, 84, let state officials waive these clawback penalties.

The 69-page study is the third in a series on jobs subsidies by Good Jobs First, a union-friendly research organization in Washington that gets 92 percent of its $1.1 million annual budget from foundation grants and less than four percent from unions.

The first study, published in December 2010, examined how much states disclosed about corporate gifts and how much they kept hidden. It includes links to each state identifying its subsidy programs, the cost in the most recent year available, links to any online disclosures by the state, and a score of how well the state programs do in meeting what Good Jobs First considers to be appropriate standards.

The second study in the series was a report card on how well state subsidy programs do at creating jobs by looking at what standards, if any, are used by states to measure their success. It examined the same 238 programs in the latest study released Wednesday.

Guarantees, the third study, shows that once states give away money they are soft on nonperformers, a moral hazard since some companies will see this as free money. Co-author Philip Mattera said he was astonished that almost 10 percent of the subsidy programs do not require any follow-up to determine how the taxpayers’ money was spent.

A searchable database showing the subsidies that researchers could pull from the public record is also available at the Good Jobs First website.

The latest research by Professor Kenneth Thomas of the University of Missouri-St. Louis shows states and local governments give at least $70 billion per year in economic development subsidies.

Some of these subsidies are outright gifts of cash. Others include condemning land and selling or leasing it below market rates, taxpayer-financed construction of freeway ramps and other infrastructure built mostly for private use, refunds of state sales and property taxes,  and even letting companies keep the state income taxes withheld from workers’ paychecks, as Illinois allows six big corporations to do.

This latest study finds huge variations within some states in terms of disclosure and enforcement of performance standard requirements from one subsidy to the next.   Using its own 100-point scoring system, Good Jobs First said 15 states have spreads of 50 points or more between their toughest and softest enforcement and clawback practices. The biggest disparity was in Iowa where the best scored near perfect at 96, but the lowest scored 18 on the nonprofit’s 100 point scale.

Maine and Maryland also had significant splits, sometimes enforcing performance standards to keep subsidies, other times being far more lenient.

Greg LeRoy, executive director of Good Jobs First, said his group wants to look at local government subsidy programs next. “We need at least $100,000 in grants to do that,” he said, adding he had to get off the phone to take a scheduled call from a potential funder.

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