Working in the dark

states and cities in the US spend more than $50 billion a year in the name of economic development. But these subsidies to create and retain jobs, called everything from “business incentives” to “corporate welfare,” are one of the most poorly understood forms of state spending. The average state has more than 30 subsidy programs, and many projects involve multiple incentives. Massachusetts is no exception.

However, it is nearly impossible for taxpayers to evaluate entire programs or specific projects. Programs are rarely audited, and when they are, auditors often conclude that poor recordkeeping precludes meaningful analysis. Records on specific deals exist, but they reside in different agencies and tax offices, making it very tedious to assemble the whole story. Compared with other ways that states interact with the private sector — such as lobbying and contracting — economic development subsidies remain in the Information Stone Age. Recent proposals for new subsidies in Massachusetts would only extend the problem.

This lack of transparency is often intentional. Governors get to announce the deals and pose at groundbreakings but rarely show any interest in making sure the deals actually pan out. Indeed, because tax breaks play out over many years, governors routinely pass big costs onto their successors.

Originally cooked up by Southern states and restricted to manufacturing (think of the Carolinas pirating the Northeast’s textile industry in the 1950s), today these deals are granted by states in every region to all manner of businesses. Some programs, such as Tax Increment Financing (TIF) and economic opportunity areas, are geographically targeted within a state. (See “Build to Suit,” Considered Opinion, CW, Summer ’08). Thanks to multiple subsidies, employers can receive more than $100,000 per job. Subsidies can reduce every kind of tax a corporation normally pays, including property, income, excise, sales, and utility. They may also provide cash grants, low-interest loans, free or discounted land, training wages, and infrastructure.

For example, Massachusetts has bid aggressively against other states for two life sciences deals: Shire PLC’s 2008 expansion decision in Lexington and Bristol-Myers Squibb’s new Devens facility announced in 2006 on land owned by MassDevelopment, a state agency. Both deals include a combination of state tax credits and local subsidies. Bristol-Meyers even won $34 million from the state for local wastewater and sewage improvements.

Companies never reveal what actually causes them to choose one site over another; this is the chronic “information asymmetry” or “prisoners’ dilemma” problem at the core of what many describe as an economic war among the states. Corporate lobbyists claim that tax breaks make the difference, but other observers point out that state and local taxes are so small — combined, they usually account for less than 1 percent of the average company’s cost structure, or much less than labor, land use, or energy costs — that subsidies rarely tip the scales.

The two recent Massachusetts episodes only muddy that debate, buttressing both arguments. Shire signaled that it was dissatisfied with Massachusetts’s original offer of $24 million when three other states offered more, so the Patrick administration upped the state package and the town of Lexington gave up $7.6 million over 20 years. This doubled the overall package to $48 million, or more than $70,000 for each of the 680 projected jobs, and Shire agreed to expand here. By contrast, Bristol-Myers Squibb chose the Bay State over a much larger subsidy package from New York, saying it could not find enough skilled workers to fill the 800 positions required for an expansion of the existing facility in Syracuse.

Sunshine is the best antiseptic

In response to recurring concerns about whether large, company-specific deals are good policy, a diverse movement seeks to reform economic development to ensure that subsidies pay off for workers, taxpayers, and communities. The movement was birthed by plant closing opponents 20 years ago; they often found that factories slated to close had received subsidies, but that the fine print did not prohibit job flight. It has grown to include public sector unions, community organizations, environmentalists and smart-growth advocates, public interest researchers, small businesspeople, and tax policy advocates from both the left and right.

At the cornerstone of their organizing agenda is disclosure, for history tells us that sunshine is the best antiseptic for bad policies. For example, when community groups alleged that banks were “redlining” urban neighborhoods, they demanded the Home Mortgage Disclosure Act. Its geographic reporting of housing loans revealed discriminatory patterns, prompting Congress to pass the Community Reinvestment Act, enabling hundreds of community groups to win billions of dollars for neighborhood revitalization.

Disclosure of job subsidies means annual, company-specific, deal-specific reporting of costs and benefits — on the Web in a fully searchable format. The reports should be issued for several years after a subsidy is granted, so that everyone can track outcomes and evaluate both individual deals and overall program results. What was the source and value of the subsidy? What obligations for jobs, wages, benefits, and capital investments did the company incur in exchange? And what results has the company achieved (or not) toward meeting those obligations?

Today, responding to grass-roots activism, at least 27 states disclose (or are committed to start disclosing) such data on the Web. New Jersey and Rhode Island have most recently enacted disclosure legislation; in other states, the executive branch has instituted public reporting on its own.

To be sure, the quality of these disclosure websites varies greatly. Most received a “D” or “F” by the grass-roots organization I direct, Good Jobs First, because they cover only a few programs, fail to report outcomes, or are hard to search. However, Massachusetts still fails to even attempt public reporting. It does not provide the names of beneficiary companies, nor the value of their subsidies, job and investment obligations, or outcomes.

Three major new subsidies proposed for the Commonwealth — Gov. Deval Patrick’s bills for life sciences and film production and House Speaker Salvatore DiMasi’s “green jobs” legislation — still lack basic disclosure requirements. (See “Subsidizing the Stars,” CW, Spring ’08.) Indeed, the life sciences and green jobs bills both call for new bureaucracies astride the state’s existing agency structure, suggesting even less transparency.

No credible arguments have ever been made against disclosure in the dozen years since states began requiring it. There are no suggestions that disclosure hurts the “business climate” or is burdensome or costly. Indeed, with the proliferation of Web-based technologies, it is easier and cheaper than ever.

That makes Massachusetts’s secrecy a farce. A state that prides itself on its technology clusters and high-powered universities cannot even take existing spreadsheets and dump them on a website? While it takes more than that to create an optimal website, the crux of the issue is simple. If a state is even pretending to watch the store, it has lists of beneficiary companies and should have tracking data on outcomes. As for the fiscal burden issue, whatever modest cost a state might incur to create its website will be recovered when sunshine helps the state “clawback,” or recoup monies from a single failed deal.

The perils of secrecy

Given its history, one would expect the Commonwealth to be keen on disclosure. Perhaps the largest pair of job-subsidy tax breaks ever enacted by Massachusetts came in 1995 and 1996, when Raytheon Corp. and Fidelity Investments led corporate lobbying campaigns for something called Single Sales Factor. Over the next decade, this one tax break cost the state $1.5 billion, yet there are no public records about which specific companies got the biggest breaks or how many jobs they created.

Single Sales Factor (SSF) is a radical change in the way a state divvies up (the technical word is “apportion”) the taxable profits of multi-state corporations. Historically, the states averaged three factors equally: the share of the company’s payroll in the state, the share of its property in the state, and the share of its sales made in the state. However, under SSF, the only factor considered is in-state sales. That can mean a drastic income tax cut — of 80 percent or more — for companies, like Raytheon and Fidelity, that have a lot of employees and property in a state, but sell most of their goods or services outside that state. (SSF also creates an incentive for some kinds of companies to reduce their physical presence in the state so as to avoid taxation altogether; that was one of the loopholes closed by the combined reporting law signed by Gov. Patrick in July.)

In 1995, when it threatened to move jobs to other states, Raytheon sought the tax change only for Massachusetts defense contractors. But SSF was soon expanded to include all manufacturers, and by the next year, with Fidelity also threatening to grow jobs elsewhere, it was expanded to take in all mutual fund companies as well. The two corporate lobbies claimed that, with SSF, Massachusetts would retain jobs in factories and grow them in mutual funds.

The two laws included modest job safeguards, but both were temporary. The manufacturing SSF required companies to maintain their payroll, but only until the end of 1999 (and using the term “payroll” instead of “headcount” enabled companies to lay off production workers while bringing in fewer higher-paid white-collar workers). The mutual fund SSF required companies to create 5 percent more jobs annually through the end of 2002, but then the job obligation expired.

Furthermore, these modest requirements did not address SSF’s fundamental lack of transparency. Most subsidies create paperwork that enters the public domain: a property tax application, a loan agreement, a training contract, etc. But SSF merely changes the definition of taxable income. It is absolutely opaque because state corporate income tax returns, like personal returns, are confidential. No one can see how big a tax windfall any specific company got, and even if returns were disclosed (as they once briefly were in Massachusetts), they say nothing about jobs.

This secrecy covers up SSF’s core policy flaw: Companies that benefit have no obligation to create or even retain Massachusetts jobs, nor must they provide health care or full-time hours. No job requirements mean no clawback, and no penalty for job-creation shortfalls or layoffs.

Without disclosure, the only thing taxpayers can see for sure is less revenue for things like infrastructure and education, which really do create jobs and do not favor a small group of big companies. A decade after their enactment, the Raytheon and Fidelity SSF tax cuts had cost the Bay State’s treasury about $1.5 billion in reduced corporate taxes, with about two-thirds of that going to mutual fund companies.

Meet the Author
Before any state lards on new tax breaks, even for a cause as timely as “green jobs,” shouldn’t taxpayers get to see where their money is going and how their investments are paying off?

Greg LeRoy directs Washington, DC–based Good Jobs First (www.goodjobsfirst.org) and is the author of The Great American Jobs Scam: Corporate Tax Dodging and the Myth of Job Creation.