Money-Back Guarantees for Corporate Subsidies

January 18th, 2012 by Phil Mattera

“Job creators” are a fickle bunch. We’re told that they won’t create an adequate number of jobs unless they feel more “certainty” about government policies (risk-taking, apparently, is passé). And when they aren’t seeking reassurance they are asking for bribes.

These aren’t bribes in a technical sense, but rather “incentives” in the form of special tax breaks and other forms of financial assistance. Many state and local officials are convinced that providing these incentives—more accurately, subsidies—is the only way to bring new jobs to their jurisdiction. The total annual cost is some $70 billion.

It should come as no surprise that, even when they are bribed, many purported job creators fail to deliver. My colleagues and I at Good Jobs First just published a report called Money-Back Guarantees for Taxpayers that evaluates states on their oversight of subsidy programs. This report focuses on the enforcement of the performance standards we evaluated in our previous study, Money for Something.

Here are the highlights of the new report:

Many subsidy programs—about one-third of the ones we looked at—operate essentially on the honor system. Violating Ronald Reagan’s principle of “trust, but verify,” they do not check that the data on job creation and other performance measures reported by companies receiving subsidies are accurate.

It’s encouraging that three-quarters of the programs have provisions for penalizing non-compliant companies, whether through recapture of funds already paid out (clawbacks) or the recalibration or termination of future benefits. The problem is that many of these penalty provisions—nearly half, in fact—are far from iron-clad. In many cases the implementation of the penalties by agencies is optional, or else companies can escape punishment by claiming one of various exemptions. These range from a downturn in general economic conditions to “acts of God.” Some can get off if they simply made a “good faith effort.”

What good are penalties if they are filled with loopholes? Imagine if the criminal code had such provisions. A person caught robbing a bank could cite the poor economy as justification, or a repeat offender could get off by claiming to have really tried to go straight.

Then there’s the issue of transparency about the enforcement process. In our report, we treated the willingness of state agencies to disclose data about their oversight as an indication of whether they took enforcement seriously. We were disappointed with the results.

Only 21 programs in a dozen states publish aggregate enforcement data (i.e., without company names or other deal specifics); only 38 programs disclose the names of companies deemed to be out of compliance; and only 14 disclose the names of companies which have been penalized (and the dollar amounts). By the way, we have lists of all those disclosure sites.

The fact that a state adopts strong enforcement procedures does not guarantee that any given subsidy program or deal is a good use of taxpayer funds. Some programs may simply offer too much assistance to companies, so that benefits will never outweigh costs. For such programs, abolition rather than accountability is the correct policy, especially in times of severe budgetary stress. Some states have been doing exactly that, though in the case of Michigan any fiscal relief is being erased by simultaneous moves to lower tax rates for all businesses.

Yet as long as a program is in operation, taxpayers have a right to demand both strong performance requirements (including job creation and job quality standards) and aggressive enforcement of those requirements. When a company is given subsidies without strings, that is a handout rather than economic development.

It would be interesting to hear what Mitt Romney has to say about this. As I reported in this blog previously, some companies acquired by Bain Capital while Romney was at the buyout firm subsequently received subsidies (or continued to enjoy special tax breaks they had already been awarded). Does Romney, who has been speaking out against regulation, believe that subsidy recipients, such as those firms that helped build his fortune, should also have fewer rules to comply with?

If we are going to bribe “job-creators,” we should at least make sure they fulfill their employment promises or provide a full refund.

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