STUDY: Transparency suffers when business tax incentives go wrong

  • A new study in Texas finds that government grants and tax incentives for businesses often don’t work out according to plan.
  • When they aren’t on track to meet job numbers, businesses often try to renegotiate such agreements behind the scenes.
  • Experts worry that Amazon’s much-publicized “HQ2” search could lead constituents in Arlington and New York City to a similar fate.

A new paper analyzing business dealings in Texas has confirmed what critics of government grants and tax incentives for businesses have long asserted: the terms of such grants and incentives often don’t work out according to plan. And when they don’t, it’s usually taxpayers that end up with the short end of the stick.

In the paper, Nathan Jensen, a government professor at the University of Texas at Austin, and Calvin Thrall, a doctoral student at the university, explain that the Texas Enterprise Fund (TEF), which is the largest of its kind in the country, functions by awarding cash grants to companies that decide to relocate or expand in Texas rather than a different state. From its formation in 2003 to 2017, when Jensen and Thrall began their research, the fund awarded more than $600 million in grants to 146 projects supposedly guaranteeing 83,000 jobs.

The face value of this tradeoff — $600 million for 83,000 jobs — can be debated, but that’s only the beginning of the story. Upon digging into the history of these projects and filing public records requests for information about economic incentive deals offered through the TEF, Jensen and Thrall found that a large number of firms had renegotiated their TEF agreements, “usually committing to fewer jobs created, or their hiring schedule, or how headcount should be computed.” These renegotiations effectively gave the companies added leeway in meeting the terms of their grants.

More disconcertingly, the renegotiations took place outside the public eye, and Jensen and Thrall found that the companies involved in the deals tried to block their requests for public records about the agreements.

Analysts and reporters have quickly jumped on the national implications of the paper’s finding, the most high-profile example of which is Amazon’s much publicized search for a city to be the site of “HQ2,” a second company headquarters. Jensen told Axios that Amazon inserted conditions similar to those used by companies in Texas in its HQ2 contracts with Arlington and New York that will allow it to block the public release of details about the deal.

“It’s only when you have these rare public auctions that the mask gets ripped off. It’s just too easy. There’s too much money sloshing around, and it’s too easy to qualify for it,” Greg LeRoy, head of Good Jobs First, a nonprofit that tracks business incentives, told Axios.

Elsewhere across the country there are plenty of examples of companies that won generous incentive packages from states and cities (whether in the form of cash grants or tax breaks) yet failed to deliver on their promised number of jobs. The company Evergreen Solar, for instance, received a $58 million grant commitment from Massachusetts to build a plant in the state. After receiving $21 million, however, the company ended up scrapping its plan in 2011, and Massachusetts only recovered $3 million. Today Evergreen Solar is no longer in business.

Wisconsin is facing a similar boondoggle — only of exponentially greater proportions — in its deal with the Taiwanese electronics giant Foxconn, which won a massive economic development grant worth $4.5 billion in return for building a manufacturing plant in Milwaukee that would create 13,000 jobs. To put this figure in perspective, Tim Bartik, a senior economist at the Upjohn Institute, calculated that the deal effectively worked out to Wisconsin covering about 30 percent of Foxconn’s payroll for 15 years.

The deal has since turned dicey for Wisconsin, however, as the company recently announced it was reconsidering its plan to build the plant. President Donald Trump spoke with Foxconn after the announcement, and the company said it would still build the plant, but a recent expose on the deal by Bloomberg Businessweek suggests that the full agreement will probably never come to fruition. If it does indeed fall through, Wisconsin taxpayers may not be on the hook for the full $4.5 billion, but it has already sunk $250 million into Foxconn-related expenses and related road improvements.

Image Credit: “Austin,TX” by J Dimas is licensed under CC BY 2.0

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