06/26/2006 Reforming Failed Tax Subsidies

Monday, June 19, 2006

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Reforming Failed Tax Subsidies

Back in April, the Stateside Dispatch profiled successful job creation programs where states not only invest in dynamic high-tech and inner-city startup companies, but make money for the taxpayer from many of their investments.

Unfortunately, the relatively small amount of money in those successful programs are overshadowed by the literally tens of billions of dollars in more traditional special interest tax loopholes and corporate subsidies handed out by state and local governments each year--funds doled out with little accountability and, sadly, pretty limited results given the amount of money handed out.   The grossest sign of the problem was the study two years ago that found Wal-Mart had managed to squeeze over $1 billion in government subsidies for opening stores the company was planning to build anyways-- and then dumping employee health costs on the communities it took subsidies from.

Fortunately, states are increasingly reevaluating these tax loopholes and economic development subsidy programs, since much of that tens of billions of dollars could be better spent on alternative economic growth programs or shoring up education, transportation and social programs. As this Dispatch will detail, a number of states are bringing tax loopholes out of the shadows in comprehensive tax expenditure reviews and proposing to regularly sunset tax subsidies in order to force regular votes to evaluate whether they are actually doing anything useful or are just special interest pork. States are also requiring more disclosure of individual economic development deals to make sure the jobs created are worthwhile, and with that information, creating clearer job quality standards and other reforms for companies receiving the taxpayers' money.

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Tax Expenditures: Review and Sunset Reforms

One core problem is that, traditionally, spending on tax loopholes are hidden in the tax code rather than clearly listed in annual budgetary allocations like other spending programs.  As this brief by the Institute on Taxation and Economic Policy outlines, tax subsidies end up being a privileged kind of government spending:

  • Tax expenditures often have no built-in cost limits, and generally there is no annual appropriations or oversight process.
  • There's often no review of a company's use of a tax subsidy; all they do is file a tax return and get the subsidy with no questions asked.
  • And whether tax loopholes benefit the public is hidden behind the cloak of tax secrecy, unlike regular spending programs that get regular evaluation.

Reviewing Loopholes: In response, some states have required tax expenditure budgets to evaluate how much states are spending on tax subsidies and whether they are being effective.  (See this chart for how good such tax expenditure reviews are in your state.) Just this past year, Connecticut passed a particularly comprehensive review law, which establishes a commission to review each tax credit and policy in the state, measure what jobs they actually helped create or retain, whether there are better alternatives to achieve the same policy objectives, and encourages individual auditing of companies' use of tax credits to ferret out abuses of tax law.

Sunsetting Tax Pork:  A few state leaders are proposing an even more comprehensive reform: automatically sunsetting all tax subsidies unless they are renewed by an affirmative vote of the legislature every few years.  Instead of needing passage of new legislation and a governor's signature to kill an abusive loophole, a sunset provision means that the refusal of either chamber to reapprove the tax loophole would eliminate it and save taxpayers the revenue.

In Ohio, Democratic leaders proposed HB 61, which would immediately sunset existing tax expenditures (which currently cost Ohio taxpayers $6.3 billion each year), and require all new tax loopholes in the future to be renewed every five years. Floridians Against Inequities in Rates are promoting ballot initiatives with even simpler language (see text of initiatives) to sunset tax expenditures every ten years and eliminate other tax loopholes.  In both cases, corporate-backed interests have been fighting the reforms, but sunset rules are gaining attention as lobbying corruption becomes a bigger political issue.

How Tax "Limitation" Laws Entrench Tax Loopholes:  Automatic sunsets of tax loopholes are even more important in states with rules requiring supermajorities to vote for new revenue.   In such states, a special interest may be able to enact a tax break for themselves with a simple majority, but then will label repeal of the tax loophole as a "tax increase" and, as long as they can buy off a minority of legislators, block any supermajority repeal vote.   The Center on Budget Policy and Priorities recently outlined this problem in an analysis of a proposal in Kansas to require a supermajority to raise revenue in that state, emphasizing how so-called "taxpayer rights" laws are often just special interest protection legislation in disguise.

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Disclosure of Economic Development Deals

Even where states disclose overall spending on tax subsidies, it's often impossible for citizens to track how much individual companies are receiving in taxpayer handouts and whether the jobs created justify the cost of the deal.  A few states, with Minnesota, Maine and Illinois in the lead, have enacted disclosure laws to track individual economic development deals and make the information accessible to the public. (See this chart for different state programs.)

The Illinois Experience: The organization Good Jobs First has been the national leader in highlighting the problem of economic development giveaways and its Illinois affiliate helped publicize problems in the Illinois subsidy programs and then helped pass groundbreaking accountability legislation in 2003.   One result of the new law is the Illinois Corporate Accountability website which tracks reports on every firm receiving different kinds of tax subsidies, the jobs they promised to create or retain, and the results year to year.

Disclosure is just the first step, since the information gives citizens the information to evaluate the effectiveness of these economic development programs and propose reforms. A 2006 analysis of the first results of the Illinois law found that 60% of jobs being created under tax subsidy programs actually paid less than what is required for family self-sufficiency (defined as $38,000 or less in Chicago metro areas and $34,000 or less in rural areas.)  And the report noted that the law doesn't require disclosure of company contributions to health care, something needed to fully detail the quality of jobs being created.


Job Quality and Other Reforms for Subsidy Recipients

As these disclosure laws come into force, they will just reinforce the trend of states and local governments demanding that tax subsidy recipients actually deliver on promises to create decent jobs and serve community interests.   Cities and states increasingly have required subsidy recipients to pay a living or prevailing wage, including recently enacted programs in Idaho and Virginia. At least forty-three states, forty-one cities and five counties attach some wage requirements to at least one subsidy program, although many programs still lack them, so additional reforms are needed.

In a recent report, Good Jobs First also highlighted that while most subsidy programs increase suburban sprawl, a few local projects have instead promoted economic development that reinforces smart growth and mass transit.  No state laws currently use transit accessibility as a criterion for awarding economic development subsidies (although one is being proposed in Illinois), but a number of communities and state agencies have negotiated community benefit agreements with individual developers that included transit-oriented provisions.

Good Jobs First has outlined a detailed list of key reforms for all tax subsidy programs and developed model accountability legislation, but the main point is that once states enact strong review and disclosure rules, it creates the information base for either eliminating or reforming any subsidy program to better serve a variety of community needs.  And if states clear out all the bad corporate giveaways, they'll actually have the funds for more effective economic growth programs.

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Legislative Examples and Models

Legislators and non-profit organizations across the country have already crafted a number of bills to use as models. Here are a number of good places to start:

Connecticut: Public Act 05-251, a comprehensive annual review of tax expenditures law

Ohio: HB 61, a proposed Ohio law to automatically sunset tax expenditures

Florida: Text of Tax Reform Initiatives, includes automatic tax expenditures sunset

State Economic Development Subsidy Disclosure Laws:

Good Jobs First, Model Accountability Legislation which includes disclosure rules, job quality standards and other economic development subsidy reforms-- and gives private citizens the legal right to enforce these rules if state officials fail to do so.

Illinois: Business Location Efficiency Incentive Act, proposed law to require that subsidized projects in a metro area must be accessible by mass transit.

Partnership for Working Families, Community Benefit Agreements

More Resources

Resource Organizations

Good Jobs First
Center for Budget Policy Priorities
AFSCME, Truth in Spending Resources
Partnership for Working Families

Legislative Examples and Models

Connecticut Public Act 05-251, comprehensive annual review of tax expenditures law

OH HB 61, proposed Ohio law to automatically sunset tax expenditures

Text of Florida Tax Reform Initiatives, includes automatic tax expenditures sunset

State Economic Development Subsidy Disclosure Laws:

Good Jobs First, Model Accountability Legislation which includes disclosure rules, job quality standards and other economic development subsidy reforms-- and gives private citizens the legal right to enforce these rules if state officials fail to do so.

Illinois Business Location Efficiency Incentive Act, proposed law to require that subsidized projects in a metro area must be accessible by mass transit.

Partnership for Working Families, Community Benefit Agreements

Studies and Charts

Institute on Taxation and Economic Policy, Tax Expenditures: Spending By Another Name

AFSCME, Table: How Does Your State Stack Up? Tax Expenditure Budgets

Center on Budget Policy and Priorities, A “SUPER”? BAD IDEA: Requiring a Two-thirds Legislative Supermajority to Raise Taxes Protects Special Interest Tax Breaks

Good Jobs First, Table: Company-Specific Subsidy Disclosure in the States

Good Jobs First, The Policy Shift to Good Jobs:  Cities, States and Counties Attaching Job Quality Standards to Development Subsidies

Good Jobs First, Making the Connection: Transit Oriented Jobs and Development

Eye on the Right

If you think corporations are doing an amazing job of avoiding federal corporate income taxes, wait until you hear what is happening in the states. According to Citizens for Tax Justice, corporations managed to avoid state taxes on 2/3 of their pretax profits. Some, like AT&T and Merrill Lynch avoided state taxes entirely for three years. The Center on Budget and Policy Priorities has identified three common loopholes. If states crack down on these loopholes, they're likely to see healthy revenue boosts, without increasing taxes on working families.

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Matt Singer
Editor, Stateside Dispatch