PART I: WHAT ARE INCENTIVES?
PART II: WHY ALL THE INCENTIVES?
PART III: HOW TO TALLY THE IMPACTS?
State and local governments in the U.S. spend around $50 billion dollars a year to subsidize private businesses – and that’s only what we can estimate and extrapolate based on limited data. Two issues are at stake: 1) the enormous costs to revenues – some reserved for critical social provisions and 2) the secrecy surrounding of the heftier subsidy deals.
A troubling power imbalance exists between the players in the incentive arrangement that stand to gain and people impacted by the revenue diversions. Some recipients are smaller operations that needed the government incentive to jumpstart a modest investment project, but most incentives are often proportional or even disproportionately regressive in bias of large corporations and upward of billion-dollar investments. Furthermore, even the most successful investment entails opportunity cost.
The goal of incentivizing development is always some form of economic growth, but projects such as refineries and data centers employ few workers, and it typically takes decades for the new revenue to offset the foregone revenue, and by then – many more projects will have been approved to receive similar benefits, potentially leading to cumulation of fiscal stress.
How did all this begin? The first such incentives popped up in isolated places starting in the 1930’s. The latter half of the twentieth century saw exponential growth in frequency of their use and size of the awards, even accounting for inflation, and expansion to cover almost every corner of the country. The cause for this enormous growth becomes apparent after only a little digging: agencies that administer the subsidies, subsidy recipients, landowners, banks and lenders and brokers, and – mostly importantly – industrial site location consultants that put pressure on governments to create and maintain a good “business climate,” meaning decreased regulation, weak unionization, and/or lower taxation. All these players add up to a powerful growth machine that can easily steamroll community opposition.
Corporate incentives take so many forms – some of which very complicated for people without a finance background to parse out, which strengthens the persuasiveness of a logically fallacious narrative (“incentives create jobs”) and difficulty in tracking down the costs. Cash payments are fairly straightforward and often take the form of “deal-closing” funds and reimbursements for training workers. Much bigger than these cash payments are the various tax incentives – tax abatement, credit, rebate/refund, and lowered assessment value – resulting in lower taxes owed. Even bigger than these, and unfortunately the most poorly disclosed and tracked are more confusing financing instruments such as industrial revenue/development bonds (IRB/IDB), which allow a tax-exempt entity to temporary hold the title, and tax increment financing (TIF), which diverts all revenues gained from the point that the area/zone/district is created to the end of the contract (typically 20+ years) to pay for infrastructure development that does not always benefit the people and sometimes directly pay-as-you-go reimbursements back to the developers. (descriptions sourced from Good Jobs First, a D.C.-based nonprofit watchdog + research organization)
Disclosures are scattered and the quality depends on state statutes. Texas is the most transparent of all states (albeit about a very damaging program that expired and got resurrected in a different form), and makes available to the public not only annual costs to state and school districts in this case but also application packages showing documents at different stages of the incentive approval process via the Comptroller's site.
Other states fall short of Texas's disclosure of this particular incentive program by varying degrees. Some invoke confidentiality clause, in their annual costs report, to hide the identity of recipients or nature of subsidized projects, or just not disclose any costs at all despite the enormity of fiscal and economic impact.
Local governments are a mixed-bag – ranging from Chicago’s meticulous record of its extensive TIF and Montgomery County’s (MD) annual tax expenditure reports, to virtually no information at all in many places on clearly active agreements. Freedom of Information Act Requests (FOIA) help sometimes, but the process of filing them is time-consuming.
Finally, in only a few states are the costs broken down by jurisdictions – county, city, school district, etc. And still, the reported figures are often not reliable, and humongous chunks of lost revenues, particularly those through tax increment financing, remain unaccounted for.
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