1 in 5 Subsidies in Minnesota Fail, State Frequently Fails to Enforce Clawbacks or Disclose Subsidies

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A new investigative analysis by two Star Tribune reporters, David Shaffer and Glenn Howatt, shows that Minnesota’s economic development subsidies often fail to create jobs, to be disclosed to the public or to undergo clawbacks if they fail to meet contract benchmarks.

Between 2004 and 2009, Minnesota taxpayers were put on the hook for 650 job-creation deals. Of those, 125 companies failed to meet benchmarks.

Despite failing to meet contractual obligations, Shaffer and Howatt found that the state skirted enforcement of clawbacks. Within the JOBZ program alone, a $33 million a year program pushed into existence in 2004 by former Governor Tim Pawlenty, 77 companies that failed to meet hiring goals were only forced to repay about four percent of the state tax breaks awarded. Worse, half the cities that should have reported on JOBZ subsidies failed to do so. A recent academic study published in Economic Development Quarterly found scant evidence of JOBZ’s impact on county-level economic growth.

Not only do these subsidies fail but the reporters discovered irregularities pointing to a lacking economic development strategy. The head of the Department of Employment and Economic Development admits the absence of goals. Subsidies to one company that failed to open a facility, Excelsior Energy, seem to be connected to large campaign donations to both parties. Another company received subsidies after pirating a patented idea from another Minnesota business. After losing a patent lawsuit and declaring bankruptcy, it got the state to give it a bailout. Woolen Mills, a wool blanket manufacturer in Faribault, MN, closed after subsidies inside the state kept it afloat while subsidies from the state of South Carolina encouraged it to take on a risky expansion. It failed, and the city of Faribault now seeks a $305,000 judgment from the former CEO. Arctic Cat, an ATV manufacturer, got subsidies in one Minnesota city after it promised to move its engineering team from another part of the state.

Economists have long known about these problems. Art Rolnick, the former Minneapolis Federal Reserve research director and now senior fellow at the University of Minnesota, has long opposed such subsidies. Many companies, he claims, would have expanded without government subsidies. The real problem, in his view, is that states and cities are playing a very flawed game stealing jobs from each other instead of investing in public goods that promote long-run economic growth like early childhood education.

Last year six economists, three from the University of Minnesota, urged the legislature to expand disclosure to economic development tax credits. No legislation has yet been introduced to correct that gap or the clawback problems or to cancel ineffective subsidy programs.

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