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Kansas’s PEAK Subsidy Fails Performance Audit

October 3, 2013

bummer for the sunflower stateA Kansas state legislative audit of the controversial Promoting Employment Across Kansas (PEAK) subsidy program found that it is inadequately managed and that previously approved deals exceed the program’s spending cap.

Clawback readers may recall that PEAK is no stranger to controversy – it is Kansas’s most used subsidy in the bitter jobs war with Missouri that continues to ravage the Kansas City metropolitan economy. PEAK diverts the state personal income tax withholdings of employees as a subsidy to those workers’ employers.  It was enacted in 2009 to compete with Missouri’s similarly structured Quality Jobs tax credit, and has unfortunately inspired copycat programs in other states.  (For more information, see Good Jobs First’s 2012 report on personal income tax diversion subsidies, Paying Taxes to the Boss.)

Despite its poor program disclosure, in 2012 the Kansas City Business Journal was able to determine that PEAK was subsidizing short border-hopping company moves primarily in the counties around Kansas City.  At that time, 44 of 55 participating businesses were located in either Johnson or Wyandotte Counties. The list of subsidized businesses included the headquarters of movie theater company AMC Entertainment, which was sold by Bain Capital to a Chinese company shortly after its PEAK award was approved.

The audit provides clear confirmation of PEAK fueling the border war.  Legislative auditors found that all but a handful of PEAK awards were given to companies relocating into JohnsonCounty.  Of the 1,550 jobs represented by companies in JohnsonCounty, all but 110 came directly from Missouri.

More disturbingly, the audit revealed that in general, “officials have prioritized getting companies into the program rather than monitoring and measuring program results.”  Specifically, auditors found that:

  • Assessing the benefits of the PEAK program is difficult because the Department of Commerce has not compiled meaningful information on the program.
  • The department’s data were incomplete because many companies had not submitted the required quarterly and annual reports.
  • The data were also incomplete because the department had not processed companies’ quarterly reports that were filed.
  • The department had not sufficiently verified the self-reported data it compiled in its information system.

The state revenue loss due to the PEAK program has grown from $2.7 million in 2010 to an estimated $12.5 million in 2012.  Among the most damning findings of the audit is the fact that the Department of Commerce has exceeded the statutory financial cap that limits awards made through the program to $6 million annually.  Commerce authorized $7.5 million in PEAK credits for fiscal year 2013.  This has ignited an embarrassingly amateur debate between the department and the legislative audit office over whether the cap is cumulative or annual.

Although disappointing, these findings shouldn’t come as a surprise to those who beat the jobs war drums in Kansas.  Their rush to engage with Missouri’s equally irresponsible fiscal behavior has produced an all too familiar result.

New Jersey Subsidy Overhaul Scraps Cost Controls and Accountability

September 19, 2013

Fallout from Hurricane Sandy and this month’s tragic boardwalk fire are not the only costs that New Jersey taxpayers will face in the coming years – Governor Chris Christie has signed off on a massive overhaul of the state’s business subsidy system that will cost the state plenty.

The Economic Opportunity Act of 2013 consolidates New Jersey’s biggest subsidy programs into two programs that will likely cost more than the largest five currently do.  Gone are the Business Employment Incentive Program (BEIP), the Urban Transit Hub Tax Credit, and the Business Retention and Relocation Assistance Grant (BRRAG) tax credit.  The state will now award job subsidies to companies through the Economic Redevelopment Growth Grant and the Grow New Jersey program.  Supporters of the Act argue that streamlining and simplifying New Jersey’s subsidy system will enhance the business climate of the state, but the legislation is seriously deficient in the matter of accountability.

This is not to say that the state’s previous subsidies were without problems.  In its nearly two decades of use, BEIP awards have cost the state over $1.5 billion.  At one point, the New Jersey Economic Development Authority was even issuing bonds in order to meet its BEIP debt obligations to subsidized companies.

Recently the Christie Administration has accelerated its subsidy spending, amounting to more than $2 billion awarded to companies in the last 3 years alone through a combination of programs.  Over half of that amount was spent through the once-credible Urban Transit Hub Tax Credit program, a subsidy designed to spur development near transit stations.  With the support of Gov. Christie, the pool of credits available for the program was expanded and quickly exhausted, with many of the awards going to companies making short in-state moves.

The two remaining subsidy programs are deeply flawed.  The Economic Redevelopment and Growth Grant (ERG) program, enacted in 2008, diverts more types of tax revenue away from public coffers than any other tax increment financing program in the nation.  One of the first awards made through this program was a bailout for the struggling Revel Casino in Atlantic City – a project so financially toxic that Morgan Stanley walked away from its nearly $1 billion investment in the development.  (Revel has since declared and emerged from bankruptcy.)

Ironically enough, the other surviving subsidy, Grow New Jersey, was enacted to appease suburban and rural areas that had lost jobs through headquarters relocations subsidized by the out-of-control Urban Transit Hub Tax Credit program.  Since the first application was approved in April 2012, the state has awarded an average of $22.2 million per month to New Jersey businesses.

Unsurprisingly, in their new iterations, Grow New Jersey and ERG lack aggregate cost controls.  There is no annual or program-wide cap for use of either subsidy, virtually ensuring that New Jersey’s economic development spending spree will continue unchecked.  The potential costs to the state are immeasurable; fiscal analysis of the bill conducted by the Office of Legislative Services concluded that “the bill will produce an indeterminate multi-year State revenue loss” but it “cannot project the direction or magnitude of the bill’s net fiscal impact on the State and local governments.” There is a   $350 million maximum subsidy per company but business eligibility criteria have been loosened.

Aside from the potentially astronomical costs to the tax-paying public, the Economic Opportunity Act of 2013 introduces a host of other accountability problems to the state’s subsidy system.  Chief criticisms include the inclusion of retailers as eligible recipients, the removal of the state’s long-standing prevailing wage requirement for subsidized facilities, the elimination of the requirement that subsidized businesses pay a portion of health care benefit premiums, the allowance for businesses to count part time employees toward job creation requirements, and the high probability that both subsidy programs will accelerate suburban sprawl in the state.

In spite of the Christie Administration’s unprecedented spending on business subsidies over the past three years, New Jersey’s economic recovery lags behind most of the nation.  At last count, the state unemployment rate was 8.7 percent, earning it a ranking of 43rd in the country.  More unchecked spending on business subsidies is surely no remedy for the state’s employment problem.  The definition of insanity is doing the same thing over and over again and expecting different results, an adage unfortunately lost on Gov. Christie and New Jersey’s lawmakers.

California Enterprise Zones Tax Credit Overhaul Enacted

July 1, 2013

CA EZ 2Last week brought a satisfying conclusion to Governor Jerry Brown’s two year effort to bring an end to California’s controversial Enterprise Zones (EZ).  Assembly Bill 93 passed the Senate with a required two-thirds vote and awaits the governor’s signature.  While falling short of Gov. Brown’s original intent to completely eliminate the $700 million per year program, the bill will implement critical reforms to EZ hiring tax credits and de-fund the most wasteful aspects of the subsidy.

The EZ program has been criticized in the past for failing to actually create jobs, its spiraling out-of-control costs to the state, directing the vast majority of its financial benefits to extremely wealthy companies, subsidizing low wage employers and job sprawl, and assisting a company that replaced its entire unionized work force with new workers.  Last month it was discovered that two strip clubs were receiving hiring tax credits for their employees.  Throughout its 27 year history, the program has never been transparent to taxpayers and recent revelations about which companies are getting tax breaks have unleashed a wave of opposition from interest groups and the public alike.

Among the reforms to EZ hiring tax credits enacted by AB 93 are:

  • A requirement that a business actually grow new positions to qualify for tax credits
  • A wage standard of 1.5 times the minimum wage for new jobs
  • Targeted hiring of ex-offenders, unemployed, veterans, and people receiving income assistance (credits are limited to these employees)
  • Public transparency requirements

In order to secure reforms to the hiring tax credits, the bill’s proponents enacted two new business tax credits, both of which would be funded with the state’s savings resulting from reduction of hiring credit activity.  A new credit against the state sales and use tax could be claimed by biotech and manufacturing companies for the purchase of business equipment.  Unfortunately, this credit will have no statewide or annual cap, although business purchases that exceed $200 million annually per company are ineligible.  The state estimates its cost at $400 million a year.

The second subsidy program enacted with AB 93 would take the form of a competitive discretionary fund.  Tax credits would be awarded to major job creation-focused projects approved by a newly established California Competes Tax Credit Committee, which would control $200 million worth of tax credits per year.

Only time will tell if California has traded one boondoggle subsidy for another, but it is encouraging that the new programs will be held to higher standards of accountability and transparency.  Almost anything will be an improvement over the EZs, and for the time being at least, California appears to have learned its lesson.

Economic Development Among Consenting Adults

June 14, 2013

Lalo Alcaraz (c) 2013

California has unwittingly joined New York and Pennsylvania in the distinction of subsidizing strip clubs. Is there a bi-coastal consensus for, ahem, full disclosure?

Late last month, as a part of California Governor Jerry Brown’s campaign to end the wasteful and ineffective Enterprise Zone (EZ) program, the Sacramento area EZ businesses list was made public.  This disclosure of companies benefiting from EZ hiring tax credits was the first time that taxpayers in California have ever had access to information about which companies receive economic development subsidies through the program and how much those tax breaks are worth.

In addition to showing that the state provides subsidies to highly profitable corporations and a casino, the list revealed that two strip clubs in the town of Rancho Cordova have been claiming EZ tax credits since at least 2010.  Gold Club Centerfolds is receiving tax breaks worth up to $37,440 apiece for nine employees, and Déjà Vu Showgirls is receiving the same deal for 13 employees.

It is unknown how many other “adult” businesses in the state are getting such tax breaks because the identities of EZ businesses are usually hidden from public scrutiny based on (clearly misplaced) taxpayer confidentiality policies.

As we blogged last week, the California EZ program is also extremely expensive, with an annual loss of state revenue now more than $700 million headed towards $1 billion.

California is not the first state to embarrass itself by subsidizing sexually-oriented businesses.  New York City provides substantial tax breaks to thousands of businesses through its Industrial and Commercial Incentive Program (ICIP).  In 2010, the New York Daily News revealed that at least three strip clubs were receiving subsidies through ICIP.  The scandal led many organizations, including Good Jobs New York, to call for an overhaul of the misguided program (NYC’s costliest).

Similarly, Pennsylvania’s Keystone Opportunity Zone program (KOZ is the state’s name for Enterprise Zones) became embroiled in considerable controversy when an “adult entertainment business” in LycomingCounty landed in a KOZ in 2005.  The business was later forced to relocate after an utterly predictable land use conflict with the nearby Little League World Series Complex, and the KOZ rules were modified to prevent strip clubs from receiving tax breaks.  Unfortunately, this eligibility rule is literally one of the only restrictions on uses of KOZ subsidies and the identities of participating businesses remain hidden from the public.

The common element these three costly programs share is secrecy: none publicly discloses recipients of the tax breaks.  Hiding government expenditures is a guaranteed recipe for waste and abuse.   Public outrage is justified when the veil of taxpayer confidentiality is lifted to reveal a subsidized strip club or other controversial enterprise.  Whether or not such uses of economic development funds are appropriate should be decided in broad daylight; without subsidy transparency, continuing scandals are inevitable.

(Comic compliments of Lalo Alcaraz, (C) 2013)

California Enterprise Zones On the Chopping Block (Again)

June 7, 2013

CA EZsGovernor Jerry Brown has again proposed elimination of California’s much-maligned Enterprise Zone (EZ) program in order to help balance the state’s precarious budget and redirect the foregone business tax revenues to better uses.   (Gov. Brown’s previous attempt to cut the program in 2011 during a severe revenue shortfall was thwarted by business groups and localities seeking to retain the business tax breaks; the state instead eliminated municipal redevelopment agencies.)

In the past, the state has hidden the names of companies getting the EZ tax breaks of up to $37,000 per employee.  Multiple disclosure requests by Good Jobs First and other accountability-minded organizations have been denied by California’s Franchise Tax Board, which claimed tax confidentiality.   For the first time, however, recipient data has just been released by the Sacramento area Enterprise Zone administrator.

The Sacramento Bee revealed that over 6,000 employment vouchers—essentially the bounty documents for EZ tax credits—have been claimed by county businesses since 2010.  FedEx alone benefited from nearly 1,400 vouchers.  Other notable recipients include Verizon, Wells Fargo, and Walmart.  However, the most notorious enterprise zone claimants are a casino and two strip clubs in Rancho Cordova.

The EZ program is no stranger to controversy.  Policy makers have been reluctant to cut or even reform the program, even in the face of evidence that it has had zero net effect on job creation in the state.  The lost revenue currently costs the state approximately $750 million a year and is projected to grow to over $1 billion annually in coming years.  Seventy percent of those tax dollars go to companies with assets valued over $1 billion.  Even more troubling, companies can retroactively claim EZ credits for employees hired up to five years in the past—even if the person is no longer working at the company—meaning that there is literally no incentive for new job creation in order to receive the subsidy.

The state also allows companies to claim EZ credits for new hires, rather than on net new positions created.  Companies don’t need to be creative to abuse the poorly designed system.  VWR, formerly located in Brisbane, laid off 75 unionized workers and moved across the state to Visalia, where it located its new facility in an Enterprise Zone and receives tax credits for the (non-union) replacement hires.  In Anaheim, stadium concessions contractor Anaheim Arena Management recently announced it would lay off 500 workers, the replacements for which would be eligible for EZ vouchers under current program rules.

Clearly it is time for California to rethink its costly EZ program.  A program that fails to create jobs, subsidizes wealthy and abusive businesses, and incentivizes job churn cannot be called economic development.  Whether California elects to reform the program to actually create jobs or eliminates it altogether, it is past time the state made this use of economic development dollars deliver for taxpayers.

More Subsidy Disclosure Coming in Oregon

March 15, 2013

winThis week our friends at OSPIRG scored another major win for subsidy transparency and accountability. OSPIRG, which played a central role in getting the state to adopt tax credit disclosure in 2011, is now bringing transparency to another key subsidy, the Strategic Investment Program (SIP).  SIP exempts many of Oregon’s largest and richest companies (especially Intel) from property taxes, based on agreements that those companies will be creating jobs.

Business Oregon, the state’s economic development arm, recently denied an open records request by OSPIRG to provide details about the state’s SIP deals.  OSPIRG then appealed to the state Department of Justice, which decided in favor of transparency and ordered Business Oregon to release records of the deals by next week.  The economic development agency is expected to comply.

While Good Jobs First has successfully obtained some types of SIP subsidy details in the past, the public has never had access to information about what exactly companies are promising in return for the special tax breaks.  Citing the program’s $322 million biennial cost, Celeste Meiffren of OSPIRG stated that “disclosure of information about SIP and all other economic development tax expenditures is important because taxpayers need to be able to track their return on investment.”

Way to go, OSPIRG!

Massachusetts Business Tax Breaks Evaluated in New Report

March 12, 2013

masspirg reportA new MASSPIRG study asks if Bay Staters are “Getting Our Money’s Worth?” from the Commonwealth’s corporate tax breaks.  The organization evaluates 25 different special business tax subsidies for fiscal safeguards and accountability and transparency practices.  Among other findings, MASSPIRG concludes that:

  • Less than one-third of the subsidies are subject to annual spending limits.
  • Few of the Commonwealth’s special business tax subsidies have well-articulated public policy goals.
  • Nearly half of all business tax subsidy programs fail to publicly disclose information important for transparency such as recipient names, program-wide cost to the state budget, or results generated by the program.

MASSPIRG  also finds that state spending on business tax subsidies has more than doubled since 1996; the Commonwealth spent an estimated $770 million in 2012 through programs such as the Economic Development Incentive Program and the Film Tax Credit.  MASSPIRG’s recommended policy options to help the state get the best results from its substantial spending on special business tax subsidies include:

  • Transitioning from business tax breaks to outright grants.
  • Adding mandatory public policy goals and expiration dates to new and existing subsidy programs.
  • Continuing to improve disclosure of subsidies awarded through these programs.

You can read the rest of the organization’s recommendations to help the state get the biggest bang for its buck in Getting Our Money’s Worth? here.

Nike Runs Away with New Oregon Tax Giveaway

December 20, 2012

NikeTown, OR, USAOregon Gov. John Kitzhaber must have missed this month’s major New York Times investigative series on business subsidies.  Less than a week after the nation’s paper of record reported that such subsidies are a “zero sum game,” Gov. Kitzhaber called the Oregon legislature into a one-day special session to pass the Economic Impact Investment Act, a corporate tax giveaway custom-tailored for Beaverton-based sportswear retailer Nike, Inc.  The rushed deal and special session were announced last Monday, just four days before the legislature was to consider the bill, and a publicly available version of the proposed legislation was not made available until Tuesday.

HB 4200, which passed the legislature handily on Friday and was signed by Gov. Kitzhaber this week, allows Nike to determine its tax responsibility to the state through the controversial Single Sales Factor (SSF) apportionment method for the next 30 years, whether or not Oregon enacts tax reform during that period.  Nike had expressed interest in expanding in Oregon, but the company reportedly expressed to the Governor that it needed “tax certainty” to commit to growing in the state.  (Make sure to see the Oregon Center for Public Policy’s excellent take on what would constitute true “certainty” when it comes to taxes.)

In its original form, the legislation would have allowed the state to grant guaranteed SSF tax breaks through the Economic Impact Investment Act for a ten-year period, and those deals would have lasted for up to 40 years.  The few accountability amendments passed during the one-day session shortened the amount of time the governor has to strike these tax deals to one year, while also reducing the period during which the tax break lasts to 30 years.

While the bill requires that Nike and any other company vying for the special tax deal invest $150 million and create 500 new jobs, it is silent on wages and other job quality standards.  Significantly, the new law fails to set a meaningful term during which qualifying jobs must be retained by Nike or any other company approved for the sweetheart deal.  It appears that the last 20 years’ worth of basic accountability reforms – now standard practice for most states – are unknown to Oregon’s lawmakers.

The lack of accountability provisions are not the only controversial aspect of the new giveaway.  The Oregonian reported this week that despite the extraordinarily compressed period the legislature was given to consider the bill, the state has been secretly negotiating the deal, termed “Project Impact,” since last July.  You can read the state’s non-disclosure agreement with a company called EMK (presumably a site location consulting firm contracted by Nike to pressure the state) here.

Oregonians are not the only constituency to express concerns about the new law.  Intel, Oregon’s other major corporate employer, was reportedly involved in several heated exchanges with Nike over a particular provision of the original legislation that would have prohibited it from benefiting from the same deal based on the fact that it is already receiving considerable subsidies through Oregon’s Strategic Investment Program.  Unsurprisingly, that provision was removed from the bill.

Oregon, unfortunately, has no such guarantees that economic conditions and fiscal obligations will remain exactly the same in the decades to come.  There are no promises the state can make that protect its residents from change, and this new giveaway means that Oregon cannot rely equally on all businesses and individuals to contribute fairly in the future.

New Jersey’s Revel Casino May Fold

December 7, 2012

Revel CasinoNew Jersey’s embattled Revel Casino received more bad news this week.   State Senate President Stephen Sweeney has called on the Division of Gaming Enforcement to investigate the Casino’s “precarious financial position.”  Despite the fact that it has been operating at a loss in 2012, Revel management has claimed that its inability to make good on its construction debts and city property tax bill is a result of Hurricane Sandy.  Predictions that the casino will fold are growing louder.

The controversial project was awarded a $261 million tax subsidy by the state in 2011 to assist its investors in leveraging additional financing to complete its stalled construction.  While this recent news bodes poorly for investors and the state’s Economic Development Authority, it may be a relief for existing casinos in the region that are forced to compete with massively subsidized new development.

New Study: Massachusetts Business Tax Breaks Doubled

August 8, 2012

A new study released this week by the Massachusetts Budget and Policy Center reports that the annual cost of the state’s business tax breaks has doubled to $770 million this year from $342 million in 1996.  “Business Tax Breaks in Massachusetts” found that “sector specific tax breaks” (for particular industries) were largely to blame for the sizeable increase in cost.  Of the specific industry tax expenditures, two in particular demonstrated rapid and substantial growth over the study period: Single Sales Factor tax breaks for manufacturers and mutual funds companies and the state’s Film Production Tax Credit.  The authors further found that the spending through special business tax expenditures has increased by 60 percent, while during the same period total state budgetary spending has fallen by 5 percent.

The MBPC prudently concludes that the value of each of the state’s business tax breaks needs to be “weighed against other types of economic development investments the state might make using these dollars, including various on-budget expenditures, for things like public education and transportation infrastructure.”  Read the full report here.