Posts Tagged ‘Clawbacks’

Will North Carolina have Nothing to Show for Its Dell Subsidies?

September 9, 2008

Public officials in North Carolina and several other states are reeling from the revelation that Dell is considering the shutdown or sale of its assembly plants. The news that the computer maker is considering an exit from the manufacturing side of the business came in a front page story in the Wall Street Journal. Dell has not denied the report, which said the company might sell some of the plants to contract manufacturers and shutter the rest, but it has not provided specific details on its intentions.

Anxiety about Dell’s plans is especially intense in North Carolina, which went to great lengths in 2004 to put together a state and local subsidy package worth more than $250 million for an assembly plant in Winston-Salem. The deal was negotiated by the Department of Commerce and pushed through the state legislature in a special session with scant debate or analysis. The incentives package included a computer manufacturing tax credit, job investment grants, tobacco settlement fund grants, training incentives, transportation infrastructure grants, workforce development grants, sales tax refunds, waiver of property tax for 15 years and 200 acres of free land. In 2004, Governor Mike Easley estimated that the Dell plant would employ 8,000 people; so far, however, it has hired only about 1,150.

Along with the Winston-Salem plant, Dell owns 11 other manufacturing and distribution centers in Austin, Miami, Nashville, Brazil, Ireland, China and Poland.

Last March, however, Dell closed its facility in Round Rock, TX eliminating 900 jobs.

According to the Journal, Dell is in talks with manufacturers in Asia, who could either operate the plants on a contract basis or buy them outright. It is unclear whether those contractors would be willing or able to operate plants such as the one in Winston-Salem. A key complication would be the subsidies. There is no apparent precedent in North Carolina for transferring incentives to a new owner, which might not want to take on the job-creation provisions of the deal.

Dell spokesman David Frink has declined to comment on the report, instead stating, “we will continue to evaluate and optimize our global manufacturing and distribution network.” Bob Leak, president of Winston-Salem Business Inc., the local economic development agency, said he was not aware of any changes to Dell’s future in Winston-Salem.

In their negotiations of the Dell deal, North Carolina, Forsyth County and Winston-Salem bent over backwards for the company. They assumed that throwing subsidies, tax breaks and other incentives at a successful corporation was a smart economic development tool. Now they may regret putting so many of their eggs in one corporate basket.

Indiana City Enacts Clawbacks Extending Past Tax Abatement Period

September 4, 2008

A growing number of state and local governments are applying clawback provisions to economic development subsidies to be sure companies live up to their job-creation promises. Unfortunately, these provisions are not always enforced and usually are unenforceable after the subsidy period has expired.

The city of Portage, Indiana (east of Gary) recently took the unusual step of strengthening its clawback provisions relating to business tax abatements so that they remain in effect for five years beyond the duration of the abatements. The Portage City Council approved the new rules after growing frustrated at the number of companies that were leaving town after the abatements expired.

“A lot of times, we made investments, and companies got up and left,” Edward Gottschling, Portage City Council Member told Good Jobs First. “We want businesses that are going to stay here, not ones that will pick up and leave after abatement period ends.”

The new rules also strengthen the ability of the city to seek payment of abated taxes even during the subsidy period. Companies are required to provide an annual report to the City Council with the number of employees and level of wages to ensure that they are following the stipulations of their application. The penalties for infractions include discontinuation of the abatement and repayment of remitted taxes. The current abatements are grandfathered in and are not subject to the new clawbacks. If a company wants to apply for an additional abatement, however, they are required to meet the new requirements. As Donna Pappas, Clerk Treasurer of the City of Portage told me over the phone, “We’re trying to develop a diversified economy within our municipalities and at the same time look out for our residents and this is going to help us.”

A similar clawback provision is on the books in Ohio, where a company receiving state income tax abatements must stay at its original location for at least twice the number of years as the term of the tax credit. Other cities would be wise to follow suit and enact similar provisions to hold companies accountable to communities.