Can Cities and States “Clawback” Their Economic Development Advantages?

(Photo: AP/Steven Senne)

Protesters hold signs outside a news conference held by General Electric CEO Jeff Immelt, Massachusetts Governor Charlie Baker, and Boston Mayor Marty Walsh on April 4, 2016. The demonstration was protesting the millions of dollars in tax breaks used to lure GE to Boston.

Can General Electric deliver 800 jobs to the greater Boston economy? That is one question that will consume local economic developers in the wake of the Fortune 500 leviathan’s surprising decision to move its corporate headquarters from Connecticut to Massachusetts.

In the course of wooing GE, Boston pledged up to $25 million in city property-tax concessions, and the state and the city together pledged more than $250 million in various other subsidies, to persuade the corporation to relocate. Having the GE HQ in Boston, they hope, will pay bigger dividends down the road.

But some deals don’t, and there often is little recourse for the cities and states that have laid out taxpayer dollars. One recourse open to such jurisdictions is “clawbacks”—requiring the corporations to give back some of the subsidy if the promised benefits are not realized.

A summary of the incentives offered to GE has already sparked some public grumbling. But according to a recent Boston Globe report, the city of Boston, the state of Massachusetts, and GE are still working on the final details. How city and state officials specify what funds they can get back if GE fails to deliver on its end will be closely watched.

Recent Massachusetts economic history has been marred by a particularly notorious example of how clawbacks can come up short. Evergreen Solar is the Bay State poster child for poor economic-development decision-making. When the solar-panel manufacturer shut down in 2011, Massachusetts was only able to clawback a portion of its multimillion-dollar investment. Eight hundred workers lost their jobs.

Rhode Island is still reeling from a breathtaking lapse of judgment by state economic-development officials who provided a $75 million loan guarantee to 38 Studios, a video-game company headed up by former Red Sox pitcher and now disgraced ex-ESPN commentator Curt Schilling. In 2010, Schilling said his company would create 450 jobs (a deal Massachusetts actually rejected). It went bankrupt two years later, and Rhode Island has had to get in line with other creditors who are tying to get funds back.

Massachusetts and Rhode Island aren’t alone. Clawbacks have met with checkered success across the country. A 2012 study of clawbacks and other economic-development subsidy safeguards by Good Jobs First, a Washington, D.C.-based national economic-development and smart-growth

policy resource center, found that although many states have clawback provisions, they often are inadequate.

According Greg LeRoy, the group’s executive director, states don’t vigorously move to enforce their repayment agreements with corporations. Even states like Vermont, North Carolina, Nevada, and Maryland, which have subsidy-enforcement programs that require companies to meet targets and that mandate penalties if they fail, only earned B-minuses from the group.

“Some public officials find it difficult to do clawbacks,” says LeRoy. “They are so pro-business and nervous about their business-climate image that they find it hard to pull the trigger even when they should.”

Yet clawbacks are a symptom of a larger failing. The far more problematic feature of American economic-development gamesmanship is that state and local officials in a city like Boston, with enviable natural resources and abundant human capital, are still compelled to sweeten the pot to attract companies.

Michael Goodman, who heads the University of Massachusetts Dartmouth’s Public Policy Center and sits on the state Economic Assistance Coordinating Council that reviews incentive applications, offered his personal view of this state of affairs.

“States and municipalities find themselves in this competitive environment where if they are not discounting taxes and they’re not offering these generous packages of support, [they can lose out],” says Goodman, who did not work on the GE-Boston pact. “Firms that are desirable to economic developers and can have a significant economic impact on a regional economy are in a position to negotiate their terms.”

Some cities and states, however, have found a better way. Instead of relying on clawbacks, they have turned to a system of performance-based incentives. Under this kind of program, a company does not get a tax credit or other negotiated benefit until it hits targets, such as creating a certain number of jobs, that have been specified in a negotiated agreement.

A performance-based incentives program “reduces the risk to the government because it means there is no outlay by the government until the company has actually done what it is supposed to do,” LeRoy says. 

Austin is one city that has embraced performance-based incentives with a vengeance. Shelterforce magazine, published by the National Housing Institute, recently noted that Austin officials entered into only a handful of incentive deals out of more than 250 corporate projects that came their way from 2004 to 2012.

When it does contemplate incentives, the city scores companies in nearly a dozen areas, such as how many people a firm intends to hire locally and the types of jobs a company plans to create. City officials base their “asks” on the resulting score. Companies must deliver on their agreements before any funds change hands. “We make sure that you met the obligation before you receive anything,” David Colligan, Austin’s global business recruitment and expansion manager, told Shelterforce.

Moving to a system that requires companies to deliver on their agreements before taxpayer-funded incentives get doled out would be one way states and municipalities could claw their own way back into a competitive paradigm that often conspires against them. 

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