Corporate Research E-Letter No. 17, October 2001
Economic Development for the People:
Making Corporations and Governments Accountable
by Mafruza Khan
In 1995, Phillips Semiconductor received a $50 million economic development subsidy package to expand its Albuquerque factory. At the time, the company employed 1,500 workers and projected 440 new jobs. But five years later, the plant was down to 950 employees. Despite the layoffs, the company was granted $400 million in tax-free bonds last year. In August 2001, the company announced that it would lay off another 250 workers.
It’s not unusual to hear of companies receiving development subsidies but not delivering. States and cities offer dozens of subsidies today: low-interest loans, property and income tax breaks, training grants, land and infrastructure deals. The rules are loose and the costs are high: one author estimates that as of 1996, states, counties and cities were already spending $49 billion a year on economic development.
At the same time, the movement to reform economic development has broadened since plant-closings activists brought attention to the issue in the mid-1980s. A diverse range of public interest groups, including tax and budget fairness groups, living wage advocates, labor unions, community-based organizations, smart growth activists and environmentalists have coalesced around the issue as a common thread in corporate and government accountability.
The results of this surge in organizing and advocacy are clear. In 1994, only six jurisdictions were known to attach job quality standards to subsidies, such as wage and healthcare requirements. As of this writing, 68 do. In 1994, only eight jurisdictions were known to have used “clawbacks” or money-back guarantees. At least 19 states and many dozens of cities use them today.
Economic development subsidies have become a significant issue for Corporate Research Project staff since we became a project of Good Jobs First, a national resource center tracking economic development practices, last January. This e-letter provides an overview of major subsidies controlled and administered by city, county, state and federal governments and gives basic research tips. It also highlights best practices in economic development and significant achievements made by activists promoting subsidy accountability.
Major Subsidies and Research Resources
Governments fund a variety of economic development programs and use dozens of economic development subsidies to support businesses. These include property tax abatements, corporate income tax credits, tax-free low-interest loans, infrastructure and land subsidies, and training grants and credits.
Property Tax Abatements
When a company’s property tax is abated it does not pay its full rate on real property (land and buildings) and/or its personal property (machinery, equipment and inventory). Abatements range from five to 20 years, and may be partial (e.g., 50%), full, or phased. In some cases, companies make payments in lieu of taxes (PILOTS) or fees in lieu of taxes (FILOTS) during the period that their property taxes are abated to partly offset for lost tax revenues.
County tax assessors and commissioners usually control property taxes. Tax abatements may be subject to public hearings before a board of tax commissioners. Property tax records are usually available at the county tax assessor’s office. If a company applies for an abatement or protests its assessment, there should be public records. Information on states and other jurisdictions that have put property tax data or other public records on the Internet can be found on the website compiled by BRB Publications at, www.brbpub.com/pubrecsites.asp.
Corporate Income Tax Credits
Corporate tax credits are dollar-for-dollar reductions in the taxes a company owes the state on its corporate income or franchise tax. Most states allow companies to claim credits for activities such as capital investment, research and development, or job creation. Because states do not require corporate tax returns to be made public, corporate income tax credits are the most poorly disclosed tax breaks. Except for West Virginia and Maine, no states have any company-specific disclosure about the value of a credit.
Other major tax subsidies include sales tax waivers (e.g., on materials for new construction), utility tax breaks, and tax breaks granted to companies in enterprise zones such as inventory tax exemptions and employment tax credits.
Enterprise Zones (State and Federal)
Enterprise zones award economic development subsidies to companies in geographic areas designated as distressed, blighted or high-poverty. State enterprise zone regulations vary widely, but generally require a public review process at the time they are created and are administered and monitored by a local zone association. As of 2001, 45 states and the District of Columbia have enterprise zone programs.
Information may be obtained by reviewing state zone regulations, interviewing the zone association director, reading the zone association’s annual reports and talking to academics, legislators and state agency officials who are familiar with the process.
Federal Empowerment Zones
In 1993, the federal government created the Empowerment Zone and the Enterprise Community Program under which cities and rural communities designated as distressed receive federal grants. In 2000, the federal government created Renewal Communities, which follows the same model. Information about federal programs can be found at, www.hud.gov. Public records, such as the Memorandum of Agreement between the Dept. of Housing and Urban Development (HUD) and the designated area, and the Benchmarks and Activities Form are available from the city’s economic development department and from HUD.
Tax-free Loans and Loan Guarantees
Governments subsidize companies by helping them borrow money at below-market rates or by providing loans that private lenders consider too risky. These include issuing different kinds of tax-free bonds, state and local loan programs at subsidized rates, federal loans and loan guarantees, and “gap” financing, including tax increment financing.
Bonds for economic development that involve private companies are known as “private activity bonds.” Specifically, they are industrial revenue bonds (IRBs, also known as industrial development bonds or IDBs). These are securities issued by government agencies on behalf of private companies. The private companies are responsible for paying the principal and the interest on the bond. Interest earned on these bonds, is tax-exempt – just like government-backed bonds – so they have interest rates about 25% lower than taxable corporate bonds. The government’s credit rating and revenue are not at risk if a company defaults on an IRB, but each state has a limit on the amount of bonds it can issue. IRB loans are reported as long-term debt on a company’s balance sheet.
Since the 1980’s, tax-advantaged loans for private companies have also been provided through “lease/purchase” financing and “certificates of participation” (COPs), which have been used for projects such as private prisons. Lease revenue bonds and certificates of participation can be an even greater subsidy, since the private company is not responsible for paying the loan. Instead, the payments may come out of government appropriations, i.e., tax revenues, and the debt is not reflected on the company’s balance sheet.
IRBs and lease/purchase bonds are different from “general obligation bonds,” like school bonds or sewer bonds. GO bonds are backed by the government’s promise to pay or the “full faith and credit” of the government that issues them.
Information on municipal bonds (includes bonds issued by cities, counties and states, private activity bonds and other bonds issued by the government) can be found in public documents called Official Statements, which are detailed prospectuses issued by the government entity floating the bonds. Official Statements can be found online via commercial document delivery services. These include: www.munistatements.com, www.dpcdata.com, and www.moodys.com. In the Washington DC area, Official Statements can be copied at the Municipal Securities Rulemaking Board in Alexandria, Virginia (URL: www.msrb.org).
Pending or recently closed bond application files are also available to the public from the relevant state or county agency. Other sources include financial filings (long-term debt section), such as the 10-K for publicly traded companies, and the IRS Form 990 for non-profit corporations. 10-Ks can be obtained online at, www.sec.gov, and at www.freeedgar.com. The IRS Form 990 can be obtained at www.guidestar.org.
Tax Increment Financing (TIF)
TIF involves designating a geographically targeted area as a “TIF district” for redevelopment. Property tax revenues are split into two streams. The first stream is pegged to property values before the TIF district was created and it continues to go to city, county and school board services. The second stream, the “increment,” is created by the increase in tax revenues that results when the area is redeveloped and property values rise. The increment is diverted away from services into a special fund to subsidize private development in the TIF district. A TIF district may have a life of five up to 30 years. TIF is now authorized in 47 states and is most frequently used in California, Colorado, Florida, Wisconsin, Minnesota, Illinois and Indiana.
Information on TIF can be obtained from the TIF agreement, which is usually available from the city development agency that negotiated it. The redevelopment plan for the TIF district can be obtained from city councils and local planning agencies. It may also be useful to check property tax records and bond documents for details.
Infrastructure subsidies pay for roads, sewer and water lines, and other public systems that make newly developed land usable. Governments pay for infrastructure through a variety of programs, grants and direct assistance. These include Community Development Block Grants (CDBG). CDBG is administered by the U.S. Dept. of Housing and Urban Development. The funds flow to cities and states for a wide variety of community and economic development activities, including both “hard” (bricks and mortar) and “soft” (administration and consulting) activities. The Section 108 loan program allows a city to use future CDBG funds as collateral for a commercial loan.
CDBG budgets are public documents and every jurisdiction that receives CDBG funds must submit a consolidated plan. The three main documents for any jurisdiction are: the Annual Action Plan, the Citizen Participation Plan and the Grantee Performance Report. States also submit their consolidated plans. Information can be obtained from HUD’s website at, www.hud.gov. (See also, www.ccc.org)
Infrastructure funding is also provided through the government’s power of eminent domain, direct land-price subsidies, the Economic Development Administration of the U.S. Dept. of Commerce, and the U.S. Department of Agriculture.
Federal and state governments fund training programs, which often subsidize companies for training their employees. The federal Workforce Investment Act (WIA) is the largest training program of the U.S. Dept. of Labor. Its funds are mostly administered by regional Workforce Investment Boards. Information on grants can be obtained by contacting the Workforce Investment System State and Local Offices.
Companies may also qualify for federal Work Opportunity Tax Credits (WOTC) if they hire workers in “hard to employ’ categories, such as former welfare recipients, former felons and people with disabilities. Information on WOTC may be obtained from state WOTC coordinators. Contact information for WIA and WOTC is available from the Dept. of Labor’s Employment and Training Administration at, http://www.doleta.gov/regions/
Best Practices and Significant Achievements
Grassroots groups working on subsidy accountability have won remedies like money-back guarantee "clawbacks," requirements that companies that receive subsidies pay fair wages and benefits, rules for full disclosure, environmental protection and "anti-piracy" safeguards against "paying Peter to rob Paul" with taxpayers money. For more information, see www.goodjobsfirst.org/gjfpubs.htm.
Two states -- Maine and Minnesota -- have subsidy accountability laws that were brought about by statewide networks of grassroots organizations: the Minnesota Alliance for Progressive Action (www.mapa-mn.org) and the Maine Citizens Leadership Fund (www.mclf.org). Several other networks have issued studies, prompting debate, including the Kentucky Economic Justice Alliance (www.kydrc.org), Citizens for Economic Opportunity in Connecticut (www.ceo-ct.org), Northeast Action (www.neaction.org), Montana People’s Action (www.mtpaction.org), the Center for Public Policy Priorities in Texas (www.cppp.org), and the North Carolina Budget and Tax Center (www.ncjustice.org/btc/). The Los Angeles Alliance for a New Economy (www.laane.org), the Fiscal Policy Institute in New York (www.fpi.org) and the Neighborhood Capital Budget Group in Chicago (www.ncbg.org) have also done pioneering work on the issue. Two major environmental organizations, the Sierra Club and Friends of the Earth, have made the explicit connection between subsidies and suburban sprawl, like Good Jobs First.
More and more, grassroots groups fighting for economic, social and environmental justice are investigating public subsidies given to corporations in the name of economic development. The stakes are high, especially since many states now face serious budget problems. Because subsidies have become so common, subsidy accountability is emerging as a strategic new tool to promote democracy through government and corporate accountability.