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The basics of tax increment financing subsidies

Last week I made a presentation to the Colorado Assessors Association on tax increment financing (TIF) subsidies. With the organization’s permission, I am sharing the PowerPoint presentation for my talk, as well as adding this introduction.

The talk begins by putting TIF in the context of subsidies generally. As a subsidy, TIF is subject to the three main potential drawbacks of their use: Inefficiency, inequality, and environmental harm. These differing harms often call forth coalitions that prove the adage that “Politics makes strange bedfellows.” One example was a joint appearance by Ralph Nader, Rep. John Kasich, and Grover Norquist in 1997. I was in a similar coalition in 2003 fighting a TIF that would have leveled downtown O’Fallon, Missouri, then the fastest-growing city in the state. Our leadership included people from liberal Democrats to future Tea Party members. Similarly, the mayor and TIF-supporting council members were bipartisan. It’s easy to find single-party governments that abuse subsidies, too, whether it’s now-Governor Kasich offering $400 million to move Sears from Illinois, or Democratic stronghold Kansas City, MO, offering multiple multi-hundred million dollar TIFs.

I then go on to discuss the legal particularities of TIF, which gives it another level of controversy. Tax increment financing typically allows governments to capture the property tax revenue of other districts (something especially hard on school districts), and these revenue fights are matched by the intense hatred the use of eminent domain usually brings forth.

The very first state to adopt TIF (in 1952), California axed TIF in 2011 due to its budget crisis, caused in part because the state reimbursed property tax revenue that school districts lost to TIF. Last year, a new version of TIF was passed, but it completely removes the option to take money from school districts, and lets other taxing jurisdictions opt out as well (see below).

 

Also of note in TIF history is the constant pressure to expand the locations able to use it (i.e., progressively less economically deprived areas want it in their subsidy arsenal) and the gross overuse of TIF for retail projects. As I mention in the link, St. Louis-area municipalities gave $2 billion in retail TIF from 1990 to 2007, creating all of 5400 jobs, no more than we’d expect on the basis of the area’s income growth. That’s why the relevant slide says $2 billion = 0 jobs.

Thanks to Karen Miller of the CAA for inviting me and agreeing to let me post the PowerPoint.

Cross-posted from Middle Class Political Economist.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Further proof that the U.S. uses incentives more than the EU

As if any more proof were needed, I recently came across yet more evidence that U.S. state and local governments give far more in location incentives than EU Member States do. A paper given this spring at the annual meeting of the Association des Économistes Québécois (Association of Quebecois Economists) includes a summary of project-by-project subsidy reporting by the consulting firm ICA Incentives.

ICA Incentives, which has on several occasions provided me data on $100+ million incentives in Europe and the United States, reports on the announcements of large investment projects. Thus, the data summarized in the paper will omit the thousands of smaller projects in the United States that are subsidized by state and local governments. My guess (I have not seen the underlying data) is that the coverage of EU projects is more complete, since EU rules require pre-notification of subsidies to the European Commission and the Commission posts all state aid decisions on its website.

From page 10 of the paper, the total of incentive packages in 2011 through 2013 inclusive, is as follows:

United State: $37.2 billion

European Union: $6.6 billion

Canada: $2.2 billion

South America: $8.4 billion (more than the EU, which has a GDP over 3 times as large)

Asia: $1 billion (I would guess this is an underestimate)

We can see that the United States gave more than 5 1/2 times as much as the European Union did over the three years analyzed. Given that these economies are approximately the same size, that is a gigantic disparity, and it shows, as I have argued on numerous occasions, that the EU state aid controls work to reduce location incentives. The result for South America also suggests this.

Moreover, the consequences of giving such large state and local incentives are enormous. As I have reported before, the value of state and local subsidies ($70 billion per year) substantially exceeds the cost of the state and local government jobs that were cut in the wake of the Great Recession. This is a huge opportunity cost for these governments as well as representing efficiency and equity losses as a result of the subsidies. With this additional evidence, the need for incentive reform is stronger than ever.

Cross-posted from Middle Class Political Economist.

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Time to comment on the GASB standards!

As I reported last month, the Government Accounting Standards Board (GASB) has proposed new rules that would require state and local governments to disclose subsidies in their financial reports. The proposal is now open for public comment from now until January 15, 2015.

Good Jobs First, which has long advocated for this change in accounting rules, has produced a detailed analysis and critique of the proposal. While any improvement in transparency is welcome, for governments’ Comprehensive Annual Financial Reports (CAFRs, as they are called) to provide useful information to citizens and investors alike, they need to truly be comprehensive. The problem, as Good Jobs First points out, is that the way GASB has defined “tax abatements” (its rather odd choice for the broad category of economic development tax incentives — odd because tax abatements per se make up only a subset of such incentives) leaves open the possibility that major categories of subsidies could be omitted altogether.

As Good Jobs First points out, GASB’s specification that a “tax abatement” includes a government forgoing tax revenue means that tax increment financing (TIF) may not fall under the definition. The reason, as I have analyzed for the Sierra Club, is that a TIF recipient is legally deemed to have paid its property taxes in full, even though it individually benefits from the diversion of the incremental taxes. If someone has “paid” all her/his taxes, then how does one say that government has foregone the tax due? GASB has to make clear that it won’t be blinded by the legalese here, but will instead be guided by what actually happens. One possibility would be to use phrasing seen in the WTO Agreement on Subsidies and Countervailing Measures, that the government promises to abate taxes “in law or in fact.” Using this phrase has the advantage that the Agreement has been adopted verbatim into U.S. law, that being the way that the United States “signed” the Uruguay Round agreements, rather than ratify them as a treaty.

Tax increment financing is a high value subsidy in the United States. TIF in California was generating $8 billion per year in tax increment by 2010. Even in Missouri, local governments adopt TIFs worth hundreds of millions of dollars every year. It would be very problematic if GASB allowed its revised Generally Accepted Accounting Principles (GAAP) to ignore tax increment financing.

Other types of potentially excluded subsidies identified by Good Jobs First include diversion of employees’ withheld income taxes (because the source for the subsidy is not the company’s own taxes) and and sales tax diversions, such as Missouri’s Transportation Development Districts (again because the source of the subsidy is not the company’s own taxes). The latter total hundreds of millions of dollars in Missouri annually. Furthermore, Good Jobs First flags highly ambiguous provisions which could lead to excluding performance-based subsidies (because the subsidy occurs after the investment or hiring, not before) and Payments in Lieu of Taxes or PILOTs (which in some state identify actual payments made by a recipient, but in Tennessee and perhaps others is simply the phrase used to describe property tax abatements).

I would suggest further that GASB require governments to cross-reference cash subsidies paid to companies in the “tax abatement” notes so the notes reflect all subsidies given to companies in one place. Cash subsidies already appear in CAFRs because they are on-budget, but grouping them with the more numerous off-budget tax-based subsidies will simplify research by bond analysts, academics, or anyone else, putting total subsidies in one convenient place within the CAFR.

In addition, Good Jobs First notes other deficiencies on the issue of transparency. There is no requirement for company-specific disclosure, which is especially important for large incentive packages but is best when universal. Furthermore, there is no requirement for governments to disclose their future commitments under multi-year tax agreements. This should be at least as troubling to bond analysts as it is to advocates for good subsidy policy, if not more so. It is impossible to tell the true fiscal position of a state or local government if it is allowed to hide large future liabilities.

Good Jobs First gives detailed instructions for commenting: The easiest way is to email your comments to Director of Research and Technical Activities, Project No. 19-20E, at director@gasb.org. What are you waiting for? It’s time to comment!

Cross-posted from Middle Class Political Economist.

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New government accounting standards to require subsidy disclosure

In a move with potentially enormous implications, Good Jobs First reports that the Government Accounting Standards Board (GASB) will soon issue new draft rules for Generally Accepted Accounting Principles (GAAP) for governments. Don’t fall asleep; this could be awesome!

As regular readers know, one of the things bedeviling subsidy debates is the lack of transparency in what governments actually give to businesses, and on whether incentive recipients actually deliver on their promised jobs and investment. We have just seen how Boeing is moving 2000 jobs out of Washington state despite receiving huge subsidies  there. And since the stakes nationally are $70 billion a year, by my estimates, better transparency is a must if we are to have any kind of democratic debate and accountability.

As Good Jobs First reports, the GASB proposal would require governments to publish detailed information on “tax abatements” (an oddly narrow term it applies to the wider concept of tax incentives; but what about cash grants or free infrastructure?) in order to comply with Generally Accepted Accounting Principles. State and local governments will have no choice but to comply with whatever is adopted, as it is impossible to issue bonds or carry out other basic financial operations unless they meet GAAP standards. This is why Good Jobs First has long campaigned for a change by GASB. The centrality of GAAP means that we have to pay attention to the draft rules and comment on them in the three-month comment period starting in November.

It turns out that taxpayers aren’t the only people who want to know about tax incentives. Bond analysts want to know about present and committed tax subsidies to help them assess whether bond issuers can really pay them back. Good Jobs First cited the example of Memphis, where tax breaks consume about one-seventh of potential property tax revenue.

What we have now is a complete patchwork where some states (and proportionately fewer cities) have good disclosure and others don’t. This requires the constant monitoring and central aggregating of subsidy costs that Good Jobs First does so well (250,000 subsidies and counting). It also necessitates the construction of estimates, like mine, of the overall costs of investment incentives and other subsidies to business. In a good world (not even a perfect one), these data would already be available in easy-to-analyze forms. Really strong GASB rules would get us a long way to reaching that point.

I’ll let you know when the comment period starts.

Cross-posted from Middle Class Political Economist.

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Subsidy Megadeals Out of Control Since Great Recession

The recent Good Jobs First report Megadeals is the most detailed compilation to date of the largest economic development incentive packages ever given by state and local governments. Defined as incentive packages of $75 million or more in nominal value, these deals have multiplied in both number and value in recent years as governments compete for a smaller pool of large investments.

 Starting with Pennsylvania’s 1976 $100 million deal for Volkswagen, the report details 240 megadeals through May 2013. The total cumulative amount of the deals comes to $64 billion. The report uncovers many deals of which I had been unaware, including a new number one subsidy of $5.6 billion for Alcoa in 2007 consisting of discounted electricity from the New York Power Authority, a state agency.

 Consistent with reports I have made on several occasions, but with a better database of incentive packages, Megadeals finds more and bigger deals than before the Great Recession. To be exact, since 2008 the number of such deals has doubled from about 10 per year (in the previous 10 years) to about 20 per year, with the average total of such deals doubling to about $5 billion per year over the same period.

 As Good Jobs First reported earlier this year in The Job Creation Shell Game, the number of significant investment projects as reported by Conway Data (publisher of Site Selection magazine) has fallen from a 1999 peak of over 12,000 per year to less than 6,000 per year in every year since 2005. This means that states and local governments are desperate to land the few projects that are available and therefore they are willing to pay more for them. Note that Conway Data reports projects meeting any one of three criteria: fifty new jobs, $1 million in investment, or facility size of at least 20,000 square feet. In particular, $1 million in investment is a low threshold.

 One thing we should realize is that while megadeals generate the most press coverage for obvious reasons, they are only the tip of the iceberg of total state and local investment incentives. The reason, of course, is that there are so many more smaller deals that collectively account for large amounts of money. The smaller ones receive little or no media coverage, which makes it hard to track them.

My only real criticism of the report is that I believe it would be more accurate to calculate present values for the subsidies that are given, rather than reporting only nominal values. Companies themselves will calculate the present value of an incentive package, and the European Commission does so as well in its supervision of EU subsidy rules. It should be more widely done in reporting in this country. $3.2 billion over 20 years (Boeing in Washington state) is not the same thing as $3.2 billion in cash; by my calculations, it is about $1.98 billion, as I first published in Investment Incentives and the Global Competition for Capital. Similarly, the $5.6 billion nominal subsidy for Alcoa comes to $3.22 billion present value, by my calculations. This is still more than 50% bigger than the Boeing incentive package and easily the largest single subsidy in U.S. history.

 In addition, I think it is a tossup whether to count Nike’s 2012 deal with Oregon for 30 more years of single sales factor (SSF) as a subsidy. SSF is already law in Oregon; Nike’s bargain only guarantees that it will not change. Still, Nike obviously thought it was important enough to bargain for, and it is possible to estimate the company’s savings relative to the pre-SSF apportionment formula, so its inclusion is certainly justifiable.

 Besides the great report, you can download a spreadsheet with all the data and sources at the link above.

 Disclosure: Good Jobs First shared its megadeals database with me in conjunction with a paper I gave in May, and I exchanged notes with authors Phil Mattera and Kasia Tarczynska as I prepared the paper and they finalized the report.

Cross-posted at Middle Class Political Economist.

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