The Equity Factor

We May Soon Be Able to Track Exactly How Badly Corporate Tax Breaks Fail Cities

“This is a precious chance for foundations and nonprofits to make a big difference in how governments account for scores of billions of dollars.”

Nevada Gov. Brian Sandoval signs an unprecedented package of incentives to bring Tesla Motors’ $5 billion battery factory to the state. (AP Photo/Cathleen Allison)

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Look no further than yesterday’s Next City post about Chris Christie’s tax breaks aimed at helping Camden, New Jersey for reasons why such corporate incentives rarely benefit city residents.

The organization Good Jobs First estimates there’s a $70 billion dollar price tag each year on corporate subsidies. But that number hasn’t been easy to come up with: State and city governments are not beholden to any standardized reporting system on these deals.

“We’ve always had to extrapolate guesses about total spending,” says Greg LeRoy, executive director of Good Jobs First. “Kenneth Thomas [a professor at University of Missouri-St. Louis] has, in our opinion, published the two best estimates, but he admits that they’re crude because there are just way too many gaps in the data.”

Now there’s hope that analyzing these deals will get easier. The Governmental Accounting Standards Board (GASB), which is the source of generally accepted accounting principles used by state and local governments, is developing disclosure guidelines that would force governments to report tax abatements used for economic development.

“This is one of the biggest events in the 16-year history of my organization,” says LeRoy. “It would be hard to point to something else that we think will have greater, long-term significance. … Transparency is fundamental to any kind of accountability issues that go along with these tax breaks for economic development.”

Cold, hard numbers could soon settle the heated debates about whether tax incentives encourage regional growth and competitiveness or simply deplete public resources. LeRoy argues that any site location consultant for a corporation could tell you that tax breaks often don’t affect the bottom line: State and local taxes comprise less than two percent of a company’s total cost structure. Other environmental factors like labor, logistics and materials matter much more. But companies would never admit that to the governments offering them free money.

In a report about property tax abatements in Memphis, Good Jobs First showed how debt deals cost the city $42 million, or about 14 percent of its property tax base, in 2013. Richard Florida recently lambasted Reno’s estimated $1.25 billion package to land Tesla’s $5 billion battery factory.

In every city, these subsidies take away from health care, housing infrastructure and, notably, public education. GASB’s proposal offers a solution. “There’s a portion of the GASB rule that says, if you’re a government body that passively loses income as the result of the actions of a different body of government, you have to report that loss,” LeRoy explains. “That exactly describes what typically happens to school boards in this country when a city council or a city board grants a property tax abatement. Very few local governments give school boards any say in what happens with those property taxes.”

Until January 30th, GASB will be accepting comments on its proposal. The new rules would affect budgets for 2016, which means that numbers for meaningful analysis could be available as soon as 2017. LeRoy and co-author Shawn Escoffery have written an article in the Chronicle of Philanthropy encouraging foundations and other nonprofits to issue comments to the organization that might inform and shape GASB’s rules.

Feedback could help define what constitutes a tax abatement (tax increment financing and PILOTs might not apply) or the length of time these reports could cover (a single year snapshot versus long-term projections).

They add, “This is a precious chance for foundations and nonprofits to make a big difference in how governments account for scores of billions of dollars. For anyone who cares about economic opportunity, government accountability, and equitable development, the accounting board’s proposed standard deserves a strong push.”

The Equity Factor is made possible with the support of the Surdna Foundation.

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Alexis Stephens was Next City’s 2014-2015 equitable cities fellow. She’s written about housing, pop culture, global music subcultures, and more for publications like Shelterforce, Rolling Stone, SPIN, and MTV Iggy. She has a B.A. in urban studies from Barnard College and an M.S. in historic preservation from the University of Pennsylvania.

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Tags: taxescorporate welfare

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