February 14, 2019; The Conversation
Regular readers at NPQ will note that we are not big fans of what are often called “economic development incentives” or tax abatements. We have, we believe, good reason for our skepticism. For instance, last year, NPQ cited the work by Timothy Bartik of the Upjohn Institute, which contends that “only 10–15 percent of the new jobs companies create in incentive-offering cities and states can really be credited to the incentives they offer,” and that, furthermore, funding for tax abatements typically reduces available funds for public education.
Just last Thursday, Amazon pulled out of plans to relocate some offices to New York City due to community opposition to the $2.9 billion price tag, even though, three days before Amazon’s announcement, Business Facilities magazine had praised the Amazon “HQ2” deal as the “deal of the century.”
For that $2.9 billion, Amazon committed to 25,000 jobs in New York City, or else the payment would be reduced. Apparently, though, jobs figures often change after politicians cut the ribbon, according to University of Texas, Austin Professor Nathan Jensen and graduate student Calvin Thrall.
Writing in the Conversation, Jensen and Thrall describe their research on the Texas Enterprise Fund (TEF). The program, operating since 2003, “allows the state to offer cash grants to companies in exchange for promises of investments and job creation. Since 2003, the program had provided over $600 million in cash incentives to companies vowing to create over 94,000 direct jobs in Texas,” Jensen and Thrall explain.
The nonprofit Washington Center for Equitable Growth published Jensen and Thrall’s paper, Who’s Afraid of Sunlight? Explaining Opposition to Transparency in Economic Development, in February 2019. For their study, Jensen and Thrall submitted public records requests for company applications and agreements for grants. But public record law in Texas allows companies to legally challenge requests, a practice that Jensen and Thrall note “is controversial yet not uncommon among other states.” Of the 165 recipient companies, 42 submitted legal challenges.
Ultimately, with some redactions, the state did provide a list of recipients. Jensen and Thrall note that in the process, they learned that 46 of the 165 companies “had renegotiated their incentive deals with the state. These deals weren’t announced by the governor’s office nor were they reported anywhere online.” So far, they add, “For the 63 companies whose contracts we received, 29 had amendments to the original.” They add that, “In case after case, companies renegotiated grant contracts…to get a better deal, all while avoiding public scrutiny.”
Typically, the renegotiations involved dialing back the commitments made to receive the tax abatements. As Jensen and Thrall detail in their paper:
What isn’t public is that a large number of companies have renegotiated their TEF agreements, usually committing to fewer jobs created, or their hiring schedule, or how headcount should be computed (with some renegotiated deals allowing firms to count employees in subsidiaries that weren’t party to original TEF-subsidized project). In many cases, such contract amendments are made right before a company would otherwise be subject to clawback provisions. For example, in one case an incentive agreement was changed to reduce the number of jobs required one day before an employment deadline.
Texas is not unique. Audits of similar programs in New Jersey and New York both show significant shortfalls in reporting whether companies fulfill their commitments. New Jersey, as NPQ has covered, has spent over $1 billion a year on these programs. In New York, a 2016 state audit found that when companies fell short, a regular staff “solution” has been to adjust the annual job creation numbers “after the fact to align with the companies’ actual lower job creation totals,” similar to how Texas has responded. As Jensen and Thrall point out, a sizable portion of Amazon’s economic incentive package ($1.2 billion) would have come from this program.
Jensen and Thrall note that clawback provisions only work if enforced. In their paper, they conclude, “Allowing companies to renegotiate contracts outside of the public eye violates the very spirit of adding performance requirements and performance provisions.”—Steve Dubb