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Thursday, October 11, 2012

New Model Legislation Would be Great First Step Toward Subsidy Reform

Yesterday, Good Jobs First released new model legislation to increase the transparency, accountability, and effectiveness of state and local subsidies, which I estimate to total $70 billion per year. If states were to adopt these laws, subsidy administration would improve dramatically, and if all states adopted them, it would put an end to job piracy as well.

The model legislation revolves around four principles.  First, company-specific, web-based reporting of subsidies received and compliance with job quality and other performance requirements. This would be supplemented by reporting by property tax districts of all tax abatements, tax increment financing deals, and other tax reductions affecting school districts and other recipients of property tax revenues.

Second, there would be standards for job creation and job quality (wages, percent full time, benefits, etc.) set that would be specific to the locality. Noteworthy among the provisions is that the model legislation would require at least one new job to be created for every $35,000 in subsidies, and that a company could not count a job towards its job creation commitments if it relocated the job from elsewhere in the United States (not just the state giving the subsidy). This latter provision would prevent states from subsidizing relocations, as happens, for example, at the New York/New Jersey and Missouri/Kansas borders, and even within metropolitan areas like Cincinnati and Cleveland.

Third, states would be required to claw back subsidies if companies did not reach and maintain their job creation and job quality commitments. The legislation gives specific language on how much should be recaptured under various scenarios (a bigger percentage for three years of failure than one year, for example). Moreover, the model legislation provides for private parties to have standing in the courts to enforce the rules if state agencies do not.

Fourth, under the Good Jobs First proposals, states would create Unified Economic Development Budgets, which would track both tax expenditures and on-budget subsidies in every state agency that provided them. This would make it easier for citizens to hold legislators responsible for overall economic development policy, and it would certainly make life easier for researchers like me who currently have to create national estimates based on incomplete data and a relatively small number of states.

These provisions would dramatically improve the transparency and administration of state and local subsidies, but at the same time they show the limits of state-by-state reform. For example, no automobile assembly plant has been built with a subsidy as small as $35,000 per job since the 1980s. No state will commit to that level, because they simply would never receive another auto assembly plant when plenty of states that are good locations for such facilities will give $100-150,000 per job, and at least one (Tennessee) over $200,000 per job. Similarly, I would doubt that many states would commit to stop their job piracy, at least if they were victimized by it to any appreciable extent.

For this reason, I have long argued that federal controls are necessary to rein in these out-of-control subsidies. However, even though governors and economic development officials realize they're in a bad bargaining position, they are not willing to give up their "tools," as we saw when it looked like the courts might rule that state subsidies violate the Commerce Clause (p. 90). For the time being, then, state-level subsidy reform is the only game in town, and the Good Jobs First model legislation is the best cookbook out there.