Outfoxed or Conning Ourselves? Balancing Accountability, Business, and Fiscal Interests in Location-Based Tax Incentive Deals.

AuthorSmathers, Jason
  1. Introduction 828 II. Background 829 A. Proactive Accountability Measures 830 B. Reactive Accountability Measures 831 C. Wisconsin's Foxconn Pitch and Legislation 833 D. Ohio's Jobs Tax Credit 834 1. Ohio's Accountability Mechanism 835 2. Enforcement of Ohio's Accountability Mechanisms 835 E. Michigan's "Good Jobs" Program 836 III. Analysis 837 A. Foxconn Contract and Wisconsin Statute 837 1. Comparison with Kohl's Contract 838 2. Job Verification and Lasting Presence 840 3. Little Red Tape Provides Attractive Option for Firms 843 B. Applying Ohio's Model to the Foxconn Deal 843 1. Statutory Clawbacks May Allow Complete Recapture of Incentives 843 2. Lack of Verification, But Evidence of Enforcement 844 3. Possible Drawbacks to Competitiveness 845 C. Michigan 846 1. Alternatives to Clawbacks Can Limit State Liability 846 2. A Mismatch in Scale for Large Deals 847 IV. Recommendations 848 A. Broad Clawback Authority Written into Statute 848 B. Require and Outline Proactive State Verification of Job Creation Numbers 849 C. Government Finance Stress Test 850 D. Exercising Political Will Toward Uniform Law and Restraint 851 V. Conclusion 852 I. INTRODUCTION

    In 2017, Wisconsin solidified the largest location-based tax incentive package in the United States involving a foreign corporation. The deal gives Taiwan-based Foxconn approximately $4 billion in location-based tax incentives over 15 years, including $2.85 billion in cash incentives from the State of Wisconsin and another $700 million in TIF incentives from Racine County. While the deal is large, Wisconsin is not alone in its aggressive posture. States like Michigan, Indiana, Ohio, and North Carolina also offered large deals, with Michigan technically offering $800 million more than Wisconsin, and Ohio rumored to have pitched a similarly sized package as Michigan. (1) The enormity of the total deal was even comparable to the total incentives offered to Amazon for its second headquarters by New York and Virginia (2)--the culmination of a multi-state pitch and intensely watched competition. (3) However, as details of the project have developed, the deal has come under intense scrutiny and criticism, not only for the price of Foxconn's economic impact, but also the company's changing strategy and reduction in promises. While Wisconsin's politicians continue to battle over the wisdom of the deal, the incentive package itself prompts several questions: Was this deal truly a bust? Did the state do enough to protect itself if the deal goes sideways? In the end, was this worth it for Wisconsin and Racine County?

    This Note will posit, through a comparison of three state approaches to location-based tax incentives, that larger location-based tax incentives will be a net-drain on state and local economies if there is no yardstick for success and no clear-cut mechanism for recouping or limiting those incentives when a firm has failed to deliver on their promises. If states intend to engage in tax incentive deals to lure new businesses to the state, there must be a reasonable balance between fiscal responsibility and the desire to create jobs.

    In Part II, this Note will review the landscape of economic development tax credits across the nation, highlight different methods of accountability, and briefly outline the legislation and contract authorizing the Foxconn tax credit package itself. In Part III, the Note will analyze how Wisconsin, Ohio, and Michigan (all states that were in the running for the plant) structure their tax-credits and other location-based incentive accountability measures, and will use the Foxconn deal as a lens through which to view their success. Finally, in Part IV, the Note will recommend a series of actions that could help restore the balance of interests between businesses and the state.

  2. BACKGROUND

    While estimates of the amount of economic development tax incentives and grants are hard to calculate on a national scale, an analysis from 2002 estimated state and local governments gave out $50 billion annually. (4) A more recent N.Y. Times accounting of state and local incentives put that number higher, having accounted for $80.4 billion worth of tax and grant incentives nationwide in 2012. Michigan, Wisconsin, and Ohio accounted for almost 15% of that amount. (5) That same report found 48 companies that received more than $100 million a year in incentives through one or more grants. (6) No matter the set of numbers, analysts have said that the number of tax incentive programs appear to have increased "substantially over the last 20 years." (7) While some of the reasons for state adoption may relate to effectiveness, some analysts theorize that the increase is due to the political effectiveness of the deals and the assumption by the public that government incentives helped bring work to the region. (8)

    While states have doled out tax incentives for business relocation since the late 19th century, scrutiny of those incentives and their effectiveness has ramped up considerably in the last 25 years. (9) At least 40 states have developed job-creation tax credits, many enacted following the economic downturn of 2008. (10)

    At the same time, observers have criticized the efficacy and accountability of those programs. (11) Some experts and taxpayers have gone even further, scrutinizing locationbased programs as possibly conflicting with the dormant commerce clause. (12) Those who want to end incentives argue they create a "bidding war" among states and municipalities vying for business relocation or retention, others have argued that many of the tax credit programs fail to produce an adequate return for state and local governments simply because state and local governments do not attempt to hold the companies accountable for their promises. (13) Divergent views on the tax incentive efficacy have led some to suggest different models for ensuring accountability. While some have advocated ending tax incentives altogether through legal action or collaboration, this Note recognizes the unlikelihood of that outcome and will thus focus on accountability measures to balance competing state and business needs.

    This Part will first focus on two generalized theories for ensuring accountability: 1) proactive measures designed to ensure compliance (such as requiring eligible companies to meet certain requirements before receiving credits or disclosing details of their use of the credits) and 2) reactive measures, termed "clawbacks" or "recapture," designed to force business to return funds if they later fail to meet their obligations for job creation, capital investment, or other standards set either in the contract or by state statute. Next, this Note will detail the outline of the three programs being compared: Wisconsin's specifically tailored statute and contract for Foxconn, which led to their relocation, Ohio's Job Creation Tax Credit, which was used for retaining larger firms in the past, and Michigan's Good Jobs Tax legislation, which was a portion of the package the state planned to offer Foxconn.

    1. Proactive Accountability Measures

      Several states have enacted statutes that require companies to meet specific qualifications before receiving tax credits or grants. (14) Some programs, such as historic rehabilitation tax credits and Enterprise Zone Tax Credits, may be couched as so-called "entitlement credits," which are automatically awarded upon meeting some qualification from the state. (15) The state may also create "discretionary" credits that put further qualifications on credits, such as that a program cannot move forward without the credits. (16) However, in larger deals, the State Legislature may need to pass a separate incentive package where the state amends statutes to accommodate the size of the credit. In this case, the state may draft a separate agreement between a company and the state to enforce the terms of relocation. (17) In either case, states usually require companies to reach a threshold of job creation, capital investment, wage rates for workers, or other metrics for economic development. (18)

      In other instances, states may adopt one of two types of disclosure requirements: Either the state publishes information on the amount, use, and return on certain firmspecific incentives or the firm is required to submit information to the state to verify its compliance with goals outlined in their contract. (19)

      Those seeking to strengthen economic development credits have touted such accountability measures, but critics have suggested these measures are rarely specific enough to ensure accountability. Some critics have pointed out that many of the accountability measures depend on self-reporting standards by the company--which the state doling out the credits does not always independently verify. (20)

      Even those programs which try to balance the needs of the business while maintaining the tax base may not "properly measure externalities"--they may enact safeguards without ever evaluating whether the tax incentive package actually brings the resultant boon to the economy and local tax base that lawmakers and the companies receiving the funds have promised. (21) Several states have taken note of this line of criticism and implemented provisions to track how effective incentives create jobs and boost economic growth. (22) However, as a 2017 Pew Charitable Trusts Report on state-by-state plans noted, only about 10 states could describe their evaluation systems as "rigorous," and no states met that standard three years prior. (23)

    2. Reactive Accountability Measures

      While proactive measures may halt the flow of tax credits to a company until it complies with statutory or contract qualifications, some states may add a reactive component termed "clawbacks" that take back funds already awarded to the company. (24) While other penalties may cut a company off from future tax funds or revise the amount of tax incentives available later on...

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