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Economic Incentive Programs at Risk as Public Criticism and Government Oversight Increases

by Kelley Rendziperis, on Feb 20, 2017 11:53:24 AM

It is that time of year again: the season for state legislative sessions and balanced budget initiatives. As Site Selection Group reviews various economic development bills introducedbefore committees throughout the United States, we notice the same theme with regard to advocates and opponents of economic incentive programs such as cash grants, tax credits, tax abatements, sales tax rebates, training grants and other valuable economic incentives that are often available to companies. The theme is one of elimination.


There are typically a multitude of bills filed trying to eliminate some, if not all, economic incentives. The reasons for doing so are varied and include protecting taxpayers’ money, evening the playing field for small businesses, eliminating crony capitalism, and refocusing spending on public safety, roads, bridges and education. Proponents of economic incentive programs usually tout improved economic activity in the state spurred by increased job creation and capital investments they feel are a direct result of targeted economic incentive initiatives.


Florida lawmakers target the Enterprise Florida economic incentive program
The pros-and-cons debate over incentives is currently brewing in Florida. Governor Rick Scott has requested $85 million related to economic incentives and $76 million for tourism marketing as part of next year’s budget. Governor Scott believes the funding is necessary to attract new business to the state and that economic incentives have been a catalyst to the state’s growth over the past six years.


In juxtaposition, the House Careers & Competition Subcommittee voted 10-5 to approve House Bill 7005 in early February, which would eliminate Enterprise Florida, Visit Florida, the Office of Film & Entertainment, the Florida Small Business Development Center Network, Florida's international offices and several other economic incentive programs. The bill will move before the House Appropriations Committee on Feb. 21.


Texas governor seeks additional funding for Texas Enterprise Fund
Texas is also in session for its 2016-17 biennium, and bills have already been filed to eliminate a multitude of economic incentive program. while Governor Greg Abbott pushes for additional funding for the Texas Enterprise Fund. A more detailed summary of various bills will be discussed in next month’s article.


Significant improvements seen in economic incentive oversight and reporting procedures
As economic incentives continue to be a prevalent topic in state politics and budgeting, we thought it would be interesting to review what has changed due to these debates. One significant improvement has been the oversight and reporting procedures for many state economic incentive programs. In fact, The PEW Charitable Trusts reported that the following states have enacted laws to evaluate the effectiveness of economic incentive programs since the beginning of 2012:

 

Alabama Alaska Colorado
District of Columbia  Florida Hawaii
Indiana Louisiana Maine
Maryland Minnesota Mississippi
Nebraska New Hampshire North Dakota
Oklahoma Oregon Rhode Island
Tennessee Texas Utah
Virginia Washington   

 

Texas serves as an example of increased state oversight of economic incentives
One of those states above, Texas, enacted House Bill 26 in June 2015 to create the Economic Incentive Oversight Board to evaluate various incentives, cash grants and loans. The oversight stems from reports that companies received funding from the Texas Enterprise Fund without applying or executing an agreement.  Since the enactment of House Bill 26, new standards were adopted and the Governor’s Office increased its monitoring of the program.

According to the Texas Enterprise Fund 2017 Legislative Report, from Jan. 1, 2015, through Dec. 31, 2016, eight companies successfully completed their TEF agreements and 16 companies terminated their agreements.

Contract terminations and nonperforming contracts can lead to money being returned to the fund in one of three ways: collection of liquidated damages for nonperformance, payments resulting from early termination, and recovery of unencumbered funds not disbursed due to termination. The monitoring of the program resulted in approximately $19 million in liquidated damages and termination payments since January 1, 2015. Approximately $12 million in unencumbered funds were returned to the fund as a result of the 16 terminations. Together these monies amounted to an increase of approximately $31 million to the fund.  Approximately $72 million in disbursed funds have been returned since inception of the program through December 31, 2016.

Another key change to the Texas Enterprise Fund was moving to a performance-based model where companies only receive funds upon performance. Historically, a company could receive upfront payments prior to job creation or investment in the state.  In fact, based on the award listings from the governor’s office, the vast majority of projects awarded grants in the past two years have yet to receive any funds.

The trend of increased economic incentive oversight will continue
With more states increasing oversight of economic incentive programs and demanding transparency, it would seem that opponents to incentives would be supportive due to increased scrutiny.  Instead, many suggest that results similar to those reflected by improved monitoring of the Texas Enterprise Fund simply prove their points. 

Despite the criticisms, we believe economic incentives have staying power. As long as President Trump aggressively pursues more domestic manufacturing and U.S. business expansion, states are unlikely to scrap their economic incentive programs. In fact, it is possible these programs will grow. The compromise for opponents will be to develop targeted initiatives that meet stated objectives, to commit to periodic reviews or audits and to provide equitably distributed benefits.

For additional information about these project and others, please contact Site Selection Group.

Read Part I of the Top Economic Incentive Questions

 

Topics:Economic Incentives

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