Cities, Counties Take Back Corporate Tax Breaks
Cash-strapped communities have a message for corporations that promised jobs in return for tax breaks: A deal's a deal.
As the economy sputters along, municipalities struggling to fix roads, fund schools and pay bills increasingly are rescinding tax abatements to companies that don't hire enough workers, that lay them off or that close up shop. At the same time, they're sharpening new incentive deals, leaving no doubt what is expected of companies and what will happen if they don't deliver.
''We will roll out the red carpet as much as we can (but) they are going to honor the contract,'' said Brendon Gallagher, an alderman in DeKalb, Ill., where Target Corp. got abatements from the city, county, school district and other taxing bodies after promising at least 500 jobs at a local distribution center.
So when the company came up 66 workers short in 2009, Target got word its next tax bill would be jumping almost $600,000 -- more than half of which goes to the local school district, where teachers and programs have been cut as coffers dried up.
The newfound boldness comes from communities and states that have long bent over backward to lure companies and jobs by offering abatements and other incentives -- to the tune of an estimated $60 billion a year in the United States, according to the Washington-based economic development watchdog group Good Jobs First.
The willingness to write -- and enforce -- the ''clawback'' provisions comes even as companies across the country struggle and against a broader backdrop of governments getting tough on business practices.
What's more, the poor economy has communities thinking about how the tax breaks they dole out will play with residents who have grown increasingly angry at the thought of anything that hints of corporate welfare.
''The public is a lot more aware of tax abatements and there's a climate of skepticism about what can be perceived as corporate handouts,'' said Geoff McKimm, a member of the Monroe County Council in Indiana.
With that in mind, county officials drew up an agreement with Printpack, a packaging company, that includes a provision requiring the company to refund either $197,000 or that year's abatement, whichever is more, if the number of employees at a new factory falls below 140.
Another provision requires Printpack to refund the entire abatement if it employs fewer than 75 people -- a guarantee meant to prevent companies from leaving a ''skeleton crew'' at a location to avoid paying up.
''With so many businesses going to Mexico, communities are desperately trying to hold onto jobs,'' said Amy Gerstman, the county's auditor. ''This was a carefully put-together abatement.''
And businesses increasingly are being forced to hold up their end of the bargain.
In Texas, where companies can get money from the Texas Enterprise Fund if they promise to create a specific number of jobs, the number of clawbacks rose to nine in 2008, compared to a total of seven for the previous three years combined, the governor's office said.
In Illinois, the number of companies from which the state sought to ''recapture'' incentive money has steadily climbed, from six in 2005 to a total of 37 by 2008.
Meanwhile, more communities are contemplating similar action.
In St. Louis County, officials have told Pfizer Inc. that if it cuts 600 jobs, as planned, they'll rethink the $7 million in tax breaks they promised to give the drugmaker for the next 10 years.
And in Detroit, while the state was approving expanded tax credits in exchange for General Motors Co.'s promise not to move its headquarters, the city council was talking about cracking down on tax breaks for GM and other major employers.
''We know that there are more clawbacks getting triggered because more deals are falling short,'' said Greg LeRoy, executive director of Good Jobs First, who has written extensively on clawbacks.
It's unclear exactly how much is being recovered because nobody collects comprehensive statistics on clawbacks, LeRoy and others say. States that do keep statistics track only their own deals, not those initiated by local governments. Communities also may revoke the entire abatement or only a portion of it, while others sometimes simply rule out future abatements, LeRoy said.
Finally, some communities crack down on companies quietly, out of concern that they could scare off other potential employers, LeRoy said. He said that fear persists even though there is no evidence that having or enforcing clawbacks poisons the business climate.
''We were told that we were going to ruin Topeka's ability to attract businesses; we'd give Topeka a black eye,'' said James Crowl, assistant county counselor in Shawnee County, where last year officials approved a settlement that calls for Target to pay $200,000 a year for 10 years after failing to create as many jobs as it had agreed to.
So what happened?
''Last year we opened a Home Depot distribution center right next door,'' said County Counselor Rich Eckert.
In DeKalb, some officials were concerned about sending a bad message to other businesses considering locating there, said Gallagher, the alderman. But he didn't buy it.
''We are 65 miles from Chicago (and) if someone wants to locate 120 miles from Chicago, I can't stop them,'' he said.
Besides, he said, $600,000 means less to Target than to a struggling community, where he said the city alone is facing a $2 million revenue shortfall.
Target was disappointed, but understood the decision, spokeswoman Jill Hornbacher said.
''We are very committed to DeKalb and that distribution center and proud to be there,'' she said.
And don't expect communities to back down soon, officials said.
''There is much more (language) tied to jobs now because of economy,'' said Lee Garrity, city manager in Winston-Salem, N.C., which along with the surrounding county is sharing more than $26 million that computer giant Dell Inc. paid after announcing it will close its assembly plant next year.
Garrity said officials are thinking about provisions that are even more specific.
''We are discussing whether we need to require the jobs of the company go to people who live in the city,'' he said.
2 More Companies Pass Up Promised NC Incentives
A pair of specialty outsourcing companies won't collect job-creation grants from North Carolina taxpayers as the recession hits health care and financial services differently.
The state's Economic Investment Committee, which awards and oversees the major incentives program used to lure expanding companies, on Tuesday canceled a 2005 deal with Hewitt Associates Inc. The Lincolnshire, Ill.-based company had planned to bring 900 new jobs to Charlotte. Those human resources administration and information technology positions didn't happen as the global financial crisis hit the banking city hard.
But two years of recession hasn't slowed the expansion of Durham-based Quintiles Transnational Corp.
The global pharmaceutical testing firm decided to postpone collecting a Job Development Investment Grant payment of $299,000 in a gesture to help out the cash-strapped state budget, an offer the committee accepted Tuesday.
The company will defer collecting the money until the middle of next year, about when the state's budget for the current year closes out.
"Quintiles has been very fortunate that we have performed well and even in this downturn we have seen expansion in our business," spokesman Phil Bridges said. "We recognize that the current economy has put the state of North Carolina in a tough financial position. Quintiles made the offer to defer payment on the (grant) as a way of saying thank you, not only for investing in us but believing in us and our future growth in North Carolina."
Quintiles could receive up to $21.4 million over 12 years under a grant awarded in 2006 to create and sustain 1,000 new jobs. The grants come from taxes the company's employees pay the state.
Since 2006, the contract drug research company has spent $51 million to build a new headquarters and hired nearly 400 workers at salaries averaging nearly $81,000 a year.
Quintiles runs clinical drug trials for pharmaceutical companies, handles documentation necessary for regulatory approval, and recruits and hires drug company sales representatives.
Hewitt met its target to create at least 158 new jobs by the end of 2006 and was due to collect $181,000, a figure the state Commerce Department couldn't and Hewitt wouldn't confirm Tuesday.
But the global provider of human resources support and consulting services wasn't able to hire at least 630 additional employees by the end of 2008 or hit its target of 900 jobs by the end of this year.
Hewitt could have collected up to $8 million if it created the jobs and kept them for 10 years.
The company is the 14th to quit the JDIG program out of 100 approved for job-creation sweeteners since the program started in 2003.
Boat builder Chris-Craft Corp., computer builders Dell Inc. and Lenovo, and memory-chip maker Qimonda North American decided in recent years to cut staff rather than expand as their sales soured, ending their claims on promised incentives. After opening a $600 million data center near Lenoir, Internet giant Google last year turned down the grant it was promised in 2006.
Hewitt restructured its human resources business process outsourcing business in 2006, then was set back as some clients suffered when the financial crisis hit, Hewitt spokeswoman Amy Wulfestieg said. The company employs about 450 in Charlotte, she said.
Dell Shuts NC Plant Despite $300 Million in Tax Incentives
Despite winning more than $300 million in incentives and tax breaks from North Carolina and local governments four years ago, Dell Inc. has decided to shutter an assembly plant because of changing economic circumstances.
This fall Dell announced it would close the plant and lay off more than 900 employees. Company officials say they expect the shutdown to be completed in January.
In 2004 the North Carolina General Assembly was called into a special one-day session by then-Governor Mike Easley (D) to offer Dell $240 million of economic incentives to build a manufacturing facility. Coupled with what Forsyth County and the city of Winston-Salem added, the deal came to more than $300 million in tax breaks and benefits.
Rushed Package
During the special one-day session in 2004, Governor Easley’s senior advisor, Dan Gerlach, argued legislators needed to act quickly to prevent other states from getting the facility. The lawmakers did, and the state put together a complex assortment of incentives, grants, and tax breaks.
With layoffs already ongoing and Dell’s prospects worsening in July of this year, Department of Commerce officials continued supporting the deal. Secretary Keith Crisco told reporters, “We need three to four years to judge it in total. [Dell is] the kind of company we need to be all over [recruiting] in this state.”
With Dell’s plant closure, some critics are pushing for more broad-based approaches to corporate recruitment. Representative Marilyn Avila (R-Wake) thinks targeted tax incentives miss the point.
Simple Solution
“We should develop a statewide economic development plan, which is simply lowering corporate taxes,” she said.
Avila has long argued the state’s tax structure and regulations hinder job creation. She believes the use of incentives should be stopped.
Governor Bev Perdue (D), however, still equates such incentives with job creation.
“When 49 other states are using incentives, if you want to compete [you have to as well,” Perdue said in an interview with WRAL-TV in Raleigh.
Speaker of the House Joe Hackney (D-Orange) pointed out Dell did not use all the available money.
"While the bottom line is still being calculated, either we didn't lose money or we had a net gain in revenues for the state," he said.
Lawsuits Likely
Hackney’s comments illustrate another dimension of the state’s incentive policies. The complexity and myriad performance measures mean disputes between Dell and the state over money owed or needed to be repaid will likely end up in court at taxpayer expense.
Dell spokesman David Frink said recently in the Winston-Salem Journal, “Our belief and our understanding is that we met the performance thresholds required for those incentives during those years, and no, we are not obliged to repay those.”
North Carolina officials hold the opposite view. State Revenue Secretary Ken Lay says the state can require Dell to pay back the money because it no longer meets criteria used to receive it. He calls such a move a “look back.”
Half the Promised Jobs
Public officials promised taxpayers this deal would not lose money for the state. In spite of the much-publicized promise of more than 2000 jobs, the Dell facility never produced more than 1,100 jobs and still received millions of dollars from the state.
If it can be proven the state lost any money, public officials might well have serious problems on their hands from voters and legal challenges from groups like the NC Institute of Constitutional Law, which has challenged many of the state’s targeted tax incentives.
Former North Carolina Supreme Court Justice Robert Orr runs the NC Institute of Constitutional Law. In a letter to the Charlotte News-Observer newspaper, he wrote: “It's very tempting to think that economic development can happen by granting a few companies exceptions to a state's otherwise unattractive tax code. But it doesn't work that way. States should be welcome mats to all business, not just those the politicians have picked as a winner.”
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Sources: NY Times, McClatchy Newspapers, News & Observer, Heartland.org, John Locke Foundation, Dell, GMAC, Hewitt, Wikipedia, Youtube, Google Maps
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