Testimony in Support of An Act to Promote Efficiency and Transparency in Economic Development

An Act to Promote Efficiency and Transparency in Economic Development, H.2565
Chairwoman Gale Candaras, Chairman Jay Kaufman, and members of the Joint Committee on Revenue

MASSPIRG is a statewide non-profit, non-partisan member-supported public interest organization. Thank you for the opportunity to testify today in favor of  House bill 2565,  An Act to Promote Efficiency and Transparency in Economic Development, filed by Representative Carl Sciortino and Senator Eldridge along with 50 other cosponsors – both Democrats and Republicans. There is a companion Senate bill S.153 pending before another committee.

First, I want to thank Chairman Kaufman and other members of the committee and the legislature for passing critical transparency reforms in June.  The new law requires the development of a comprehensive state budget website, detailed to checkbook level, which will also include the amount and names of the companies who receive refundable or resalable tax credits. The tax subsidy information is supposed to be made available as of May 2012. The ability to see how government uses the public purse is fundamental to democracy. Transparency in all government spending checks corruption, bolsters public confidence, and promotes fiscal responsibility.

Last year the state approved almost $200 million in state and local tax breaks for 37 companies that collectively promised to create 2,475 jobs through the Economic Development Incentive Program. Since the start of the program in 1994 the state has approved an estimated $3-4 billion worth of tax breaks for area businesses. Today, Auditor Suzanne Bump reviewed 92 business tax breaks or credits, and estimated the cost of those provisions is in excess of $2.1 billion for FY 2012. 

State and municipal investments of public dollars in private enterprises must be held to highest level of transparency and accountability in order to ensure the most efficient use of our limited and valuable tax dollars. Currently, transparency and accountability of the economic development tax subsidies are poor and/or non-existent in some cases. As a result, while many of the subsidies may be worthwhile investments, others are not. And worse, there is not enough publicly accessible information to identify if or which subsidies are in fact benefiting the state, and if so, to what extent and at what cost. We can’t measure or evaluate what we can’t see, and currently the lack of transparency results in a lack of accountability and efficiency in spending taxpayer revenue. Further, the lack of meaningful comparative information prevents informed and participatory debate on important budget decisions here in the State House and in all 351 cities and towns.

According to today’s findings by State Auditor Bump, of the 92 business tax breaks and credits she reviewed, many dating back decades, only 7 had sunset clauses, automatic review of the program after a fixed period of time, and only 10 had claw back provisions requiring the businesses to return the money they received if they failed to meet their commitments for which they received the tax break.

As you know, tax expenditures have the same bottom-line effect on state budgets as direct state spending, since they must be offset by cuts to other programs or by raising other taxes. Once created, tax expenditures often escape oversight because they do not appear as state budget line items or rarely require legislative approval to renew. For these reasons, spending through the tax code is in particular need of meaningful and easy-to-use disclosure.

For this reason, MASSPIRG supports the passage of An Act to Promote Efficiency and Transparency in Economic Development H.2565 and S.153 which will require that all economic development tax breaks on both the state and local level be transparent and posted on the state budget website; require improved reporting data to evaluate the success of the investments; set standards for successful economic development programs; and hold companies accountable to their job creation commitments by requiring companies to pay back the value of the tax break if they fail to meet their promised commitments.

The strong disclosure requirements will bring Massachusetts more in line with states such as Connecticut, Maine, Maryland, Ohio, Pennsylvania, New Jersey, New York, and Rhode Island that already have similar provisions in place.

This bill would:

Require uniform data collection

Uniform reporting requirements would mean that every economic development program funded by the state or a municipality would have the same data reporting requirements. Applicants would have to document their current in-state employment levels, salary, and benefit structure to establish an objective benchmark from which to measure gains. Under this amendment:

• All proposals for assistance must include benchmark summaries of
    o The number of jobs prior to receiving assistance
    o Benefit levels (e.g. health insurance) provided current employees
    o Salary scale of current employees
• Also required is a summary of proposed benefits to the Commonwealth
    o Number of new jobs to be created
    o Benefit levels for these new jobs
    o Wages scale for new jobs
• Requires recipients to report on results annually for the life of the subsidy.

Provide transparency

• Requires the DOR to produce an annual unified economic development budget
    o Detailing tax reductions, tax credits and subsidies for economic development
    o Including all line item expenditures for any state-funded entity including quasi-public authorities
    o Local property tax abatements and reductions also included
• Requires EOEHD to make all applications and reporting materials available to the public.
• DOR and EOEHD reports and supporting materials (applications, etc.) must be posted on the web in a searchable, easy to use format.

Establish standards and require claw-backs when benefits are not met

• If a company fails to meet its job creation commitments within two years, the state will be required to recapture (“claw-back”) a pro-rated portion of the subsidy.
• Wages must remain at or above 85% of average wage for the industry and region (75% for small businesses). If taxpayers are going to subsidize jobs with public dollars, they shouldn’t be eroding community standards through those investments.
• The subsidy per permanent, full-time job may not exceed $35,000, which is the limit set for job creation when applying for federal Community Development Block Grants.
• Section 12 empowers the Executive Office of Economic Development to waive the subsidy limit and job standards upon finding that there exist significant public policy goals apart from job creation. The policy goals would have to be explicitly stated and become the basis of annual progress reports.

We can be heartened by the fact that Massachusetts is making more spending information available to the public, but it is just a start. The recently passed transparency law must be implemented without delay, and we must adopt greater control, analyses and transparency of the economic development subsidies and tax expenditures including those awarded locally. While the new law requires the reporting of which companies receive tax subsidies from a set of programs and the amounts they receive, full transparency would disclose this information for all corporate tax subsidies, show whether or not companies fulfilled the commitments they promised in return for those subsidies, claw-back any investment where the recipient failed to meet their commitment, and provide better analyses as to the value of those tax expenditures.

Whether in good times or bad, Bay Staters need to be confident in our investments and with meaningful, comprehensive transparency should be able to fully participate in decisions and discussions about state and local budgets and priorities.