Shedding Light on Public Subsidies for Private Development

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Image from James Willamor:

Bringing Transparency to Tax Breaks for Private Development

Governments have any number of programs, policies, and perks at their disposal to woo private developers to invest in their region. Nationwide, local governments give up $80.4 billion in incentives, with Texas earning the designation as the nation’s most incentive-inclined state, spending $19.1 billion annually to court businesses.

While high-profile deals to attract investment in state and local economies often involve generous tax breaks and incentives that are well documented by the media, there is no nationwide accounting for these tax-payer subsidies. But that may change with new rules proposed by the Governmental Accounting Standards Board. If local governments are forced to disclose subsidies for private development, will that change the economic development landscape? And how should the public and policymakers use this information?

The new rules proposed by the Governmental Accounting Standards Board call for mandatory tax abatement disclosures that would make local governments more accountable for granting tax breaks to spur economic development. Under the new rules, government entities would have to disclose the nature of any tax abatements, detail the commitments made by the incentive recipients, indicate the total dollar amount of all subsidies made during a given period, and specify any other commitments the government body made as part of a tax abatement agreement.

The Board notes that these new procedures would give the public and policymakers a better understanding of “how tax abatements affect the government’s future ability to raise resources and meet its financial obligations” [PDF]. It would also speak to the effect that subsidies have on a governing body’s overall financial condition.

This could be a potentially powerful tool in places where there isn’t rigorous debate about the costs and benefits of public subsidies. Would the public support the construction of a mega-hotel if they knew that the taxes guests were paying were going to the hotel developer instead of funding vital city services like police, fire, and infrastructure repair? Would they support the subsidy if they knew that the hotel would, in exchange, pay their workers a living wage and use local disadvantaged workers during construction? It’s hard to say, but disclosing the total subsidy and the strings attached to that subsidy would certainly make for a more informed debate.

Here in LA, where the city has been criticized for not being selective enough in doling out tax incentives, meaningful concessions have been made on the part of private developers.

In the booming hotel market [PDF], generous tax incentives have proved to be a powerful leveraging tool for organized labor, with the City approving a minimum hourly wage of $15.37 for workers at large hotels in LA. Likewise, more than 120 cities have living-wage laws that hold contractors and groups that receive public subsidies to higher wage standards.

While public subsidies and tax abatements can be leveraged to achieve significant outcomes for local communities, oftentimes it isn’t clear how the costs of the subsidy stack up against the public benefit. If the new Government Accounting Standards Board recommendations are implemented, that may no longer be the case.

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