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Bill Proposes Transparency in Incentives

South Carolina taxpayers could be in store for a belated Christmas present – one that would radically overhaul the awarding of economic development incentives and subsidies by state government.

The gift, in transparent wrapping and emanating accountability, exists in the form of a bill prefiled for a new legislative session slated to begin Jan. 11.

The sponsor of the bill, Republican Sen. Tom Davis of Beaufort, says it is designed to make sure taxpayers get a good deal when the state doles out incentives and related financial breaks to business and industry.

“I would rather not play that game,” Davis says of such handouts.

But if the state is going to engage in what he describes as the government picking winners and losers, Davis says, “I think there ought to be some very clear accountability.”

As it stands, he says, “there’s really no formal due diligence” on the front end of incentives to objectively analyze their public costs and benefits. Nor is there any true holding of feet to the fire on the back end with respect to employment and capital investment pledges by companies that receive incentives, Davis says.

“All we do is mouth the words ‘it creates jobs’ and the analysis doesn’t really go beyond that,” he says.

All of that could change under the senator’s bill.

The legislation, S. 206, would totally restructure state incentives and subsidies. Instead of outright giveaways, the perks would be provided as forgivable loans with stringent criteria to receive and keep them.

Titled “the Economic Incentive Transparency Act,” it would require legislation that grants a targeted incentive to be considered as a freestanding bill separate from any other proposed subsidies. And, the legislation says, “A recorded vote is required for second and third reading of the bill.”

In addition, targeted incentives and subsidies would expire after five years unless the General Assembly extends them.

Also under the Davis bill, which would apply to new tax breaks only:


  • The S.C. Board of Economic Advisors and an independent economist commissioned by the state Department of Commerce must conduct separate cost-benefit analyses of incentives given to a single business that exceed $100,000 in value over five years.

  • The recipient of the subsidies would pay for both analyses, and the studies would be made publicly available online.

  • The reviews would include details about job creation; the ratio of public spending to each job created; and estimated impacts on existing businesses and industries, among other information.

  • “Subsidies must not be awarded,” the legislation says, “if the cost for each job exceeds the average per capita income in South Carolina.” That amount was a touch less than $31,800 in 2009, according to the U.S. Department of Commerce.

  • A public hearing on the incentives would be mandatory and the company seeking them would have to submit a detailed application to the Department of Commerce spelling out its job creation and wage targets, its timeframe for meeting them, statements as to the public purpose of the subsidies and why they are needed, and other relevant facts.

  • Businesses receiving subsidies would be required to submit annual reports to the S.C. Department of Revenue summarizing their progress toward achieving their employment and salary estimates.


SHARP CLAWBACK

A company failing to meet those benchmarks would have to repay its subsidies. Repayment would be prorated based on how close the company came to meeting its goals, plus interest and a 10 percent penalty.

Such firms would be “ineligible for any future tax incentives,” the bill says.

Both the incentives application and the yearly reports would be publicly available on the Internet.

The bill would amend the S.C. Freedom of Information Act to allow for disclosure of the reports. Currently under the FOIA and other parts of state law, specifics about the value of a company’s subsidies and its employment and wage levels are private under the guise of trade secrets and confidential taxpayer information.

“And to me, that’s always been the problem,” Davis says, describing that secrecy as the lack of accountability on the back end of incentives deals.

However, a legal expert in crafting incentive deals says businesses jealously guard such information.

“Most companies consider that to be highly confidential,” says Burnie Maybank, an attorney with the Columbia-based Nexsen Pruet law firm.

Counters Davis: “I think what comes with that is a willingness to be open about what you’re asking for. I think that’s part of the deal.”

Maybank, who represents many a client seeking special tax-break deals from the Legislature, is a former two-time director of the Department of Revenue. He played a key role in drafting the agency’s voluminous Tax Incentives for Economic Development publication.

Asked by The Nerve to review Davis’ bill, Maybank said it has merit conceptually. “I think everybody agrees with the spirit of the bill.”

But he said it’s written too broadly. “They would probably need to define what an incentive is,” Maybank said.

Insofar as companies reporting their job creation and wage levels publicly, Maybank said the legislation also would need amending to revise state law where it protects those details as confidential taxpayer information.

“They don’t mind disclosing it to Commerce,” he said. “They just don’t want their competitors to read it.”

Lewis Gossett, president and CEO of the South Carolina Manufacturers Alliance, offers a similarly mixed review of S. 206.

“I never have a problem with recorded votes on those kinds of things,” Gossett says of subsidies and the like.

Regarding the individual bill provision for incentives, he says, “If it’s not germane, I wouldn’t want to see an economic development bill that I was interested in attached to something that’s not relevant.”

Gossett says it has been well documented that such “bobtailing,” as it is known, runs afoul of the S.C. Constitution. “The courts have made it very clear that they’re not going to tolerate that Christmas tree approach.”

But if adding incentives to other economic development legislation is necessary because another legislative vehicle is needed, Gossett says, “I’d still want that flexibility.”

And, like Maybank, he questions the idea of disclosing proprietary company information “because there are competitive issues out there.”

BOEING, SEMBLER CONTEXT

To be sure, the Davis bill did not originate out of the blue.

Indeed, it follows the biggest corporate giveaway in South Carolina history, a package of taxpayer-financed bonds and other freebies for the Boeing Co. Conservatively, the estimated value of the Boeing incentives totals at least half a billion dollars, The Nerve found in an investigative series published in January.

In a rare fall special session of the General Assembly, legislative leaders crammed the Boeing package through the Legislature in October 2009.

Davis says the Boeing case, “by virtue of its scale and scope,” raised public awareness of incentives and influenced his decision to sponsor his bill. “I just think that that serves as a good example.”

He says a retail incentives bill in this year’s legislative session also informed his decision.

That deal would have provided tens of millions of dollars in state sales tax rebates to the Florida-based Sembler Co. The money would have subsidized an upscale shopping mall the out-of-state developer planned to build in the Lowcountry.

As it happens, Nexsen Pruet negotiated the Boeing deal on behalf of the aerospace giant, and Maybank represented Sembler.

The Sembler incentives had gained momentum early in the session. But the subsidies died after Davis, Sen. Greg Ryberg, R-Aiken, and a broad coalition of grassroots groups marshaled opposition to them.

The critics included the Coastal Conservation League and The Nerve’s parent organization, the South Carolina Policy Council, a nonprofit free-market think tank based in Columbia that opposes all special tax breaks.

As a debate about the Sembler proposal was beginning to heat up, the Policy Council released a report outlining ways to improve transparency in economic development incentive deals. The report served as a template for Davis’ bill.

Policy Council research director Jameson Taylor oversaw the project. “That’s one aim of the report – to prompt the creation of model legislation that would be the strongest in the country regarding economic incentives transparency,” Taylor says.

The Palmetto State apparently could use a lot of help in that regard.

Earlier this month, a nonprofit nonpartisan research center in Washington, D.C. – Good Jobs First – released a survey grading the states on how well they disclose their economic development incentives and subsidies online.

South Carolina’s grade: F.

“We limit the failing grade of F to those states with no disclosure at all,” says the report, “Show Us the Subsidies.”

Peter Calcagno, an associate professor of economics at the College of Charleston, also reviewed the Davis bill to comment for this story. Calcagno, who is critical of incentives, describes the legislation as the “second best solution” to subsidies.

“This solution does not get at the heart of the matter which is that the [industrial] property tax rate is stated in Article X of the S.C. Constitution,” he said in an e-mail. “This is the excuse that most lawmakers give as to why incentives must be offered in the first place because the 10.5 [percent] rate in the constitution is too high (uncompetitive with other states).

“What needs to happen,” the professor continued, “is to remove the excuse of the high property tax rate by amending the constitution.  If we cut tax rates across the board – income, property and corporate for all firms – we would be an attractive place for business to grow and invest.”

Says Gossett, “And 10.5 is pretty much the highest in the United States. I mean there’s no reason a company would locate in South Carolina if they have to pay the 10.5.”

Added Calcagno, “As a second best solution this [legislation] may be more politically feasible and slow down the ability to offer incentives and perhaps is better than the status quo.”

Taylor agrees, calling it a good bill overall.

“This bill does not end the practice of using taxpayer subsidies to pick winners and losers,” he says. “What it does do is require the winners – the companies getting the special tax breaks and incentives – to show that they are actually creating jobs. Not only does it bring transparency to economic development deals, it requires lawmakers and companies to prove these incentives are working. But if they’re not, why continue to support a failed policy?”

But it’s not just free-market types sounding positive notes about S. 206.

In a Dec. 9 editorial, the Hilton Head Island Packet characterized the provision requiring disclosure of the public spending per job as “a very telling piece of information”

Said the Island Packet of the legislation as a whole: “If this bill becomes law, it would move us light years ahead in holding government officials and businesses accountable when they make special deals. We might even learn whether they are worth the public expense involved. Let’s hope other lawmakers are willing to be held accountable.”

Reach Ward at (803) 254-4411 or eric@thenerve.org.

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