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Subsidy accountability

What is it?

Subsidy accountability strategies can help cities ensure that businesses supported by public resources deliver measurable public benefits and that economic development plans are equitably designed and executed. Municipalities across the United States provide economic incentives and subsidies to attract businesses and create jobs: over $80 billion of public money is spent each year on programs that finance business relocation and development, including tax abatements and exemptions, low-cost forgivable loans, cash grants, and utility discount rates. Tax breaks and other corporate subsidies are often wasteful and ineffective; however, when thoughtfully crafted and paired with explicit equity goals and strong accountability mechanisms, these types of subsidies can contribute to equitable economic development, creating positive social impact and good middle-wage jobs that are accessible to traditionally marginalized workers. Clawbacks, the gold standard in subsidy accountability, are legally-binding contract provisions that provide a “money-back guarantee” by requiring companies to repay subsidies if they fail to meet their obligations. Critics argue that subsidies given to large corporations disadvantage local businesses and divert funds from the public good without proven benefits, and urge greater accountability for this use of public funds. At the same time, insisting on accountable subsidy practices presents an opportunity to promote equity outcomes through greater public participation and the enforcement of strict community standards.

For more resources on subsidy accountability, see Good Jobs First.

Who implements it?

  • Elected and appointed officials can implement approval processes, contract provisions, and reporting requirements to hold subsidy recipients responsible for meeting specified standards.
     
  • Businesses receiving public resources can proactively demonstrate their social and economic impacts by providing independent verification of their performance.
     
  • Residents, community-based organizations, and other advocates can campaign for specific equity requirements for municipal subsidies and transparency in city decision making and business reporting practices.

Key considerations

Effective subsidy accountability programs should entail robust cost-benefit analyses and outcomes measurements to ensure that both businesses and city officials are guided by the principles of transparency and social responsibility in the use of public funds.

  • Performance goals: All public subsidies and economic incentives should be tied to specific and measurable economic and social impact targets, including job quality standards regarding wages and benefits.
     
  • Transparency: City decisions regarding economic development subsidies should include meaningful public input and transparency. Public agencies and officials should be required to disclose all public subsidies and report on their outcomes. The Government Accounting Standards Board now requires state and local governments to report the costs of corporate subsidy “tax abatements,” and the data will be publicly available beginning in 2017.
     
  • Performance-based incentives: Incentives and subsidies can be disbursed based on actual rather than projected performance, such that companies only receive financial support after they have met the economic targets of the subsidy agreement.
     
  • Enforcement: Cities can enact clawbacks and rescissions that obligate subsidized businesses to return all or part of the public resources they receive if they fall short of the conditions laid out in the incentive agreements.
     
  • Protecting public schools: City leaders should work closely with school boards to ensure they are not extending tax-increment financing (TIF) or tax abatements that will adversely impact local public schools funded by property taxes. By exempting companies from paying property tax (abatements) or diverting their tax dollars to infrastructure and construction costs (TIF), these subsidies undermine the tax base that funds public education.
     
  • Interagency coordination: Where applicable, cities should aim to standardize performance and reporting criteria with state and federal agencies, coordinating the subsidy process so companies do not receive unnecessary incentives.
     
  • Complementary strategies: City leaders should align public subsidy expenditures with complementary strategies—such as community benefits agreements and workforce training programs — to maximize public return on investment in new business ventures.

Where is it working?

City leaders have a responsibility to measure the benefits of economic development initiatives against their costs, including the forfeiture of future revenues as well as direct public spending. Any firm or project receiving public resources should provide significant public benefits; contribute to inclusive, equitable, and sustainable growth; and demonstrate transparency and community accountability.

  • Since 2013, the Economic Development Department in Austin, Texas has used performance-based incentives and required businesses to demonstrate that their presence or expansion will increase jobs and generate revenue for the city when they apply for public subsidies. The department uses a transparent scoring system based on 11 criteria — ranging from jobs created to contracting opportunities — to weigh the costs and benefits of providing a business with public money. The city provides support only after pre-established goals are met, and reserves the right to terminate subsidies if public benefits are not reached on schedule. Companies receiving public subsidies are also required to integrate diversity and inclusion targets in their business plans. The city posts the details of all its economic development agreements online for the public to review.