Cash-strapped communities have a message for corporations that promised jobs in return for tax breaks: A deal’s a deal.
As the recession drags on, municipalities struggling to fix roads, fund schools and pay bills increasingly are rescinding tax abatements to companies that don’t hire enough workers, lay them off or 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 go 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 — so-called “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 recession 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 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 companies 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 6 in 2005 to a total of 37 by 2008.
Meanwhile, more communities are contemplating similar action.
In St. Louis County, officials have told Pfizer that if it cuts 600 jobs, as planned, they’ll rethink the $7 million in tax breaks they promised to give the company 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 keep do statistics only track 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 thought 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 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 even 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.
Copyright 2010 The Associated Press.