The Clawback Clause

If a company getting tax breaks doesn't deliver the goods, should the state or locality involved demand its money back?
by | October 2002

Four years ago, Georgia made a tax-subsidy deal with Alltel Corp., a telecommunications company based in Little Rock. Under Georgia's "revenue and apportionment" program, Alltel received tax breaks totaling $13.5 million over five years--one of six companies (along with Turner Broadcasting, HBO, General Electric and others) to receive such benefits.

Even at that price, it would have been a good deal for Georgia. The agreement called for the company to produce almost 800 new jobs at its Alpharetta, Georgia, headquarters. That's about $17,000 per job, but Alltel promised the jobs would pay on average more than $60,000 per year.

Last spring, however, Alltel acknowledged that it hadn't met the terms of the deal. After instituting company-wide cutbacks in 2001, the company wound up with about 135 more jobs in Georgia than it had in 1998, according to one estimate. And there was no evidence that the jobs paid anywhere near $60,000 per year.

Was Alltel simply responding to economic downturns by cutting back on its expansion plans and consolidating Southern operations in Florida rather than Georgia? Or did Georgia get taken by a company that accepted tax breaks and turned a healthy profit while welching on its end of the deal?

Either way, Georgia might be able to get some of its $13.5 million back--if it chooses to pursue Alltel under the "clawback" provisions contained in the state's tax-subsidy law. The law isn't airtight; Georgia doesn't even get a compliance report from the company unless state officials ask for one.

The state may or may not pursue a settlement. But the Alltel case is the latest example of an emerging question in economic development: If a company getting tax breaks doesn't deliver the goods, should the government agency involved demand its money back?

Clawback provisions--the term is taken from tax law--are increasingly common and some givebacks are taking place. United Airlines returned more than $30 million to government agencies in Indiana last year after failing to meet its jobs goal for a maintenance hub at Indianapolis International Airport--a deal that gave the airline $300 million in tax breaks. After he was elected mayor of New York City, Michael Bloomberg rescinded a tax-break deal his company had negotiated with the city. (It was a refund steeped in irony: The subsidy was less than the sum he spent on his campaign.)

Nonetheless, enforcing clawback provisions still isn't the norm. By and large, the corporate-tax subsidy is still viewed as a one-way street in the United States.

On the surface, it makes sense to insist on a clawback. But whether it's realistic depends on how you view the true nature of a tax subsidy. It can be seen as a loan to a company: a financial liability that must be paid back if things don't pan out. Or it can be considered an investment: a financial bet by the government that the company will grow and prosper.

There's an argument both ways here. On the one hand, we're talking about tax money. It's O.K. to put that money at risk for a valid public policy objective such as economic development. But it's not a whole lot different than an economic development agency providing a below-market loan to a growing company--a risky process, to be sure, but one in which financial recourse is part of the deal. The agency loaning the money may lose it in the end if the company tanks, but it might get at least part of it back as creditors are paid off.

On the other hand, there's no way to guarantee the success of a business venture--that the markets will be there for the products and services and that contracts will continue to flow in. Given the recent history of corporate America, there isn't even any way to be sure that a large company will be managed well--or even honestly.

To take the argument a little further: It's one thing for economic developers to lay the necessary groundwork for prosperity--to provide significant pieces of economic infrastructure (airports, highways, buildings) or to try to stimulate specific parts of the economy (by encouraging networking among industrial clusters and the like). It's another thing, however, to lay a bet on a specific company. That's not economic development. That's gambling.

Clawback provisions might alter the balance of power to some extent. They could, for example, put corporate executives on alert that the government is interested in a partnership, not in giving away money.

The clauses could also have no effect whatsoever. The competitive pressures in American economic development--state against state, city against city--make it unlikely that clawbacks will become the norm rather than the exception. So let's be clear about what's going on. If the taxpayers want to lay a bet on a specific company, they can't complain about what happens to their money in a bear market.

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