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Getting Our Money's Worth?:

Promoting Transparency and Accountability for Corporate Tax Subsidies in Massachusetts

by Tom Van Heeke, Frontier Group; Phineas Baxandall, U.S. PIRG Education Fund; Deirdre Cummings, MASSPIRG Education Fund

Executive Summary

The people of Massachusetts deserve to know how their tax dollars are spent, including on tax subsidies for businesses. Full transparency allows citizens to hold lawmakers, government contractors, and recipients of public subsidies accountable. It also promotes fiscal responsibility, checks corruption, and bolsters public confidence in government. Currently, Massachusetts offers its citizens the opportunity to scrutinize state spending down to checkbook-level detail thanks to its online portal, Open Checkbook on the Massachusetts Transparency website. Yet, with the exception of transferable and refundable tax credits, the Commonwealth provides less transparency and accountability for spending conducted through the tax code in the form of “special business tax subsidies.”

This special spending through the tax code merits particular attention because it is not subject to the normal public scrutiny of other line-item spending in the state budget. Unlike conventional budget items, the annual cost of such spending may not be known until after the money is spent. And because programs are often automatically renewed each year, they can continue to impose costs on the Commonwealth without undergoing thorough consideration and annual approval by the Legislature and Governor. To protect the public, Massachusetts should adopt common-sense practices to increase the transparency and accountability of special business tax subsidies.

Massachusetts spends twice as much on special business tax subsidies as it did 16 years ago.

  • In fiscal year 2012, Massachusetts spent $770 million on special business tax subsidies, up from an inflation-adjusted $342 million in fiscal year 1996, according to research by the Massachusetts Budget and Policy Center. This is more than the $678 million the Commonwealth spent in fiscal year 2012 on school building construction, or the $510 million the Commonwealth spent on all public health programs including initiatives to prevent smoking and teenage pregnancy.
  • Spending on special business tax breaks as a share of the state economy has increased 60 percent since fiscal year 1996. Every other major area of government spending except health care and education decreased as a share of the state economy during the same period.
  • The vast majority of special business tax subsidies – a total of $626 million in fiscal year 2012 – are special deductions or credits that businesses can use to reduce the corporate excise on profits or to collect tax rebates from the Commonwealth. Other subsidies allow companies to avoid sales taxes or permit certain businesses filing taxes through their owners to receive credits or deductions against personal income tax obligations. In fiscal year 2012 these subsidies cost the Commonwealth $129 million and $15 million, respectively.

The Commonwealth does a far better job creating new tax subsides than ending old ones.

  • The number of special business tax subsidies has almost doubled since fiscal year 1996 with the addition of 13 new tax subsidies. At the same time, lawmakers have phased out just two subsides that were active in fiscal year 1996.
  • Two of Massachusetts’ most expensive special business tax subsidies – film production credits and the single sales factor formula, which allows certain companies to avoid taxes on their property and payroll in Massachusetts – have been created since fiscal year 1996.

While Massachusetts’ lawmakers have taken steps to make spending through tax expenditures more transparent and accountable, the Commonwealth currently lacks important tools to ensure that citizens get the most bang for their buck.

  • Few of the Commonwealth’s special business tax subsidies have well-articulated public policy objectives.
  • A lack of clearly defined goals for subsidy programs limits the ability of the Commonwealth to impose money-back guarantees, known as “clawback” provisions. Only nine of the 25 active special business tax breaks currently have such provisions in place. Where clawback provisions do exist, they are not as clear or demanding as they should be.
  • Fewer than one-third of the Commonwealth’s special business tax subsidies (seven of 25) are subject to annual spending limits.
  • Only eight of Massachusetts’ 25 special business tax subsidies require the Legislature to actively renew the program, meaning that the other 17 continue regardless of their merit.
  • Important information is scattered across different reports and online databases.
  • Nearly half of all special business tax subsidy programs fail to publicly disclose one or more of the following pieces of information: recipients, subsidized projects, project-by-project or program-wide cost to the state budget, or results generated by the program.
  • With the exception of the film industry and life sciences industry tax credits, no publicly available evaluations of after-the-fact cost-effectiveness exist for special business tax subsidies. Bay Staters lack tools to easily discern when the state has recaptured subsidies from companies that fail to deliver on promises. A dearth of information on costs and benefits means that Bay Staters cannot weigh in on the merits of particular subsidy programs before they are renewed.

To increase the transparency and accountability of special business tax subsidies, the Commonwealth should adopt the recommendations of the state’s bipartisan Tax Expenditure Commission as a starting point. Building on these, ultimately the system should:

  • Transition away from discretionarily awarded tax subsidies to a system of direct grants, improving the transparency, accountability and efficiency of economic development subsidies.
  • Articulate clear and measurable public policy goals for each subsidy program, and require that proposals for new breaks include a clear policy purpose. Businesses that receive a tax subsidy should report measurable, company-level targets that fit with the subsidy’s overarching policy objective.
  • Mandate periodic review of all tax subsidies and require them to expire in the absence of active decisions to renew based on the review.
  • Cap the cost of each subsidy program, protecting the Commonwealth and its citizens from runaway costs.
  • Define strong and clear clawback provisions to recoup tax subsidies from companies that fail to meet their programmatic goals wherever practical.
  • Continue to improve public disclosure of information – including information on each subsidy program’s purpose, progress toward the policy’s goal, total annual cost, expiration date, clawback statistics and names of beneficiaries – on the state’s transparency website.  Users should have the ability to “drill down” to see details about the monetary value of each business’ tax subsidy, the intended benefit for the state (number and quality of jobs, volume of sales and so on), the recipients’ performance relative to targets, and any instance in which the state gets its money back due to a recipient’s failure to deliver on promises.
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