Getting our Money’s Worth?

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New Report Reviews $770 Million of Spending for Special Business Tax Breaks

MASSPIRG Education Fund

As Massachusetts kicks off its months-long state budget deliberations, MASSPIRG Education Fund released a new study today that reviews a much-debated and costly category of state spending. The study, Getting our Money’s Worth? Promoting Transparency and Accountability for Corporate Tax Subsidies in Massachusetts, provides analysis of Massachusetts’s special business tax breaks and finds taxpayer dollars are being put at risk due to a lack of accountability measures in many programs. The report proposes straightforward and proven policy reforms to protect taxpayer dollars and ensure Bay Staters get the best bang for their buck. The study analyzes 25 special business tax breaks worth a total of $770 million. The report found that many tax subsidy programs lack adequate accountability measures, like goals for job creation, measures requiring companies to return subsidies when they fail to deliver promised benefits, and adequate public transparency to enable independent assessment.

“Massachusetts is a national  leader in making many forms of state spending transparent, yet many of our corporate subsidy programs put taxpayer money at risk for waste due to a lack of openness and accountability,” said Deirdre Cummings, MASSPIRG’s Legislative Director and co-author of the report. “By implementing straightforward and proven improvements to these programs, we can ensure that taxpayers get the best bang for their buck.”   

Special business tax subsidies are deductions, credits, exemptions or other tax treatment specifically designed and enacted by the legislature to spark economic growth. Since fiscal year 1996, tax subsidies have more than doubled in value to $770 million. In fact, growth of special business tax subsidies as a share of the state economy outpaced all other major areas of state spending since 1996. Given the enormous growth of these tax subsidies, accountability to taxpayers is critical.

“The study released by MASSPIRG underscores the need for legislators to keep pushing for greater transparency and accountability for corporate tax subsidies,” said Senator Jamie Eldridge. “The people of Massachusetts deserve complete and full transparency and are entitled to know how taxpayer money is being spent. It is imperative that we continue to improve programs that monitor and shed a light on state spending levels.”

While Massachusetts’ lawmakers have taken steps to make spending through tax expenditures more transparent and accountable, the Commonwealth currently lacks important tools to ensure state spending goes to programs that yield the best results. Specifically,

  • 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.

Despite taking steps in the right direction, the Commonwealth does not yet meet the best practices of accountability and transparency for $770 million in state spending through the tax code. To make the special business tax subsidies full accountable, the state should:

  • Transition away from discretionarily awarded tax subsidies to a system of direct grants, improving the transparency, accountability and efficiency of economic development subsidies.
  • Set clear and measurable public policy goals for each subsidy program and require that proposals for new breaks include a clear policy purpose.
  • 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.

“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,” concluded Cummings. “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.”