Whatever Became of the Multistate Compact on Tax Incentives?

Billy Hamilton

Billy Hamilton is the deputy chancellor and CFO of the Texas A&M University System. In 2015 Hamilton led Texas Republican Gov. Greg Abbott’s Strike Force on the Health and Human Services Commission to complete a management analysis of the agency. Before that, Hamilton was the deputy comptroller for the Texas Office of the Comptroller of Public Accounts from 1990 until he retired in 2006. He is also a private consultant, advising on numerous state tax matters.

In this installment of State Tax Merry-Go-Round, Hamilton examines the status of recent efforts to halt or limit states’ business tax incentives and finds that not much progress has been made so far.

Unless you live in Colorado or are a country music fan, you may have never heard of the Gaylord Rockies Resort and Convention Center, the self-styled “Opryland of the West.” At least, I hadn’t heard of it.

The 1,501-room resort — the state’s largest — is located in Aurora, about nine miles southwest of Denver International Airport. Operated by Marriott, it offers many activities, like a spa, golf, a “lazy river,” water slides, and pickleball (whatever that is). It opened in December 2018 and, like most hotels and resorts, it struggled during the pandemic. It was shut down for a time, and then opened at limited capacity in June of 2020. It’s fully open now, and you can book a room starting at about $229 a night.

I ran across the resort because of a May 21 article in The Gazette announcing that Ryman Hospitality Properties was buying all the remaining interest in the facility.¹ Ryman is a Nashville, Tennessee-based company, and it’s the same Ryman as the city’s fabled Ryman Auditorium, long the home of the Grand Ole Opry.

The fact that there’s a very nice hotel near Denver is not what drew my attention. What’s eye-opening about the article is its contention that the resort is the beneficiary of $1.3 billion in state and local tax incentives over 23 years, according to public records obtained by The Gazette.

The incentives are conditioned on performance, but if The Gazette’s findings are correct, the Gaylord Rockies Resort incentive package would rank about 15th on the all-time list of “megadeals” compiled by Good Jobs First, a Washington-based group that tracks large state and local business subsidies for individual companies.

Good Jobs First defines a “megadeal” as any incentive package of $50 million or more for a single project, but 20 deals on the list include incentives estimated at more than $1 billion each. It makes me wonder whether these supersize deals have become so common in the last decade — 12 of the top 20 megadeals on the list — that a new category beyond megadeal is needed, like “ultradeals” or “whoppers.” That issue I will leave to the experts at Good Jobs First.

According to The Gazette: “Starting in 2015, [the resort project] began receiving tax revenue rebates as laid out by a 2011 incentive agreement signed by the City of Aurora, the Aurora Economic Development Council, the Aurora Urban Renewal Authority (AURA) and the state’s Office of Economic Development and International Trade (OEDIT).” The package includes tax breaks on state and city sales taxes, use tax, lodger tax, and occupational privilege tax plus incremental property tax from Adams County. The first $10 million of annual tax revenue, with inflation adjustment, goes to Aurora, and the rest goes to Ryman.

It’s a complicated arrangement. “AURA committed 100 percent eligible tax increment revenue from property taxes from the city, county, school district and others for 25 years starting in 2018,” The Gazette said, based on a report Gaylord filed with the OEDIT, which it does annually. Based on city reports, the city refunds 96.3 percent of sales tax, 96.25 percent of its lodger tax, and 93.3 percent of use tax.

By now, tax concessions of this magnitude for individual companies aren’t a surprise, but as I read this article, it made me recall an effort that was in the media before the pandemic to do something to halt or limit business tax incentives. I wondered what had become of the effort, which included a proposed multistate compact on tax incentives.

The End of Corporate Welfare Act

The answer is: Not much. The issue surfaced in early 2019 after the demise of the Amazon HQ2 deal with New York City. As you may recall, in September 2017 Amazon invited open bids from cities to be the site for a second headquarters, nicknamed HQ2. The company planned to invest $5 billion and ultimately create 50,000 jobs.

Amazon’s announcement touched off a yearlong frenzy in which cities and states fell all over themselves to offer staggeringly large tax incentive packages (many of the 238 U.S., Canadian, and Mexican bids remain undisclosed). Critics claimed that the company not only reaped the benefits of billions in potential incentives but also gained a treasure trove of corporate intelligence. “Amazon, which is a growing corporation, has now accumulated a massive database of what people were willing to offer to get a particular project,” Steven Strauss, a professor at Princeton who served as managing director of the New York City Economic Development Corp. under former New York City Mayor Michael Bloomberg, said in 2019.

The size and audacity of the competition gave new life to long-standing concerns over the corrosive effects of economic development competition among the states, but the company continued its beauty contest and eventually chose Arlington, Virginia, and Queens, New York, for dual HQ2 locations.

However, in the weeks following the announcement, the Queens deal collapsed after lawmakers and activists criticized the state and local incentive package as a “corporate giveaway” that would gentrify the Long Island City neighborhood and be a waste of tax dollars. “You walk out in New York City, in any corner you can see people identifying a million ways to spend their money better than giving it to Jeff Bezos,” Assemblyman Ron Kim (D) said. “Amazon doesn’t need our money. It’s a trillion-dollar company.”² Reaction to Amazon’s decision, which had been trumpeted by New York Gov. Andrew Cuomo (D) and New York City Mayor Bill de Blasio (D), turned sharply negative. In the midst of mounting bad press and political resistance, Amazon in February 2019 abruptly pulled out of the New York deal and focused on Virginia and other locations.

At about the same time, news stories began to appear about an effort to ban company-specific incentives altogether, or at least limit them. At the time, the proposal was called “The End of Corporate Welfare Act.” The goal was to start a national movement to halt the practice of states being played off against one another in harmful bidding wars. Amazon’s exit from New York seemed to suggest that more would be possible. “It’s not just about Amazon — there is a deep issue here,” said Kim, who, along with state Sen. Julia Salazar (D), introduced the End Corporate Welfare bill in New York. “I think Amazon leaving abruptly and the grassroots groups clearly claiming wins is in and of itself a turning point in how we view growth in our communities.”

The End Corporate Welfare Act became a model for legislation in several states, as the original concept was adapted to each state’s particular needs and procedural forms. For example, Kim’s bill proposed “an interstate compact prohibiting company-specific subsidies.” It defines “company-specific subsidies” as company-specific tax incentives, including “any change in general tax rate or valuation offered or presented by the state to a specific company that is not available to other similarly situated companies.” Also included were prohibitions on company-specific grants, including “any disbursement of funds, property, cash or deferred tax liability” to a specific company.³ Preexisting subsidy awards would be allowed to continue, and the legislation would authorize the creation of a board of compact administrators representing all member states in the compact. It also provided for other administrative details like joining or withdrawing from the compact.

Asked about the difficulty of getting the states to agree to an idea as economically fraught as a nationwide cease-fire on incentives, Kim claimed that momentum for a compact was building across the country. He also pointed to the European Union, which he said exercises much tighter control on tax incentives than the United States.⁴ Kim wasn’t alone. During the 2019 session, compact bills were introduced in Arizona, Illinois, Missouri, and West Virginia. As if to demonstrate that support for the idea hadn’t yet reached critical mass with legislatures, all the bills died in committee.

‘A Reasonable, Go-Slow Approach’

Anyone who has studied the history of multistate tax cooperation knows that getting agreement among the states on any issue is difficult. The Streamlined Sales and Use Tax Agreement has never had anywhere near full membership by all the sales tax states, although all were willing to tax online sales once they had the chance after the U.S. Supreme Court decision in Wayfair.⁵ More importantly, the states already have one multistate body — the Multistate Tax Commission, which was created in 1967 under the imminent threat of congressional preemption in the area of multistate business taxation. Even at that, most states have declined to participate as more than associate members of the MTC, much less adopting the full Multistate Tax Compact.

That uncomfortable reality aside, the tax incentive compact efforts continued. In January 2020, for example, two Illinois lawmakers began the legislative session by introducing a bill designed to end the “rush to the bottom” among the states in trying to attract corporations with taxpayer-funded subsidies. Sen. Ram Villivalam (D) and Rep. Bob Morgan (D) announced that they were joining in “a national bipartisan campaign to phase out corporate giveaways by establishing an interstate compact,” according to a release. “While our state budget is already starved by excess tax breaks, we want to build support over time and appeal to our colleagues who don’t wish to unilaterally disarm in the giveaway game,” Morgan said. “This is a reasonable go-slow approach, and can help us refocus our state budget on priorities such as education and human services funding.”⁶

In the 2020 sessions, legislation was introduced in 14 states: Alabama, Arizona, Connecticut, Delaware, Florida, Hawaii, Illinois, Iowa, Maryland, New Hampshire, New York, Rhode Island, Utah, and West Virginia.⁷ Still, not a lot of progress was made. The Connecticut bill got a committee hearing, and the Utah bill, carrying the awkward title of the Interstate Compact for Mutually Beneficial Economic Development, remarkably passed out of the House before dying in the Senate. All the other bills were left to languish in committee.

The same likely will be true this year. The above 14 states plus Pennsylvania have had compact legislation introduced in this year’s sessions. Still no real progress, although some legislatures are still in session.

The movement, such as it is, is at least still expanding, however gradually, but thus far the idea doesn’t seem to be gaining much traction among lawmakers at large. But then, the idea’s supporters generally describe it as a long game that will take time and effort to become a reality. “We’re just in the beginning steps of getting this done,” former Utah Rep. Marc Roberts said last year.⁸

Good Jobs First

Since there isn’t much legislative activity, not a lot has been printed about what lawmakers are thinking regarding how their long-term strategy is going more than two years removed from the political heat surrounding the Amazon flap in New York. To get some current insight, I contacted Greg LeRoy, Good Job First’s executive director and a leading expert on business subsidy reform. LeRoy’s biography says he “backed into subsidy reform” accidentally while creating a nonprofit consulting practice against plant closings from Chicago. He founded Good Jobs First in 1998. In 2005 he published an excellent book on the politics of business incentives, The Great American Jobs Scam, and Good Jobs First continues to produce interesting analyses on business tax incentives, including a recent report on the $4 billion in public subsidies Amazon has received over the years.⁹ I have cited Good Jobs First’s work dozens of times, because the group is, along with the Pew Charitable Trusts, one of the few consistently studying how and why states award increasingly massive business tax subsidies, an arms race that now churns out megadeals and whoppers on an annual basis.

LeRoy told me where the idea for the interstate compact originated. “So the proposed state legislation to create a multistate commission is the brainchild of a Chicago lobbyist named Dan Johnson,” he said. “We’ve spoken, and I have attended a few of his conference calls. The idea has also attracted the support of conservative economists at the Mercatus Center at George Mason University in Virginia, especially Matt Mitchell.”

Johnson is the founder of Progressive Public Affairs, a Chicago lobbying firm with a distinctly liberal bent whose slogan is “change the world, one law at a time.” He served, for a time, as a lobbyist for the Coalition to Phase Out Corporate Giveaways, the association for lawmakers that was created to advocate for the multistate compact legislation.

LeRoy said he’s supportive of the group’s effort, especially to the extent that it “rests on the premise that ‘states must be allowed to cooperate’ and liberated from their ‘prisoners’ dilemma’ jail cells.” He also likes how the bill has attracted both progressive and Libertarian sponsors. “That reflects real common ground that we have engaged with in a handful of states on specific debates,” he said.

The prospects for a true multistate compact, though, are somewhat limited, both because of state politics and the dim prospects for federal action. “I don’t think there is any hope for congressional action,” LeRoy said. “Especially given that the last time any federal legislation was introduced on this, it was a bipartisan-sponsored bill to legalize everything wrong and more.”

Instead, LeRoy laid out what he thought was the best hope of a solution in a 2019 paper prepared in the wake of Amazon’s yearlong carnival of dubious intentions.¹⁰ Whether it is a final solution or not, his five suggestions are a useful framework for reining in a process that’s effectively beyond control.

The paper’s first point is to create more “cease-fire” pacts like the one Missouri and Kansas worked out in 2019 under which they agreed to stop paying companies to relocate over very short distances — frequently within the border-straddling Kansas City metro area — to take advantage of the long-standing economic border war between the two states. The pact has had its ups and downs, but it seems to be holding. Lately, Kansas City, Missouri, has been struggling to get the incentives it still hands out — mainly to developers in the form of property tax abatements — under greater control, building on modest reforms adopted in 2016. And the city council faces pressure from the Kansas City Public Schools board to better protect school revenue from the abatements. Citing sharp city-suburban disparities in costs per student, the school superintendent has called the abatements “systemic racism.”

Second, the paper says, subsidy caps are needed to keep spending in check. It argues that caps “can be imposed by federal and state governments, which in turn would rein in localities.” Caps can be designed to put a limit on incentives per project, per job, per program, or per company.

Pew came to a similar conclusion in a 2020 report, noting that “caps are among the most effective tools for governments to guarantee that these incentives do not cost more than expected or intended.”¹¹ The report found that many states have caps on at least some of their incentive programs, “but few use this protection consistently.” This is a common problem with how states have developed incentive programs piecemeal over time through the legislative process. Some of these programs have caps, some clawback provisions (that is, money-back safeguards), some regular monitoring and evaluation, and some legislative review. Probably no state applies the various available safeguards to all its incentive programs, although since about 2012, states have begun to make programs more consistent with improved oversight. Still, it’s a slow process.

Third, LeRoy’s paper argues for a “reinvigorated federal commitment against interstate job piracy,” which, he said, was necessary at the time to counter “President Trump’s green light on ‘job wars,’” one byproduct of which was the Foxconn deal in Wisconsin, a debacle about which I have written several times as it has morphed from economic development dream pie into a steaming pile of broken promises.

In any case, the report says, “While most major federal economic development programs have regulations that prohibit their use in moving jobs across state lines, these rules are obscure and seem only to be contested or enforced when an investigator knows about such fine print. Congress should review these far-flung rules, combine them into a new umbrella law drawn upon the best existing standards, apply one high standard to all federal incentive programs (including federally tax-advantaged deals), and loudly message its intent.” That’s a good idea, but it also runs counter to LeRoy’s comment to me that Congress won’t do anything, which I believe is closer to the truth. A “national perspective” doesn’t prevent members of Congress from being “homers” when it comes to jobs.

In much the same vein, the report recommends a federal “carrot” to give states “a positive incentive to not actively pirate jobs from each other, to stop legally designating existing jobs ‘new’ for purposes of qualifying for incentives, and to embrace process reforms and best disclosure practices.” Again, a good idea, and possibly more likely now than in 2019, but still a long way from reality.

And finally, the paper says that reforms to the process of awarding subsidies are needed, particularly greater transparency in revealing deals before a final commitment is signed. This should be buttressed by “neighborhood-friendly hearings” and “systematic public engagement” — processes already available in some cases but not in others. Most deals are a closely held secrets or vague rumors until the press conference to announce them. Of course, if nothing else, Amazon’s adventure in New York has now demonstrated that it’s not always good policy for leaders to get too far ahead of their followers. And after the deal is done, the paper says, a strong disclosure process is vital so that “records about the deals are not shielded by nondisclosure agreements, privatized or partially-privatized economic development functions, or faulty state Open Records Acts.”

The prescriptions laid out in the paper are a long way from eliminating interstate tax competition, but they would go a long way toward making the process stronger and less stacked in favor of businesses that are, after all, only doing what they do — looking for the best deal available.

“The only update I would add to my paper,” LeRoy told me, “is that the opportunity cost arguments are definitely gaining strength, especially thanks to [Governmental Accounting Standards Board] Statement 77, which enables us to name, for example, 149 school districts losing more than $1,000 per student per year to corporate welfare.” (Statement 77, issued in 2015, requires governments that comply with generally accepted accounting principles to disclose how much tax revenue they lose because of tax abatements every year as part of their financial reporting process.)

‘Heads I Win, Tails the Taxpayer Loses’

My general view of the business tax incentive issue falls on the fatalistic end of the spectrum. The states rightly embrace the idea that they are free actors that can and should be allowed to make policies that fit their economic needs and politics. They should be able to experiment, which ultimately will make the overall process better for everyone as they learn and compete with one another. But anything can be taken too far, and the interstate competition for jobs and investment is one area in which that’s happened — and has been happening for years. The idea of an interstate compact to ramp down the competition is an interesting idea, but it isn’t likely to happen. If Amazon didn’t produce enough political heat to bring about change, what more would have to happen to make such a change possible? The threat of congressional action, possibly, but even then the likelihood of anything meaningful happening would dissipate with each passing day after the crisis ended, one clear lesson of the Multistate Tax Compact. Politics operates in an eternal Now in which the past is quickly forgotten.

The system, however, can be improved, and LeRoy’s ideas are a good place to start. Creating jobs and economic development are two goals almost universally supported by politicians of all stripes, although they all differ in their ideas about how to achieve those goals. Many, if not most, politicians prefer the direct approach: Incentives help to lure companies to a state or community, and handing them out is really about giving away tax dollars that wouldn’t exist without the deal anyway. “This contradicts decades of scholarship by experts like Peter Fisher and Alan Peters, Tim Bartik and Nathan Jensen that finds that incentives only actually leverage between about 6 to 25 percent of deals,” LeRoy pointed out. Nevertheless, the prevailing wisdom seems to be the bigger the deal the better, justifying increasingly large incentives.

Up to a point, the politicians have a point. The government is giving away potential future revenue based on the assumption that without the incentives there would be nothing to tax, and that the jobs and investment created by the deal will ripple through the local economy, creating other benefits that offset the revenue loss many times over. But that’s not the whole story — or maybe even the real story. “We consider this frame as only a political shield that enables politicians, when criticized for waste, to point to the developers and say they signed what’s known as a ‘but for’ certification, claiming the deal would have gone elsewhere but for the incentive, and since the developer’s true decision-making process remains a black box, no one can then challenge the politician’s decision,” LeRoy said. Also, many deals come with hidden costs, like increased demands on local infrastructure and schools, that may be glossed over to cut a deal or may not be fully recognized for years. In some cases, as in Queens, people simply don’t want a particular business in their neighborhood; at other times, the economic boost that a project produces doesn’t make up for the cost of the incentives.

So why do business tax incentives continue to grow if the evidence suggests that they should at least be used more judiciously? The explanation is the structure of political rewards associated with bringing new jobs and investment to a community or state. In a 2019 article about the Amazon competition, Eddy Malesky, a Duke University professor of political science who studies economic development incentives, was quoted as saying he had found in his studies that voters heavily reward politicians when companies move to the area.¹² A new development can give an elected official associated with it a 20 percent poll bump, rising to 25 percent if that politician offered the company an incentive. Most importantly, voters gave a 10-point bump to a politician who offers an incentive even if the investment does not come.

This means, the article said, that incumbent politicians are “heavily incentivized to offer tax breaks to corporations even if the deal is terrible” because there’s no political downside. “Even when they know in their hearts it’s the wrong thing to do, they still do it,” Malesky said. “It’s heads I win, tails the taxpayer loses.”