Voice of the Practitioner
As taxpayer scrutiny of incentive deals continues to rise, public agencies offering incentives are increasingly using performance agreements as a tool to document the total public incentive invested and the anticipated economic benefit expected. The company and community enter into these agreements in which the firm commits to providing a specific set of deliverables (e.g., jobs created, payroll generated, investment leveraged, etc.) during a pre-specified time period in exchange for a public investment. Furthermore, the agreement identifies payment schedules and potential clawback provisions if the company does not meet its obligations. Often, intermediate milestones are included in the agreement.
Clawback provisions outline what happens if the firm does not fulfill its obligations, providing the government with the ability to stop payment on future incentive awards or to request a partial return of funds. Many states and communities avoid clawback provisions by creating pay-for-performance agreements in which the company receives benefits after they have provided a benefit. Even in these situations, there is often a need for continued monitoring, especially when companies are required to maintain a benefit (such as job or an investment) after the scheduled payments.
- Identify an account manager to service a client incentive recipient to ensure the incentive is treated as a transaction between the client and the public sector
- Develop an agreed upon plan for monitoring performance and compliance related to the incentive to build in accountability
- Develop a periodic reporting plan to capture information, including a process for validating client claims through third-party state administrative (i.e., corporate tax or wage) records
- Contribute reported information in confidential form to program- or agency-wide tracking and reporting systems to ensure transparency with public stakeholders
- Close-out the agreement once performance requirements are satisfied
Jurisdictions are being more transparent with incentive deals
State and regional governments are taking a more proactive role in explaining the rationale for making investments and describing the resulting outcomes. States and regions have created analytic tools and publicly visible dashboards to convey information about incentive deals after they are signed. For example, Indiana created a Transparency Portal that provides specific data about each individual deal.
Checklists and Guides
Center for Regional Economic Competitiveness, Redefining Economic Development Performance Indicators for a Field in Transition (2017). This document (pp. 5-14) examines metrics and indicators related to job quality/worker prosperity and business dynamics.
Center for Regional Economic Competitiveness, State Data Initiative: State Corporate Tax Comparison Tool (2017). This resource identifies data elements in state corporate tax reforms that could support program performance evaluation.
GBQ’s Guide to Businesses for Negotiating Clawback Provisions in Tax Incentives (2016). This guide provides insight into the pressure points investors consider when negotiating the inclusion of clawback provisions.
Good Jobs First – Examples of Clawback Provisions in State Subsidy Programs (2005). This document provides template language and examples of clawback language included in state tax programs.
Matthew Murray, Donald Bruce, Best Practices for the Design and Evaluation of State Tax Incentives for Economic Development (2017). This document (pp. 8-15) considers factors important in the design and evaluation of tax Incentives.
OECD Guiding Principles to Enhance Transparency and Governance of Tax Incentives in Developing Countries (2013). This document (pp. 1-5) provides insight into the pressure points investors consider when negotiating the inclusion of clawback provisions.
Pew Charitable Trusts, Evidence Counts: Evaluating Tax Incentives for Jobs and Growth (2012). This document (pp. 4-11) offers criteria for states to recognize effective evaluation of tax incentive programs.
Pew-MacArthur Results First Initiative, Evidence-Based Policymaking: A Guide for Effective Government (2014). This document (pp. 4-17) provides key components for achieving evidence-based policymaking.