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Altaf Rahamatulla on November 30, 2009 - 4:38pm
As part of the Progressive States Network’s 2010 Shared Multi-State Agenda, we are advancing a corporate transparency initiative in coordination with key allies and experts. Demand for transparency in government is rising, but most states still do not collect even the most basic, critical data from recipients of state grants, state contracts or tax breaks.
In this Dispatch, we will examine the need for corporate transparency, recent cases relating to the subject, and how the policy will benefit states dealing with massive deficits.
Our policy staff are also available to answer questions and supply information not on the website. Legislators and advocates can contact us about supporting the Corporate Transparency in the State Budget Process campaign through our website or by emailing email@example.com.
Table of Contents:
Summary of Corporate Transparency in State Budgets Policies and Why They Matter
The lingering effects of the recession have forced state lawmakers to take extraordinary measures to alleviate fiscal crisis. Two reports released this month, the Pew Center for the States' Beyond California: States in Fiscal Peril and the National Governors Association and the National Association of State Budget Officers' joint publication, Fiscal Survey of States, highlight burgeoning budget gaps, precarious economic circumstances, enormous declines in tax revenue, and generally reveal a poor fiscal outlook for states in the upcoming years. Several states have resorted to making huge cuts to vital services, like education and health care, even as they still dole out millions of taxpayer dollars to corporations.
At the same time, voter outrage over corporate abuses in the financial and other sectors is increasing demand for greater transparency to explicitly reveal how public policy directs money to the economically privileged. Several high profile instances of these problems highlight the need for more transparency, including the closure of a Dell plant in North Carolina just a few years after it received a promise of up to $300 million in grants in 2004, an amount more than twice the cost of building the plant, and Indiana's cancellation of a $1.34 billion contract with IBM after chronic errors in implementing a welfare privatization contract were found and thousands qualifying for help were cut off by the system.
States are beginning to take action. In 2008, the Ohio legislature passed legislation that requires the state attorney general to review economic development awards received by entities. Attorney General Richard Codray's office began the process this past October by informing over 3,000 entities that they must provide his office with information, such as actual jobs created, efforts to attract minority or disadvantaged workers, and wage law compliance. Codray remarked, "Our goal...is to ensure that tax dollars are being used as intended in these awards. Promises were made by businesses and organization to create and save jobs in Ohio and those promises must be kept."
Why Corporate Transparency Matters: At the basic level, people deserve to know how businesses that benefit from public contracts, subsidies, or tax expenditures are spending tax dollars. Lawmakers must make sure that these businesses are creating jobs, saving the state money, and best serving the public interest. To foster a more targeted budget process, increase efficiency, and allow for future savings, states must adopt more stringent corporate disclosure and transparency legislation.
Problems due to lack of transparency in subsidy distribution, contract allocation, and hidden tax breaks are well-documented. Almost every week there is a story relating to states distributing subsidies with little to nothing to show for it, failing to save money from utilizing contractor services rather than state employees, and providing huge tax breaks to large corporations that often do not reflect the greater public interest. As well, states have been losing millions of dollars from declining corporate tax revenue. As a percentage of total state tax revenue, the corporate income tax has dropped significantly. The Center on Budget and Policy Priorities (CBPP) finds that in 1979, the corporate income tax accounted for 10.2 percent of total state tax revenue. In 2005, the figure dropped to 6.5 percent.
Dealing with the aftermath of the steepest economic contraction since the Great Depression, declining tax revenues and massive budget gaps, states cannot afford to hand out enormous subsidies or award lavish contracts with nothing to show in return. States must enact transparency to garner a more comprehensive understanding of spending and trends in corporate income taxation.
To that end, PSN has worked with allies to produce the following model corporate transparency bill based on best practices from around the country.
Bill Summary: Corporate Transparency in the State Budget
Model Legislation: Corporate Transparency in the State Budget
Key provisions include:
- Applicant and Recipient Corporation Disclosure: The legislation would establish public transparency on subsidy awards that exceed $25,000. For each applicant and subsidy, a description of the subsidy, number of anticipated jobs creates, wages and health benefits, expected tax revenue the granting agency will accrue, description of the project site, projected cost and value of the subsidy, and key events in the allocation of the subsidy would be reported publicly. Similarly, agencies would make information on contracts more than $25,000 publicly available, including the contact information of the contractor, subcontractor and corporate parent, anticipated savings to the agency, total cost of the contract, wage, hours, compensation and health benefit information, description of the contract service, number of people required to fulfill the service required by the contract, schedule of key events, and other relevant information.
- Reports on Subsidies and Contracts: An agency that grants a subsidy, in coordination with the recipient, would produce an annual and bi-annual report that includes a description of the subsidy, number of employees, their location, wage and health benefits, tax revenue the granting agency accrued, description of the project site, cost and value of the subsidy, and key events in the allocation of the subsidy. A contracting agency, in coordination with the contractor, would complete an annual and bi-annual report on contracts exceeding $25,000. The reports would detail savings to the agency, total cost of the contract, wage, hours, compensation and health benefits the contractor provides, description of the contract service, number of people required to fulfill the service required by the contract, schedule of key events, and other relevant information.
- Unified Reporting on Corporate Tax Expenditures, Contracts and Subsidies: The legislation calls for a state's budget department to compile unified report of tax expenditures, contracts, and property tax reductions and abatements to submit to the Governor and Legislature annually. The information would be available to the public in both written and electronic format.
- Corporate Income Tax Disclosure: The legislation also makes public information on corporate tax payments to state governments. Specifically, the bill would give the public access to information on the total taxable income, taxes paid, tax owed, tax before credits, total receipts, apportionment data, net operating loss, employment figures, and alternative minimum tax if applicable for each company.
Messaging on Corporate Transparency
The public overwhelmingly favors transparency: Not only is corporate transparency a smart policy, it is also popular politically.
- For example, a recent survey conducted by Lake Research Partners, in collaboration with Topos Partnership, found substantial support for stimulus transparency and oversight. 76 percent of voters thought "a national website where citizens can see what companies and government agencies are getting the funds, for what purposes, and the number and quality of jobs being created or saved” would have an important impact on the success of the stimulus.
- Similarly, 76 percent of voters believe state websites to track the stimulus were important and 34 percent believed this initiative was "very important."
- Knowing that representatives and government officials are being responsible stewards of public funds overwhelmingly resonates with voters across the political spectrum. The survey on stimulus transparency found that, "Republicans, Independents, and Democrats alike strongly support the inclusion of tracking and reporting requirements to ensure...money is effectively spent and has a positive impact on the economy."
Corporate transparency is needed to address the fiscal crisis and budget gaps: One of the most critical components of messaging around this campaign will involve the national fiscal crisis and state deficits. CBPP estimates that in in 2010 and 2011, states will face a combined budget deficit of $350 billion. State revenue collections have also decreased dramatically.
- Transparency supports better budgeting with minimal to no dollar impact on the budget: The corporate transparency bill will allow for more focused and fairer review of state spending going to private corporations. Lawmakers and the public will be able to see where exactly taxpayer dollars are going and judge if tax expenditures, subsidies, spending on contracts, or corporate tax breaks are benefiting the state.
- Transparency will permit greater equity in state spending: Monitoring tax expenditures, subsidies, contracts, and tax breaks will allow lawmakers to properly assess whether or not those dollars are being spent efficiently. With this knowledge, legislators can make more informed spending decisions, provide funding where it is truly needed, and appropriately invest in long-term growth.
- Transparency will create future budget savings: More precise analysis of state spending will undoubtedly reveal some areas of wasteful spending. This will empower lawmakers to make better budget decisions in the future and increase savings for the state. For instance, states often pay for services or subsidies to companies that do not deliver on their promises. By tracking the performance of state subsidies, Minnesota and Illinois have both been able to recapture money from numerous projects that failed to deliver promised results.
Corporate transparency can help economic recovery by identifying which programs are delivering good quality jobs and which are not: By requiring subsidy recipients and government contractors to report the number of jobs created, the wages paid, their location and other key economic information, transparency will help policymakers redirect funds to alternative programs delivering high quality, high-wage jobs in their states.
- Transparency can expose corporate outsourcing that is ineffective: As states grapple with the recession and search for the best methods to alleviate economic and budgetary pressures, some government officials continue to propose privatization as an effective policy. In the past decade, some states have scrambled to increase outsourcing and privatization of services, even without tangible evidence demonstrating efficiency. Many privatization efforts have cost taxpayers hundreds of millions of dollars, botched services for the public, and even led to charges of corruption.
- Transparency can strengthen workers' rights: By requiring that corporate recipients of state funds disclose how many jobs are being created, what type of wages they pay, what type of health care is offered, and other information related to the quality of workers lives,transparency can provide information needed to hold companies accountable for workers rights abuses. The same information can be utilized to identify programs that actually do provide significant economic development and good jobs for the community.
Corporate transparency will address voter anger over corporate abuses: A Pew Research Center survey highlighted the public's anger earlier this year, revealing that 77% of Americans believe "there is too much power concentrated in the hands of a few big companies." The public outcry over Wall Street greed and the financial bailout demonstrates the potency of the issue.
- Transparency will reveal corporate abuses undermining the public interest: States across the country continuously deal with problems related to subsidies, contracts, and corporate tax breaks. Placing an emphasis on a deal gone awry, an agency losing money by using private contractors, or a company making enormous financial gains while receiving taxpayer dollars during an economic downturn will elevate the issue and increase public awareness.
- Transparency will highlight that corporations are paying less and less taxes: Lawmakers should additionally stress that as a result of changes in the corporate tax structure, several corporations have an extremely reduced tax burden. For example,The Iowa Fiscal Partnership reported that approximately half of Iowa corporations with at least $1 million of sales in state pay no corporate income tax. Similarly, the Oklahoma Tax Commission revealed that only 35 percent of corporations filing tax returns in 2000 reported positive taxable income—almost an anomaly considering the economy experienced substantial gains that year.
- Transparency will identify which corporations are not paying their fair share: In a time of economic hardship, it is important that lawmakers determine that everyone is paying their fair share in taxes. As CBPP points out, "[b]ecause of the large number of variables that affect a corporation’s tax liability, it is quite difficult for non-experts to understand the impact of states’ tax policy choices. Concrete examples of how these policies actually affect the tax liability of identifiable corporations could be invaluable in enabling policymakers and citizens to understand the effectiveness and fairness of a state’s corporate tax policies."
Building a Campaign
Advocates and Resources: Several allies and affiliated organizations have done extensive work on these issues. Of particular note, the following groups have provided the intellectual framework for this initiative and produced extremely insightful and comprehensive resources on the subject.
- American Federation of State, County, and Municipal Employees (AFSCME)
- Center on Budget and Policy Priorities (CBPP)
- Center on Policy Initiatives (CPI)
- Center for Public Policy Priorities (CPPP)
- Citizens for Tax Justice (CTJ)
- Good Jobs First
- Economic Policy Institute (EPI)
- Los Angeles Association for a New Economy (LAANE)
- National Education Association (NEA)
- National Employment Law Project (NELP)
- Policy Matters Ohio
- Service Employees International Union (SEIU)
- US Federation of State Public Interest Groups (U.S. PIRG)
Polling: The following polls provide insight on voters' opinions of transparency, legislators, political representation, and government in general.
- Lake Research Partners and Topos Partnership - New National Poll finds Strong, Bipartisan Demand for Transparency in Economic Recovery Package
- DEMOS - By, or for, the people?: A Meta-analysis of Public Opinion of Government
- The Pew Research Center - Independents Take Center State in the Obama Era: Trends in Political Values and Core Attitudes: 1987-2009
Reports: There are several key studies that examine the need for corporate transparency.
- On subsidy transparency, see Good Jobs First's The State of State Disclosure and Drum Major Institute for Public Policy (DMI)'s Accounting for Economic Development Subsidies
- On contracting transparency, see AFSCME's Legislative Approaches to Responsible Contracting, NELP's Road to Responsible Contracting, PSN's Privatizing in the Dark and Center on Policy Initiatives' Good Government: The Pitfalls of Privatization
- On tax expenditure transparency, see CBPP's Promoting State Budget Accountability Through Tax Expenditure Reporting and Citizens for Tax Justice's Judging Tax Expenditures
- On corporate income tax transparency, see CBPP's State Corporate Tax Disclosure, CALPIRG's Sunshine for California: Shining Light On Corporate Tax Secrecy For Healthier State Budgets, Investments and Markets, and Oregon Center for Public Policy's Corporate Tax Dodge: The Decline of the Oregon Corporate Income Tax and the Shift to Individual Taxpayers
For state comparisons of online disclosure, see CALPIRG's California Budget Transparency 2.0, which gives a good nationwide review of best current practices on online disclosure, while Good Jobs First's The State of State Disclosure provides a comprehensive analysis of state disclosure practices as they relate to economic development subsidies, contracts, and lobbying activities.
Tracking Transparency and Privatization: Allied organizations are consistently analyzing corporate transparency. The following websites provide case studies about subsidies, contracts, and corporate tax breaks.
- AFSCME - Privatization Update
- DMI - DMI Blog
- Good Jobs First - Clawback and Corporate Subsidy Watch
- U.S. PIRG - Consumer Watch
PSN has also done research around these issues. The following Dispatch pieces highlight complications arising from misuse of state funds in subsidy allocation, contract distribution, and unnecessary tax breaks.
- Privatization During an Economic Downturn: Still Inefficient and Problematic
- Privatization Update: Schools, Prisons, Mental Health -- and What States are Doing to Hold Contractors Accountable
- Privatization Update: Recent News from across the Country
- Some States Wasting Money on Job Bidding Wars and Corporate Subsidies
- Economic Subsidy Recipients Who Fail on Job Promises to be Held Accountable in NY
- Stopping Privatization Profiteering
Legislative Momentum Around Corporate Transparency Initiatives
There has been substantial momentum across the country around corporate transparency. Just in the past year, several states have either implemented or proposed legislation with similar objectives. Though the bills cited below do not completely mirror PSN's model bill, they are demonstrative of significant legislative movement and support for transparency, disclosure, and much-needed reform.
- Oregon: This year, the Oregon Legislature took up two significant bills to strengthen the rules regarding contracting and disclose more information about contracts and actual savings accrued to the state. HB2037 would require that the Department of Administrative Services and the local contracting agency keep records regarding contracts and submit reports to the Governor and Legislature on such information. Rep. Chuck Riley offered his insights on the importance of these efforts, "[t]hese bills seek to make this degree of transparency and accountability part of every major public contract all across Oregon. Over the years state and local governments have relied on contractors to provide public services, yet many of our laws regarding transparency and accountability have not kept up.. it is time for the state to increase the availability of information and to ensure that taxpayers are getting what they are paying for." While HB 2037 did not pass this session, the state did enact HB2867 to requires the contracting agency to establish measurable standards to assess the quality of contractors' performance, permit the Secretary of State and contracting agency to audit a public contact, mandate that an agency prove that they are not capable of performing the service or would incur less cost by procuring services rather than performing them in house, and provides other guidelines for contract services.
- New York: This month, the New York Assembly passed A40012 during a special session that drastically expands oversight of state public authorities by increasing reporting requirements, allowing the state Comptroller to pre-approve state authority contracts valued at over $1 million that are not competitively bid and contracts that are paid with the state funds appropriated to the authority, and creation of finance committees to review debt issuance proposals. Asm. Richard Brodsky, who has consistently championed transparency and public authorities reform stated, “[t]his is a fundamental reform of government authorities that will benefit the public. What had been rogue institutions will be forced to operate with more transparency and accountability."
PSN Support in Your States
PSN has already begun working with legislators and advocates to provide support for them as they introduce corporate transparency legislation around the country. We'd like to work with many more! Our policy staff are available to answer questions and supply information not on the website. Legislators and advocates can contact us about supporting Corporate Transparency in the State Budget Process campaign through our website or by emailing firstname.lastname@example.org.
As bills are introduced and sessions begin, PSN will provide ongoing resources and updates on contract transparency legislation, as well as help coordinate strategy and information sharing with our partners among sponsors and advocates.