Home > News > Elon Musk got millions in tax breaks to put a plant in Austin. Here’s why laws don’t stop these secret deals.
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Elon Musk got millions in tax breaks to put a plant in Austin. Here’s why laws don’t stop these secret deals.

Many officials may be simply ignoring them.

- August 6, 2020

During a July earnings call, Elon Musk announced his intention to build a Tesla manufacturing facility outside Austin. There, Travis County offered the automobile company 10 years of tax abatements worth almost $14 million. The local school district is offering tax breaks worth $50 million, and the state will most likely add enough incentives to top $100 million in total. Although Tesla was rumored to be considering the Austin area, the deal was kept secret until this announcement through nondisclosure agreements, exceptions to public records laws, and code names.

Secret deals to try to attract businesses are common — and rouse a lot of political disagreement. Some people believe that higher transparency requirements — enforced openness about deals underway — might make officials more accountable to taxpayers. However, our research suggests that existing transparency requirements aren’t changing the behavior of public officials very much. Indeed, many officials may be simply ignoring them.

Scholars and standards authorities have pushed for more transparency

What’s interesting about the Tesla story is that Austin is an unlikely place in which to have government officials making closed-door deals to attract businesses. The city government has high ratings for willingly providing information; only last year, Travis County announced it would stop using economic development incentives. However, county officials unanimously voted to change this rule for Tesla, while later publicly bemoaning their own lapse in transparency.

Other communities are more secretive still. That often means that local economic development policies end up subsidizing business investments that would have happened anyway.

Some academics and authorities think that more transparency could force public officials to be more cautious about spending public money on ineffective economic policies. In 2015, the Government Accounting Standards Board (GASB), the organization that sets financial standards for localities, enacted a rule requiring cities to disclose revenue lost to tax abatements. As a result, government officials that strike secretive deals with companies now have to reveal the annual costs of these activities.

After this rule was enacted, some states and cities released numbers that made headlines. Voters discovered that New York City was forgoing $3 billion a year to tax abatement programs, while Cleveland’s school districts lost $34 million in revenue to economic development incentive programs.

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This didn’t have the expected consequences

Our research asked whether this rule actually affected the behavior of government officials. We looked at the economic incentives that governments gave firms, both before and after the GASB rule was introduced. Our initial theory was that the change in rule would affect some incentives and not others.

Even before the rule, local governments were required to publicly reveal cash grants that they gave to companies, so we didn’t expect that transparency would have significant consequences. However, the rule meant that many local governments would have to start revealing how much tax revenue they had sacrificed through tax abatements — agreements in which they exempt companies from certain tax payments for a period of time. These abatements are very common, and very hard for ordinary people to decode. We expected local governments would be less likely to use them if they had to publicly reveal the actual costs.

We were wrong. Our statistical estimates suggest there was no change in how city governments behaved before and after this ruling.

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Some local governments may just be ignoring the rule

There are many plausible theories as to why transparency didn’t lead to change. It could be that transparency doesn’t work unless watchdog groups inform the public about what is going on. It could also be that voters just see these incentives as business as usual, so officials don’t feel any need to change their behavior.

But transparency NGOs such as Good Jobs First have noticed some interesting patterns, which point in a different direction. Many cities simply don’t mention this new rule in their annual financial reports and don’t provide any details on incentives. Our own analysis below confirms that there is enormous variation in how many municipal governments report actually using these powers, even though the latest survey of economic development found that 95 percent of communities at least have the power to issue such incentives.

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If so many local governments have these powers, why do so few report using them? One possible explanation, of course, is that their different reporting reflects different patterns of behavior: Some municipalities do use them, while others don’t.

Our suspicion, however, is that the number of cities not reporting anything seems implausibly high — and that many cities are just failing to report their economic development incentive deals. If our guess is right, many communities may be simply breaking the rule. If this is so, observers interested in changing such behavior may wish to examine how transparency rules are enforced, what consequences there might be, if any, for breaking the rule.

Figure: Calvin Thrall
Figure: Calvin Thrall

Nathan M. Jensen (@NateMJensen) is professor in the government department at the University of Texas at Austin and co-author of Incentives to Pander: How Politicians Use Corporate Welfare for Political Gain (Cambridge University Press, 2018).

Calvin Thrall (@calvinthrall) is a PhD student in the government department at the University of Texas at Austin.