GM, Pay Back the Money
Why Ohio has leverage in its dealings with an auto giant.
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**I provided an update on this story here.
Last year, General Motors closed its plant in Lordstown, Ohio, where, among other vehicles, the Chevy Cruze was manufactured. The closing received significant attention at the time due to the fact that President Donald Trump had pledged during his 2016 campaign that the plant would stay open — famously telling GM workers not to sell their homes — and because GM shuttering a facility in Ohio was treated a perfect emblem of the broader decline of Midwestern manufacturing.
But the closing was also an affront to Ohio taxpayers, who subsidized the plant with tens of millions of dollars. And they would like it back now.
Specifically, the state’s Development Services Agency has recommended to the Ohio Tax Credit Authority that it recoup about $60 million in payouts to GM. A provision of the company’s economic development contract with the state allows Ohio to demand money back if GM didn’t hold up its end of the bargain — which GM certainly did not, since it was supposed to maintain the Lordstown plant through at least 2037 to receive the full amount of subsidies promised.
In economic development, this is what’s known as a “clawback” provision. It gives the local government the ability to claw back (see?) money given to corporations that don’t fulfill their investment or job creation promises. If successful, Ohio forcing GM to pay back $60 million would constitute the largest economic development clawback in American history.
In a brief supporting the clawback, Ohio Republican Attorney General Dave Yost laid out the clear economic rationale for demanding GM repay the state:
GM is entitled to make its business decisions. It must also bear the costs of those decisions. If the Authority choses to abandon the rights of Ohio taxpayers to the refund, then the Authority is committing the moral hazard of saddling Ohio taxpayers with GM’s business risk.
Doing so is particularly abhorrent when GM has the ability to pay the refund (one percent of its first-year cost savings from the closure, and less than 5 basis points of its annual revenues5) and GM continues to benefit from tax incentives for other Ohio plants. Does the Authority want to send the message that GM and others like it can walk away from their commitments to Ohioans at any time with impunity?
Demanding any less than a full refund sends this exact message—loud and clear.
Yost’s brief also does a nice job pushing back on GM’s claims regarding why it shouldn’t have to give back anything taxpayers granted it. The whole thing is worth a read if you have a few minutes. And Yost is not the only state official voicing support for clawing back GM’s now ill-gotten gains.
Ohio Republican Gov. Mike DeWine, meanwhile, has been less hard-nosed about the payback, suggesting that GM could find a way out of the clawback demand by making other investments in the state. But it’s the very existence of the clawback provision that allows DeWine to make that case: Without the threat of the clawback hanging over it, GM could simply tell DeWine to take a hike. (If someone more knowledgeable about Ohio politics wanted to let me know about the relationship between DeWine and Yost and why they’re going good-cap, bad-cop here, that would be much appreciated.)
Therein lies the wisdom of using — and enforcing — clawback provisions in economic development contracts. They give lawmakers a way to design agreements so corporations can’t leave taxpayers holding the bag when they up and leave town.
As this study advocating clawbacks put it back in 1990, “U.S. policymakers can avoid expensive mistakes if they tie incentives to written guarantees of job creation and other benefits.” When, as is so often the case, those benefits fail to materialize, states and cities have a way to make taxpayers whole.
Lots of states allow for clawbacks in economic development agreements, but they aren’t often enforced. Or the terms are so easily achieved that it’s hardly worth putting the provision into the contract at all. Many lawmakers, as I’ve discussed before, fear being labeled as “anti-business” if they drive too hard a bargain.
But Ohio is showing the wisdom of putting requirements into a contract up-front, and then demanding corporations pay up when they don’t follow through. Even if the $60 million in tax credits isn’t ultimately repaid — which, to be clear, I think it should be as a matter of policy and principle — policymakers have a way to leverage their own power against that of GM to demand other benefits, either in terms of investment or payouts to workers.
It’s unclear at the moment what the Ohio Tax Credit Authority intends to do. It was supposed to discuss the matter at a meeting last week, but pulled the GM item from its agenda. The Authority next meets on September 28. Yost, meanwhile, has said he will take GM to court to enforce the agreement if need be — which is good, because Ohio has a real opportunity to set a new precedent for the country, and it’d be a shame if it were wasted.
One more thing: Readers of this newsletter will know that I was no fan of the CARES Act, the federal government’s main coronavirus response. Well, Neil deMause at Field of Schemes has dug up one more reason to dislike it: CARES Act money is subsidizing professional sports stadiums.
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— Pat Garofalo