The Rural Tax Credit Hustle
Beware investment firms pitching themselves as the saviors of rural America.
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A Kentucky House committee last week approved the Rural Kentucky Jobs Act of 2022. According to its proponents, the goal of the legislation is to promote investment in parts of the state that don’t see much outside money coming in. “This will be another tool in the box for those rural small businesses,” said Republican Rep. Myron Dossett.
But the bill is actually part of a long con being perpetuated on states by a group of investment firms pitching extremely expensive, inefficient, and financialized ways of trying to boost local economies. The benefits redound to financiers, not the communities at which they’re ostensibly aimed.
The Kentucky proposal would give credits against insurance premium taxes to corporations who provide funds to investment firms that then turn around and invest money in smaller businesses in rural Kentucky. If it seems like that’s needlessly complicated, well, it is. More on that later.
The key thing to know is not the specifics of this bill, but the fact that a group of investment firms have been pushing similar bills through state legislatures all over the country, always making the same case, for literally decades. They come with different names and targets, and slightly different funding mechanisms, but the overall point is the same: Funnel public money through these private firms and supposedly good things will happen to downtrodden places. Except it never really does.
The investment firms in questions are first, Advantage Capital, which testified in favor of the Kentucky bill and is the most active proponent among them, it seems, as well as Enhanced Capital and Stonehenge Capital. They have pushed similar legislation under a slew of different names — including CAPCO (for Capital Companies), the New Market Tax Credit, and now these rural jobs acts — for years, and have benefited significantly. Most of the programs cropped up in the late 90s and early 2000s, with more popping up in the last few years, and those same three firms have been there, over and over, pushing for them every step of the way.
In 2017, a Stateline analysis found that “Under those programs, about $2.6 billion in state tax credits was allocated, and $1.6 billion was managed by Advantage, Enhanced, Stonehenge or their affiliates.” This enables them to collect all the fees and commissions associated with holding all that money. As one professor said last year when a bill was under consideration in Florida: “That’s really how they make their money — selling the legislatures on these programs.”
The results for the actual places that were supposed to benefit, meanwhile, were underwhelming. In fact, state after state over the years has looked into whether these programs work and found them wanting. Audits in Washington, D.C., Missouri, Alabama, Colorado, and New York found they underdelivered — creating few jobs at an astronomical cost per position — and recommended they be shut down.
Just last month, a Georgia audit found that the Peach State’s version of the program, the Georgia Agribusiness and Rural Jobs Act, will barely cover its own cost even with generous assumptions about secondary benefits, and will take 72 years to pay off for the state if looking strictly at revenue generated. Massachusetts Gov. Charlie Baker vetoed a program last year, saying that too many other states had already had a bad experience with the same thing.
Why the underwhelming results? Well, now we can get back to the flaws in the very design of these programs, the first of which is that they require passing public money through several middlemen who take a cut while doing nothing for the actual public. Instead of directly funding local businesses or using taxpayer dollars to build the infrastructure and social safety net that would help them thrive, these rural programs fund tax credits, which fund investors, which fund businesses, giving everyone a chance to take a cut before the money materializes for any actual residents on the back end.
This comment from an economic development commission that opposed a bill in Arkansas really sums it up: “The state money goes in and starts falling down the waterfall. At every level there are lawyers and investment bankers there raking money out of the deal. The fees and the profits for the investment banks is incredibly high.”
The one Kentucky House member who voted against the bill in committee last week — Democratic Rep. Josie Raymond — made this exact point: “I don’t understand why you all can’t come and invest in rural Kentucky businesses that show a lot of promise on your own, and why this coupon is necessary for some very large, very wealthy investors.”
These programs suffer from many of the same flaws the federal Opportunity Zone program has: Filtering taxpayer money through investors is simply less efficient and productive than making public investments in those places directly. (Remember, rural areas pay a huge premium for receiving far less under most corporate incentive programs.) Where, in theory, there should be some sort of multiplier effect, because investors bring more of their own dollars to a project than the amount in tax credits they receive, in practice that effect is blunted by money leaving the community as various parties take their cut.
But even if there was some sort of significant multiplier effect, these programs, like Opportunity Zones, suffer from a more fundamental issue: The communities supposedly “benefiting” from investor interest wind up receiving investments based on what faraway financiers think is the most profitable project, rather than based on what they say they need. So public money goes to pad things with higher rates of return in the short term, rather than what will build long-term prosperity or raise quality of life for the local residents.
And that’s the best case scenario. More often, investment funds just chase positive things that were already happening.
You can see this clearly with Opportunity Zones, where funds ended up going to places that were already gentrifying; investors were riding the wave, not creating it, resulting in a waste to taxpayers, because the money wasn’t creating anything new that wasn't going to happen anyway. Meanwhile, the program did nothing but juice displacement and increased cost of living for folks already in those communities, because so much of it was concentrated in luxury real estate. Residents probably wanted specific things, but OZs were never going to bring them.
To complete the doom loop here, a close look at Kentucky’s bill reveals that, despite its name, it doesn’t only apply to rural areas: Urban ones that have Opportunity Zone designation for purposes of the federal program can also qualify for investments. So the state is proposing to build a new boondoggle on top of an existing one.
With the sheer weight of history and evidence against them, you’d think no one would entertain starting another one of these programs for even a second. But there’s always pressure on state lawmakers to do something about rural areas that are getting left behind as more and more of our economy concentrates in a few metro areas. And because so many of those lawmakers (and the people they hear from on a regular basis) are trapped by the big myth of economic development — that there’s nothing to be done other than bribe someone to move a company or invest a few dollars in a particular place — they keep coming back to these ridiculous bank shot programs that provide a windfall to wealthy investors but don’t help many people on the ground.
So here we are, talking about the same thing that’s failed repeatedly for decades as if it’s something new and worthy of debate.
SHAMELESS SELF-PROMOTION: I testified before the Michigan House Commerce and Tourism Committee this week against a proposal to create a new corporate handout known as the Michigan Employment Opportunity Program. Under MEOP, as it’s being called, taxes paid by employees would be diverted back to their employers, a practice dubbed “paying taxes to the boss.” You can read my prepared testimony here.
ONE MORE THING: Intel announced last week that it will be building a new semiconductor plant in Ohio, prompting a bipartisan parade of celebration from the likes of President Joe Biden and Ohio Gov. Mike DeWine. While it’s certainly good that some semiconductor manufacturing is coming back to the U.S. — as having it overseas is an economic and national security problem — what’s unclear so far is what Ohio is paying for the privilege of hosting this facility, though it’s most definitely something and probably a very large number.
The plan from local lawmakers was pretty clearly to parade news of the plant around without releasing any of the details that might prompt deeper questions about whether the state’s investments will pay off. Thus, public officials can reap all the benefits of the good news while burying anything that looks bad in another news cycle. It’s clever, if cynical.
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— Pat Garofalo