California’s Hidden Corporate Tax Cuts

(Bloomberg Opinion) -- A recent Bloomberg report unveiled how Apple and other retailers have dozens of long-standing agreements with California cities that divert sales tax revenue back to the companies. The cities made these deals, officials say, to lure the firms or make sure they stayed put.

Cities and their taxpayers have a lot to gain by attracting and retaining businesses. Granted, they’d be better off collectively if they agreed not to compete with each other using tax breaks and subsidies, but until that happens, these preferences can serve the interests of individual cities. The question is whether they work as they should — that is, case by case, are they well-designed to make those cities better off?

Right now, taxpayers often have little way to judge. Details of these tax-rebate agreements are typically hard to find, and much of what’s available omits basic details. Without knowing how much revenue Cupertino and other cities are missing out on — and what they’ve been promised in return — taxpayers can’t know whether they’re getting a good deal.

California passed a law in 2015 that helped to ban some of the more outlandish deals and provided for more transparency — but the latest round of agreements shows it didn’t do enough. Companies should be required to disclose adequate information before new agreements are signed. City residents should hear exactly what’s involved, including the number and quality of jobs the firms are promising. If the rebates increase net revenues, that’s fine; if they don’t, money to pay for schools and roads will be lost, and residents need to be told. Once the deals are in place, there should be audits and evaluations to make sure the arrangements continue to make sense, and if they no longer do, a clawback mechanism should apply.

Some companies have balked at calls for more information, arguing the requests would make them reveal proprietary information, or be too burdensome. These concerns can be addressed. In any case, nobody is forcing companies to accept a subsidy.

States can help with audit resources — Texas has instituted an audit program for property-tax breaks — and with enforcement. They can also encourage cities to cooperate with each other in attracting investment, thereby keeping tax-and-subsidy competition within bounds. But as long as cities choose to compete, officials would do well to give voters an account of why the deals they’re cutting work for ordinary taxpayers.

Editorials are written by the Bloomberg Opinion editorial board.

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