Tax incentives are intended to spur economic growth which may have not otherwise occurred. More specifically, these grants and tax breaks are usually offered to convince businesses to relocate, hire, and/or invest within a state’s or community’s borders. But what happens when a company doesn’t make good on their commitments?
Many states seek repayment of incentives known as a clawback. A clawback is a provision in an economic development agreement that requires a company to repay any financial benefit gained for which it did not meet certain performance thresholds, such as job targets, capital investment levels or project timelines.
The existence of clawback provisions is not new, but such provisions are being initiated more frequently and becoming more stringent. States such as Indiana, Tennessee, and North Carolina are also instituting new clawback provisions into incentive deals.
It is important to note that many states are also issuing an annual report to publically track the status of repayments owed by companies.
When negotiating or complying with incentives, companies should consider the following items to help prevent and/or remediate clawback provisions:
The bottomline is that when it comes to clawbacks, it’s complicated! Arguments can be made both ways on when and how clawbacks should come into play. On the one hand, some people believe companies who do not meet commitments should be held accountable for repaying any and all incentives. On the other hand, many incentive programs are performance-based meaning until jobs are created, companies are not eligible to receive incentive anyways. Moreover, total tax revenues generated from the project usually outweighs any incentives the companies realized.
Regardless of your viewpoint, economic incentives are here to stay and clawback provisions will likely impact more companies as states work harder to track their return on incentive investments.