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Jobs program lost its way — and tax money

Millions have been spent on tax breaks for businesses that promised to create jobs. But in hundreds of cases, few or none resulted, yet companies kept the savings

The state gave Bob’s Discount Furniture a $75,000 tax break to add an outlet in Stoughton, six months after the store opened. The state gave Bob’s Discount Furniture a $75,000 tax break to add an outlet in Stoughton, six months after the store opened. (Essdras M Suarez/ Globe Staff)
By Todd Wallack
Globe Staff / March 14, 2010

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First of two parts

BILLERICA — The blue sign on the building says Nortel Networks, but it might as well be “Your tax dollars at work.’’

In exchange for more than $2 million in state and local tax breaks, the Canadian telecommunications equipment maker promised a decade ago to expand its campus in Billerica, keeping 2,200 existing jobs and adding as many as 800 more. But instead of adding jobs, the struggling company has steadily slashed its operations for years.

Today, it has 145 employees. It also still has those tax breaks, set to continue through 2014.

And Nortel, amazingly, is by no means an isolated case.

Over the past 16 years, Massachusetts has given away hundreds of millions of dollars in state and local tax breaks for more than 1,300 development projects under its Economic Development Incentive Program, which aims to encourage companies to invest here and create jobs. Often the incentives work and new jobs result. But far too often taxpayers have not come close to getting their money’s worth, a Globe review has found.

Hundreds of the projects delivered fewer jobs than promised, and some companies actually slashed employment. Many firms won subsidies for projects they were set to build without state assistance; in some cases, incentives that were approved long after the projects were underway or complete. And many got generous packages though they agreed to create only a handful of low-paying jobs.

A review of state records found that more than 40 percent of the companies that received tax breaks pledged to create 10 full-time jobs or fewer, including nearly four dozen that promised only to add one full-time job. Often, the companies planned to pay new workers little more than minimum wage.

Among the tiny projects singled out for subsidies were a pizzeria in Ware, a liquor store in Plymouth, an auto body shop in Fall River, a video store in Somerville, a laundromat in Brockton, a self-storage facility in Somerset, and a hair salon in New Bedford.

“It’s one thing to use this program to attract a state-of-the-art pharmaceutical facility,’’ said Michael Widmer, president of the nonprofit Massachusetts Taxpayers Foundation. “It’s quite another to reward pizza parlors and hair salons.’’

Other projects that sounded great on paper, such as the Nortel expansion plan, have fallen far short of what was promised. A Fall River rubber parts maker pledged to create 20 jobs, but cut 36 instead. A manufacturer in Orange promised to add five full-time jobs, but cut a half-dozen or more instead. But even when jobs are cut, the state often takes years to end a tax break, if it takes any action at all. And officials could not name a case in which they asked a company to repay subsidies already pocketed.

“Oversight is practically nonexistent,’’ said Neil Cohen, Massachusetts’ deputy inspector general, whose office has been critical of the program in the past. “The state must ensure that it is getting something for what amounts to an investment.’’

To be sure, the economic development program has helped attract life sciences companies, high-tech research parks, and manufacturing plants to Massachusetts.

For instance, the state helped persuade pharmaceuticals giant Bristol-Myers Squibb Co. to build a $750 million drug manufacturing plant at the old Fort Devens Army base in Devens by offering the company roughly $70 million in tax incentives four years ago. Bristol-Myers has hired 250 employees at the site and plans to hire 100 more when it starts production next year.

But even state officials declined to defend some of the deals. Greg Bialecki, the state’s secretary of housing and economic development, said the program has had “hits and misses’’ over the years.

“I think there were definitely cases where the [incentives] were used for very significant job creation,’’ said Bialecki, who has been working with Governor Deval Patrick and lawmakers to revamp the program. “But I think there were other cases where the amount of tax credits was disproportionate to the amount of job creation and it wasn’t the best investment.’’

Bialecki estimated that the tax breaks, which must be approved at the local level and by a state council, have cost an average total of $25 million a year in lost state revenue in the past few years, and hundreds of millions since it began. But the state has not kept an exact tally and no one has tracked the value of the local tax breaks that are part of the package. Those, Bialecki estimated, have probably amounted to several hundred million dollars over the life of the program.

The job creation numbers are even fuzzier.

Bialecki said the program created more than 73,000 jobs and generated $22 billion in investment. But those figures are only what companies promised, he concedes, not what they might have delivered.

. . .

Launched during the state’s last deep recession in 1993, the program was originally intended to forge a partnership between the state and communities to jump-start development in blighted areas.

This is how it was designed to work: In exchange for a promise to add jobs and investment, companies were allowed to negotiate a discount on local property taxes for up to 20 years. And once their projects were approved by local officials and a state board, the companies automatically qualified for an additional state investment tax credit equal to 5 percent of their spending on renovations, new equipment, and other items. Additional benefits applied if a company expanded into a long-vacant building.

Representative Daniel Bosley, a Democrat from North Adams, was among the legislators who helped craft the original bill, which was signed into law in 1993. Bosley said he still believes in the program, but has been disappointed that the state has not done more to reject questionable proposals or make sure companies kept their promises.

“It wasn’t intended to just give companies tax breaks,’’ Bosley said. “It was intended to create real job development. . . . It’s kind of gone in different ways than the original intent.’’

The story of Astronaut Pizza in Ware is a tiny but telling example of what he means.

When owner Nick Karanikis was forced to move his pizzeria to a new location, he knew he wanted to stay in Ware, where the business had operated since 1976. Karanikis eventually settled on a vacant building on West Street, just down the road from his old location.

But after hearing that some other businesses had received tax incentives for similar moves, Karanikis asked for one, too. Karanikis said the town’s community development director, Paul Hills, offered to take care of the paperwork. And in June 2005, the state approved Astronaut’s application for a 10-year tax break just as Karanikis was opening the new location.

Karanikis said he has two full-time employees, the same as at his old location, but added part-time workers. And as of last summer, he had saved nearly $8,000 in state and local taxes and will probably save thousands more.

“The savings aren’t that much,’’ he said. “But every little thing adds up.’’

But do not tell that to Steve Kolenovic, the owner of a competing restaurant, Villa’s Pizzeria, just 1 mile away.

“It’s not fair,’’ Kolenovic said. “I thought these tax breaks were supposed to go to businesses that build up a town — not a pizza shop.’’

Hills initially told the Globe the tax incentives were needed to encourage Karanikis to keep the restaurant in town and renovate an old building.

But when told that Astronaut Pizza had planned to stay in Ware anyway, Hills offered another rationale — the subsidy was designed to make the shop more prosperous, perhaps leading to new jobs.

“We would certainly want to assist local businesses,’’ Hills said.

It is not just tiny restaurants and retailers that have taken advantage of the program.

The government has approved millions of dollars in incentives for big-box retail chains, including Target, Wal-Mart, Home Depot, Lowe’s, Ikea, Bed Bath & Beyond, and Kohl’s. Lowe’s received tax breaks for eight locations in the past seven years, including one in Salem in December.

But some economic development specialists question whether the state subsidies in such cases make sense, contending that new stores typically take sales from existing retailers.

“You are not really growing the pie very much,’’ said Bialecki, the state’s economic development chief.

In addition, some economists say such stores would probably be built without the subsidies. When Plainville turned down requests for tax incentives from Target and Lowe’s over the past few years, the stores opened in the town anyway.

“Most of the time, retailers are making decisions based on where their customers are,’’ said Michael Goodman, chairman of the public policy department at the University of Massachusetts Dartmouth, who sits on the state council that approves the tax breaks.

Goodman said it only makes sense to offer subsidies to retail projects in special cases, such as when the retailer is moving into a blighted building. But when Goodman has voted against retail proposals that do not meet that test, he has always been overruled.

In some cases, there is little doubt the incentives were not needed. The Globe found numerous examples for which the projects were already completed or well underway when the state approved the money — making the tax savings less of an incentive to expand than a cherry on top.

For instance, when the state approved a $75,000 tax break for Bob’s Discount Furniture in 2003 to open an outlet in a busy shopping district in Stoughton, the approval came six months after the store opened.

An executive at Bob’s acknowledged that the tax break played little if any role in the decision about where to open the new store. He said such an incentive would only make a difference if the chain were weighing two comparable sites a few miles apart.

“These incentives are really nice to get, but they are not going to drive our strategy,’’ said Bill Ballou, chief financial officer of Bob’s.

Since then, Bob’s has opened six more stores in Massachusetts without obtaining tax incentives, though Ballou does not rule out tapping the program at some point down the line.

Another case that fits this pattern is that of the drug company Sepracor Inc., which won $7 million in state and local tax breaks to expand its Marlborough headquarters last year — though the company had already finished the bulk of the construction.

“While I am very happy to have Sepracor here in the city, I was concerned that we were giving a tax incentive for something that they were doing anyway,’’ said Paul Feero, a dissenting member of the City Council that approved this deal.

Sepracor, which outlined plans to build two buildings next to its headquarters, had already completed the larger of the two buildings when the state ratified the deal in March 2009. The company is unsure when it will build the other building.

. . .

Every incentive grant must first be approved at the city or town level. But many local officials are hesitant to say no, sometimes because of fears that a neighboring community might attract an employer by voting in the tax breaks.

“It’s a poker game,’’ said Joseph Fernandes, the town administrator for Plainville, which has approved incentives for just one company.

And sometimes it is an easy yes for local officials because the program is set up so the state often picks up much or all of the tab.

For example, when the Wild Oats Cooperative Market in Williamstown decided to move down the street the town offered the small natural foods store a 10-year tax break potentially worth more than $50,000, though the grocer pledged to create only one full-time $20,000-a-year job and several part-time jobs. The tax breaks will probably cost the town just $2,800 in lost property taxes, with the state absorbing the rest.

And some communities said the tax breaks wound up costing them nothing. Though the law technically requires communities to offer a local property tax break to participate in the program, some officials said they found a loophole by asking companies to reimburse them for the local portion of the tax breaks.

For instance, Stoughton helped Kohl’s obtain more than $339,000 in state tax credits after the company built a store in a busy section of town alongside Route 24 in 2004. It also received a 20-year discount on its property taxes. But Kohl’s agreed to write a check to the town equal to whatever money it saves in local taxes.

“It’s not going to cost us anything,’’ said Paula Keefe, Stoughton’s chief assessor. “If the state wants to give them a tax break, that’s up to them.’’

The attitude is similarly casual at the state level, where every tax break deal must be approved by a 10-member state board, the Economic Assistance Coordinating Council, which is made up of designated state employees and members appointed by the governor. But this is a council that just cannot say no.

Out of nearly 1,400 applications brought to the board since 1994, the board has only rejected one — a proposed tax break for Security Federal Savings Bank in Falmouth — and that was because the property tax break approved by Falmouth officials was not big enough.

Bialecki, whose staff members chair the council, said the council members felt obligated to approve the applications because they did not want to block cities and towns from using tax incentives to spur local development.

But he said that starting this month, the state would exercise more discretion in deciding whether to piggyback state investment tax credits onto local tax breaks. Under the original legislation creating the program, companies automatically received a 5 percent tax credit when the state approved the applications. But under the new law, signed last year by the governor after the Globe first raised questions about the program, the state can kick in anywhere from a 0 to 10 percent credit.

“It’s going to be a very positive development,’’ Bialecki said.

. . .

Just as it has often failed to weed out dubious proposals, the state has also done little to make sure companies live up to their promise of creating jobs and new investment.

Although the state requires companies to report how many jobs they have added each year, the government does not ask companies whether these are new jobs — or simply positions moved from other locations in the state. Nor does it use outside sources, such as tax data, to verify the reports.

“It’s on the honor system,’’ said Cohen, the deputy inspector general.

And after companies admit they did not add the jobs they promised, the state is often slow to end the tax breaks — if it does so at all.

For instance, when C.H. Yates Rubber Corp., a Fall River company that makes plastic and rubber wheels, failed to create the jobs it promised, the state simply reduced the local portion of its tax break and changed its agreement with the company so it would “not be held accountable for continued job creation.’’

And it took eight years to end a 10-year tax break to Echo Industries Inc., a company in Orange that makes steel shelves and other products, after the company started cutting jobs instead of adding the five it had promised.

In both cases, the companies were able to keep the money they had already saved in taxes — Yates kept $75,000; Echo $76,000.

Bialecki said the state is addressing the issue. The legislation signed by Patrick late last year will make it easier for the state to recoup foregone tax revenue from projects that do not deliver on job promises.

“If you agree to create jobs and you don’t, then we should get our money back,’’ said Bialecki, the state’s economic development chief. But Bialecki said the change only applies to tax incentives approved starting this year; he said the state cannot do much about projects already approved.

He means projects like the one involving Nortel, which struck its deal with the state a decade ago.

In exchange for a 15-year tax break, the telecommunications equipment maker promised big things — a $70 million expansion of its Billerica offices and 450 to 800 new jobs.

But shortly after signing the deal, the Internet bubble burst, sending the company on a downward spiral that resulted in thousands of layoffs.

The state never revoked Nortel’s tax break, which has already saved the company nearly $1 million in state taxes and $1.2 million in local property taxes and is set to run for four more years.

Nortel spokeswoman Jamie Moody said no one was available to comment on the propriety of keeping the incentives. State officials now say they are considering ending Nortel’s tax break early, but cannot legally recoup any of the money unless Nortel committed fraud.

Meanwhile, Billerica officials are struggling to determine how to handle future requests for aid.

Town manager John Curran said towns face a difficult quandary, because they must do what they can to spur development — but do not want to give up tax revenue with nothing to show for it.

“There are a lot of risks associated with using the program,’’ Curran said. “It’s not a perfect science.’’

Todd Wallack can be reached at twallack@globe.com.
Tomorrow: Tax benefits often flow to affluent communities.