A lot of other states were doing it. And the pressure got to West Virginia to follow suit.
Now, lawmakers have approved putting $30 million into a deal-closing fund meant to attract new businesses to the state, following Gov. Jim Justice’s recommendation during the recent special session. Dubbed the “seal the deal” fund, the money is meant to go to projects that will convince a company to come to West Virginia.
Economic Development Secretary Mitch Carmichael says this kind of fund is necessary for West Virginia to compete with its neighbors.
“In a post-pandemic world, we’re trying to recover from our worldwide economic slowdown, and other states have these tools,” Carmichael said. “Why would anyone want to tie the hands of West Virginia, and not allow us to compete for these jobs and opportunities?”
But these types of funds have drawn bipartisan criticism in other states for failing to get results, and past West Virginia incentive programs rarely produced the promised economic benefits. Plus, the Legislature approved the fund without putting guardrails on it — so while officials say rules are coming, there is currently no independent oversight governing how it’s spent and analyzing what jobs — if any — materialize.
If at first you don’t succeed….
Justice has tried for years to get the Legislature to appropriate money for a deal-closing fund; a few years ago, he proposed allocating $35 million to it, but lawmakers opted to exclude that item from the final budget.
“All of our contiguous states possess such funds, and we have long sought those funds,” said Carmichael, who was Senate president from 2017 to 2021. He lost his seat in the 2020 Republican primary election. “We tried to get these deals, but there was always a higher priority for public funds.”
But West Virginia’s budget surplus, largely attributed to the surge of funds the state has received through federal stimulus packages, changed the fund’s outlook. Justice called a special session in June to ask lawmakers to appropriate $250 million in surplus revenue to go to various initiatives. Voting on June 24, legislators from both parties overwhelmingly approved nearly all of Justice’s requests, including the $30 million deal-closing fund.
“It is for the purposes of filling that gap in a transaction to recruit a business that would otherwise not be here if not for this funding stream, whatever it might be,” Carmichael said. “It could be a water and sewer project to a particular site, it could be broadband development, it could be environmental cleanup, any of those issues that are impediments to a company locating and creating jobs in West Virginia.”
John Deskins, director of the Bureau of Business and Economic Research in West Virginia University’s College of Business and Economics, agreed with Carmichael that not having such a fund would put West Virginia at a competitive disadvantage.
“Other states are doing this very aggressively,” Deskins said. “If other states are doing it, we have to do it as well.”
But he said the fund needs rules that are clear and transparent so there’s confidence from both businesses and the government that the other side will fulfill their ends of any agreement.
Guardrails and opposition
So far, West Virginia’s fund doesn’t have any rules. Lawmakers passed the bill without placing any guardrails on it to make sure the money is well-spent, though Commerce Secretary Ed Gaunch told them at the time they would welcome oversight.
“The rules and specifications and oversight would still have to come, and we would invite that,” Gaunch said during a House Finance Committee meeting.
Carmichael said the flexibility the newly-created Department of Economic Development has with the money is part of the point: it helps close deals, facilitate relationships and quickly create jobs.
And he’s already started committing the money, promising $200,000 to Macy’s for a stoplight in an area that will help its Eastern Panhandle distribution center. Carmichael added that he won’t write the check until the fund’s guidelines are put in place.
“This is going to be completely transparent, and there’ll be guardrails around it such that we know that we’re getting what we’re paying for,” he said.
But organizations across the political spectrum agree: the best practice with such funds — if they’re going to be used at all — is to lay out the rules ahead of time to make sure the money isn’t misspent.
Kasia Tarczynska, a research analyst at the left-leaning organization Good Jobs First, said, ideally, lawmakers would have included some regulation on the funds, such as job creation requirements and caps.
James Hohman, director of fiscal policy for the conservative Mackinac Center for Public Policy, which is based in Michigan, said the best practice is to insert into any statute authorizing the funds required clawbacks, so if a company doesn’t fulfill its obligations it has to pay the state back. But he said regardless, such funds don’t usually achieve what lawmakers expect of them.
“In fact they wind up more often than not showing that they’re ineffective at creating jobs, unfair to the businesses that don’t get them and expensive to state budgets,” Hohman said.
For Delegate Pat McGeehan, R-Hancock, whether there were rules is a moot point. McGeehan was one of the 12 state delegates — all Republican — who voted against the bill. He called it an “immoral procedure.”
“‘Hey, we’re going to take this money and steal it off of all the working people in the state, and then give it to these big businesses who don’t need it and it’s likely not going to seal any deal anyway that wasn’t already sealed,’” he said. “It’s just [going to] waste a lot of money, you’ll get a bunch of ribbon-cutting ceremonies, some politicians will get their names in the paper, but nothing productive is going to come out of this.”
McGeehan said the bill would not only be ineffective but also counterproductive, putting too much power and influence over public funds into the hands of a select few, an enterprise that he said could be ripe for abuse.
The delegate cited historical examples of the state misusing money as a basis for concern, pointing to stimulus money the Obama administration gave to West Virginia for broadband expansion in 2009. A West Virginia Legislative Auditor’s report found that millions of dollars that could have gone to expand high-speed internet was wasted.
Over the years, West Virginia hasn’t exactly had a successful history with programs that used tax breaks and other incentives to try to boost the state’s economy. Among the most high-profile examples was the Super Tax Credit program in the mid-1980s. It was meant to lure an automobile plant to the state, but the plant went elsewhere and the tax credits went mostly to the coal industry. More recently, an audit earlier this year found the state Economic Development Authority spent millions of dollars on incentives for jobs that never came.
Tarczynska says there are more effective economic development solutions than deal-closing funds.
“What we recommend usually is spending that money on programs that really reduce poverty and create equal opportunities for growth,” she said.
Hohman said there is a growing coalition of people across the ideological spectrum sceptical of deal-closing funds.
“Regardless of whether you’re on the right or the left, both sides kind of agree that this is not the type of competition states should be engaged with,” he said. “We want to compete over your business climate and quality of life issues, rather than how much lawmakers offer to a handful of companies.”
For multiple years, state Sen. Mike Romano, D-Harrison, has sponsored legislation that would enter West Virginia into an interstate compact agreement to not offer subsidies to companies.
According to the Coalition to Phase Out Corporate Tax Giveaways, this compact is still theoretical: no state has entered into it yet, but legislation to do so has been introduced in 15 state legislatures this year. While none have ultimately gone into effect, a bill managed to pass the Utah House last year.
“I think that this legislation, SB 95, is an excellent way to get all the states to join in a compact that says, ‘Look, we’re not going to buy business, we’re going to be competitive, we’re going to be competitive based on the attributes of our particular state,’” Romano said. “And, if you want to come to one of our states, pick us up because we’re the best place for your business.”
His bill, though, would allow the state to compete as usual against states not in the compact. It would also not impact existing company-specific subsidies.
And, until his state and other states sign on to the agreement, Romano said West Virginia would have to continue to compete using such deal-closing funds.
While Romano was absent for the “seal the deal” fund vote, he said to get his support for putting future money into the fund he would like more parameters on it.
“If it was up to me, that ‘seal the deal’ will be used to benefit all businesses, not one particular business,” he said.