Tax Analysts Blog

A Very Good Idea to Curb Incentive Abuse

Posted on Oct 1, 2014

Last month California did something that may turn out to be revolutionary. The state's Office of Business and Economic Development banned consultants from receiving commissions for procuring the California Competes tax credit, effective August 18. Consultants can still get paid, but their compensation can't be based on a contingent fee arrangement.

Many economic development consultants earn commissions based on the size of the government incentive they secure for their clients. That creates a perverse system whereby consultants encourage businesses to continually shop around for more and better incentives -- and the shopping continues after the business has decided where to invest.

To my knowledge, the California ban is the first restriction any state has placed on economic development consultants. In general, I don't like the idea of the government restricting how much people earn or how they do it. But because the government invented and runs the incentives game, I'll make an exception.

Ending the commissions will significantly deter businesses from playing states against each other. Ryan LLC has challenged the regulations implementing the ban as exceeding the state agency's statutory authority. If Ryan prevails, California should immediately pass a law prohibiting all commissions for economic development work.

Greg LeRoy of Good Jobs First has been writing about this issue for years and has long called for the regulation of economic development consultants and a ban on commissions. He's right.

State political leaders around the nation must be tired of being played and taken advantage of. They should follow California's lead.

This post is an excerpt of an article that appeared in State Tax Notes.

Read Comments (2)

charles chongoSep 30, 2014

David--question... Where is the line between Circ 230 no contingent based
fees...and this type of consultancy...

edmund dantesOct 1, 2014

This is great news. Now California can compete for new business development on
the basis of their low tax rates, their modest regulatory burdens, and the
quality of their government services.

Texas, here I come.

After a couple years of zero or negative growth, there is a good chance that
this policy will be reversed.

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