Keystone tax break program needs more attention — and a fix to make sure it’s working | Editorial

For the top Philadelphia law firm Dechert LLP, there’s no place like home in a Keystone Opportunity Zone. That’s the state tax break program the law firm wants to use to help pay for a new global headquarters — a short walk from the headquarters it established in 2005 using the same tax breaks. What some would describe as double-dipping or “zone-hopping” is not specifically prohibited by the 1998 law that launched the KOZs as a tool to spur development of vacant land in neighborhoods statewide. The law needs amending.

Pennsylvania clearly asks far too little of the corporations and other companies that benefit directly from KOZ incentives, which create state and local tax-free zones that last 10 years. The KOZ was established in 1999 to spur economic and employment benefits in distressed neighborhoods. The state did turn down Dechert’s latest KOZ application; the firm is suing, and while we’re glad Pennsylvania is fighting back, the program ought to be revamped regardless of how the judges rule.

For one thing, there is no rule that companies can’t use the tax breaks more than once. But more worrisome is the lack of data collected on whether the return on these investments are reality or fantasy.

Companies typically promise that a certain number of jobs will be created in exchange for a tax break. But scrutiny into whether and how many jobs are created is light. Pennsylvania’s Department of Community and Economic Development acknowledges that it does not track the costs associated with creating those jobs. Nor is there a requirement in the KOZ statute that ensures the law’s intent is met. Additional oversight measures, the department says, would have to be voted upon by the Pennsylvania General Assembly.

There’s lots of evidence that tax incentives and similar subsidies generally don’t work as advertised. There are indications that other ways to invest in neighborhood development, such as the bond market, may work better. New Jersey incentives primarily aimed at luring companies to Camden have rightly been criticized for lacking oversight or effective targets for job creation. And the federal “Opportunity Zone” program in President Trump’s 2017 tax cut package also is heavy on enabling investors to profit but remarkably light when it comes to ensuring that zone residents benefit.

Philadelphia officials cite the dramatic transformation of the Navy Yard, where some developments have utilized KOZs, as a marquee example of how the program is working in the city.

» READ MORE: No Keystone-zone tax breaks for Comcast's tower

» READ MORE: Pennsylvania taxpayers may never know what Keystone Opportunity Zones cost or accomplished

A 2014 analysis of KOZ impact in Philadelphia by then-city Controller Alan Butkowitz found that 617 businesses received city tax credits worth $384.7 million from 1999 through 2014. But two-thirds of those were partnerships or limited liability companies with no employees, meaning, no one paying wage taxes to the city. The analysis did conclude that the 3700 new jobs created thanks to the KOZ cost $103,971 per job.

Competitive pressures mean that Pennsylvania likely will continue offering tax breaks. Pouring hundreds of millions of dollars into programs without a clear assessment of whether they’re successful is bad enough. Ignoring the opportunity to amend the program to close loopholes and make it more effective is even worse.