The Treasury’s Final Rule on Economic Development is Only a Win if it’s Enforced

February 8, 2022

The U.S. Treasury recently issued its final rule on the eligible uses of the American Rescue Plan Act’s (ARPA) Coronavirus State and Local Fiscal Recovery Fund (CSLFRF), a $350 billion program that provides direct assistance to state, local, and tribal governments in responding to the economic and public health impacts of COVID-19.

The new rule gives governments more flexibility in how the money may be spent, including: using it to replace lost revenue; expanding eligible water, sewer, and broadband infrastructure projects; and rehiring government staff at or above pre-COVID levels.  

The guidelines also clarify what funds may not be used for. Notably, the Treasury said they can’t be used for general economic development purposes. The rule now explicitly states that “activities that do not respond to negative economic impacts of the pandemic and rather seek to more generally enhance the jurisdiction’s business climate, would generally not be eligible under this eligible use category,” and that “funds must be reasonably designed to respond to the harm, benefit the beneficiaries that experienced it, and be related and reasonably proportional to the harm or impact.”

This stipulation was included in the interim rule released last May. But the May language was vague, enabling some states to move fast in providing generous subsidies to lure large companies to their states.

Georgia Governor Brian Kemp signed a law that would expand tax breaks by $50 million for defense contractors in hopes of reeling in a Lockheed Martin project. Officials in West Virginia approved a $30 million “seal the deal” fund to attract new business to the state. They brazenly cited the recent budget surplus as the reason they were able set up the fund (and later followed that up with a $1 billion subsidy to an unnamed company, later revealed to be Nucor, the nation’s largest steel company).

Others have arguably done the same: Texas gave Samsung the ultimate Christmas gift back in December – $1 billion in tax breaks and infrastructure for a microchip fabrication plant. It’s the state’s largest subsidy package to date. North Carolina gave Apple a similar subsidy package of almost $900 million. This deal also set a new state record.

It’s been well documented by this point that tax breaks and subsidy packages like these play a pitifully small role in deciding where companies locate. The jobs they create often don’t cover the costs of the subsidies, and too often these deals fail to include safeguards that ensure workers are paid living wages with benefits, are locally hired and are permanent positions.

But even those well-documented claims digress from the issue of the bigger problem here: the Treasury has prohibited using the covid relief money for economic development subsidies.

Now, the Treasury must enforce its new guidelines. As states ramp up their ARPA spending, the Treasury needs to get tough and claw back the money if it’s being spent on things expressly prohibited.  

CSLFRF money needs to go toward programs and projects that concretely align with the Treasury’s final rule. It should support families and workers in ways that advance racial equity. It should go toward infrastructure projects and to rehire public servants to have the capacity to carry out that work.

The CARES Act’s Paycheck Protection Program offered warnings about what happens when spending isn’t tracked or monitored – research led by the Massachusetts Institute of Technology found at most, 34 cents of every $1 actually went to workers (the program was targeted to keep people employed).

Unless the Treasury enforces its own rules, we’ll end up once again with a future report detailing how billions of dollars meant to help families and communities rebuild with more resiliency, instead ended up in the pockets of the wealthiest and most powerful.