Clawbacks

A “clawback” (also called “recapture”) is a contractual provision whereby a company may be required to pay back all or part of a development subsidy, such as a grant, loan or tax break, if it fails to fulfill its responsibilities required by the subsidy agreement or program.

While disclosure and public participation may reduce the likelihood of abuse, ultimately the greatest tool states and cities have is deterrence.  That means raising the cost of failing to deliver on job promises with specific, legally-enforceable regulations and contract language.  The most effective way to raise the cost of non-performance is by a clawback provision: if the recipient company fails to deliver, the subsidy must be refunded.

Clawbacks can be adopted in two ways:

• embedded in a contractual agreement between a government and a subsidized company; or

• incorporated into the laws and/or regulations that govern development programs (to which development agreements must adhere).

Penalties that states and cities have invoked include:

• Full payback of a subsidy, with or without interest

• Prorated payback of a subsidy based on the degree to which the company fell short of its responsibilities (with or without interest)

• Barring a company from receiving future subsidies

Common requirements to which clawbacks are attached include:

• Number of new jobs created

• Wage levels of new jobs or all jobs

• Level of capital investment

• A specified length of time company must stay at the subsidized location

Updated June 19, 2003