It has been painful for several years to see the retailer Sears disintegrate before our eyes. The company did not adjust well to changes in its environment, and it has paid a steep price. Whereas WalMart and Best Buy have figured out various roles for themselves, Sears has not done so yet. How the mighty have fallen. Almost thirty years ago, Sears crafted a move of its headquarters, one of the biggest operations in downtown Chicago, to a large office complex in a suburb at least thirty minutes away from the iconic Sears Tower and all of the crime and bustle of downtown. McDonald’s did the same thing, locating in a different suburb, but now it and many other corporate headquarters are moving back to downtown locations, perhaps as a move to recruit and retain employees, perhaps because of changes in real estate values. What if Sears had stayed downtown, would it have been spurred by an environment that can be more creative than the staid suburbs to make moves that would have kept it viable? Would it not be ironic if Amazon HQ2 located in downtown Chicago, supplanting Sears even in a physical manner? Similar to the experiences of other companies, Sears negotiated large tax incentives and concessions as part of its move to suburbia. The typical means of doing this is for the suburb to allow the target company to be placed in a Tax Incremental Financing (TIF) district, or a similar separate quasi-jurisdiction. The suburb, in Sears’ case it is Hoffman Estates IL, sells bonds to benefit the TIF, to provide funds with which the suburb would acquire land to be sold/leased to the target company, and to provide improvements like utilities, roads, freeway interchanges, and the like. In the typical case, the bonds are designed to be paid off over a short period of time, usually less than twenty years. The repayments are made by earmarking the property taxes paid by the target for the debt service. This allows the target to use the funds from the bonds to control the design and architecture of the designated area, and to make frequent improvements to the infrastructure in which it operates, by plowing back into the district area most or all of the taxes that it pays, rather than sharing them with the rest of the suburb. In Sears’ case, the incentives originated by Hoffman Estates came to at least $250 million, and they net to about $10 million per year today. The corporate campus developed office and light manufacturing buildings for other entities, as well as a medium-size sports arena, parkland with water features, and other amenities, over almost one thousand acres. The TIF agreement was scheduled to pay off all of the Hoffman Estate bonds over about twenty years, after which the property taxes paid by the development would revert in full to the suburb’s coffers. The earmarking period brought about by the TIF would allow the development to grow, largely by keeping and using its own tax payments, after which time the business park would be a strong neighbor benefiting the entire suburb through its tax revenues. Obviously, those plans did not work out, at least for Sears. Layoffs and various downsizing measures are underway, and several of the Sears buildings now are nearly vacant. Other tenants in the office park are doing well, though, and certainly Hoffman Estates can find new tenants for the space that Sears is leaving behind. But the Hoffman Estates School District has its own angle. The school district (among others) is planning to sue Sears to recover the property taxes that the district maintains were diverted from general use to the TIF area. Using the jargon of the incentives industry, the suburb wants to “claw back” the incentives because Sears failed to become the strong, property-taxing neighbor that it pledged it would be, and to provide the roughly five thousand jobs that were projected for the development. Many tax incentive packages include a formal clawback provision. Often it works like this: “The suburb will give you X dollars to develop your business, but you must pay back Y percent of that amount if your do not create Z full-time jobs at market salary levels within Q years.” Sears apparently was not subject to a formula as specific as this, but the school district wants to show how it was damaged by the loss of revenue that was diverted by the TIF earmarking. This is a good case study for your students to appreciate how tax incentives are designed and the functions that they serve. Working with tax credits and incentives, and working with federal, state, and local governments to put together packages to entice businesses to move to a new location (or stay in an existing one), is a somewhat glamorous part of the tax and consulting practice, one that might make for an attractive career path. In the negotiating period before they moved to Hoffman Estates, Sears was rumbling about moving its headquarters out of state or out of the country, so competition arose among several Chicago suburbs for the Sears project. Government officials are hired and elected because they work to bring jobs and physical improvements to their jurisdictions. And all because they can put together tax incentives like TIFs to bring about demonstrable change. But the business cycle always prevails, as Sears and Hoffman Estate now are finding out. Question.Should cities and suburbs be in the business of recruiting and retaining commercial entities by using tax provisions as an enticement? State and justify your position.Find a story about similar tax incentive packages in your area. Summarize the details of the arrangement. Describe any clawback provisions that are included.