Air Quality Affects Economic Development The relationship between the economy and the environment is quite complex and multi-dimensional. At times, it appears to be one of conflict, as interested parties clash over the proper development of residential and commercial real estate, industrial sites, reservoirs, or other economic resources.
On the other hand, a substantial body of evidence suggests that environmental quality actually contributes to economic growth, particularly among high-tech industries, which seek desirable and attractive locations. Similarly, clean air and ample supplies of clean water are vital to public health.
Air pollution is a very serious matter in many parts of our state, as well as across much of the nation. Most of this pollution results from daily business routines and activities; with higher factory output, increased construction, and greater traffic congestion, the problem continues to grow.
The Federal Clean Air Act is the legal foundation for the national air pollution control program. Authority to enforce the provisions of the Act is granted to the Environmental Protection Agency (EPA). The act requires each state to develop and regularly update a State Implementation Plan (SIP) that denotes measures being taken to maintain proper air quality standards.
During the 1990s, federal environmental standards became more stringent with passage of the 1990 Clean Air Act Amendments. Specific attention was given to the operation of vehicles and industrial equipment, considered to be major sources of two types of pollutants—nitrogen oxides and volatile organic compounds. These pollutants combine in hot, stagnant air to form ground-level ozone; high levels can cause serious health problems, which in turn result in increased medical expenses and losses in productivity and efficiency throughout the economy.
The EPA can impose penalties for areas not in compliance. The sanctions include limiting new facility development and withholding federal highway funds from the affected areas.
Several Texas metropolitan areas have been found by the EPA to be in violation of air quality standards, primarily due to excessive ozone levels. The areas include Houston/Galveston/Brazoria, Dallas/Fort Worth, and Beaumont/Port Arthur. The El Paso area, in addition to having ozone levels that exceed the standards, also has problems with high levels of carbon monoxide and particulate matter.
In addition to these nonattainment areas, six other urban regions—Corpus Christi, Victoria, Austin-San Marcos, San Antonio, Tyler, and Longview-Marshall—are characterized as “near nonattainment” areas.
The 41 counties involved represent only a small portion of the vast landmass of Texas, but they account for more than 70.0% of the state’s population, 76.4% of aggregate employment, 83.4% of total personal income, and 83.0% of gross state product. Nearly 85.0% of manufacturing activity is located in these counties. Because of the integrated nature of the Texas economy and the dependence of rural and suburban areas on spin-off activity from the larger metropolitan areas, all parts of the state are affected by what occurs in these regions.
The 77th Legislature created the Texas Emissions Reduction Plan (TERP). It incorporated a variety of voluntary financial incentive programs, as well as other programs designed to assist in the improvement of air quality across the state. A major component of the TERP was a grant program to replace and retrofit diesel engines that have unacceptable levels of emissions. The funding approach initiated involved a significant increase of fees on cars imported into Texas. The fee was subsequently struck down as too excessive by a court challenge. This action left a key element of the state compliance plan without necessary dollars.
The EPA has indicated that Texas’ SIP will be non-compliant unless funding is restored. Failure to do so would cause the state to become subject to severe penalties affecting our health, quality of life, future business and export expansions, and highway funding. As we face the challenge of enormous fiscal stress and the task of assigning priorities among many worthy endeavors, Texas must comply with the Clean Air Act Amendments to ensure our future.
posted @ 07:37 AM CST [link]
Friday, January 24, 2003
Education Plays Important Role in Economic Development Education is a cornerstone of economic development. A Texas high school graduate will probably make about 50% a year more than an individual who doesn’t complete high school. The variance between a high school diploma and a Bachelor’s degree is even more pronounced. A college degree can boost yearly earnings by more than 82% over a high school diploma.
By many standard measures, educational attainment in the Lone Star State is inadequate. According to the US Census Bureau, only 79.2% of Texans receive a high school diploma by the time they are 25 years of age, ranking the state last among the ten most populous states that frequently compete as sites for new business locations. Texas also ranks behind most key competitors in student math and science achievement, a fact that is further exacerbated by the US failing to rank among the top ten nations in what is clearly a global market for talent.
The statistics with regard to higher educational attainment levels are further cause for concern, particularly with regard to ethnic disparities in achievement. Texas ranks 33rd among the states in percentage of adults with a Bachelor’s degree. One-quarter of whites, 33.7% of Asian/Pacific Islanders, and 14.3% of African Americans have earned a college degree. However, only 8.7% of Hispanics have achieved a similar level of education.
There are some indications that educational attainment levels for Hispanics are slowly rising. Even so, recent demographic studies based on the 2000 Census unequivocally reveal that, if current trends in population and educational levels persist, Texas will experience declining average living standards over an extended time horizon.
A recent study reveals that firms locate in areas with high-performing schools, in part because skilled workers demand excellent learning experiences and opportunities for their children. In addition, good schools improve the quality of the available workforce, a key consideration in most corporate locations. This finding, which corroborates earlier research and is consistent with a fundamental role of government in economic development, is particularly relevant for technology-oriented growth industries.
Higher education also plays a vital and essential role in long-term economic progress for Texas. In addition to the need to improve high school graduation rates, there is also a critical need to increase college enrollment. Working to remove barriers to college entry, particularly financial impediments, will prove advantageous to the state and its residents.
Although the idea of education for its own sake is certainly appealing, the vast majority of people cannot afford to make higher education decisions simply on that basis. Instead, the likely income gains associated with educational choices are typically considered. As higher educational institutions move forward in endeavors to match programs to the needs of business, Texans will be better served and businesses across the state will greatly benefit from the constant influx of quality graduates.
Another key economic issue related to higher education pertains to the training of scientists, engineers, medical researchers, and similar professionals. High-quality research, the ability to attract substantial federal grant funds, and state-of-the-art laboratory and computational facilities are vital. For Texas to have a sustained presence in the emerging technologies, significant investment in higher education must be made.
For the Lone Star State to achieve its full potential, Texans must be educated to meet the ever-increasing demands of a sophisticated economic complex. This outcome is only attainable within the context of an exceptional educational system at all levels. The press has been filled with stories of a $10 billion budget shortfall and newly inaugurated leadership with a determination to improve fiscal discipline. These goals are certainly laudable and, indeed, essential. The key to success in these tough budget times, however, is to prioritize those things that are most essential to our future. Education at all levels—elementary, secondary, college, and job training—is at the top of that list.
posted @ 07:51 AM CST [link]
Friday, January 17, 2003
Electric Competition: A Year in Review About a year ago, a substantial portion of the Texas electric utility industry was opened to retail competition. Looking back at progress thus far leaves little doubt that this initiative has already been a very good thing, with the promise of much greater benefits in the future.
Independent observers and analysts have given high marks to the Texas process. The Center for Advancement of Energy Markets recently ranked Texas number one among all states in terms of attributes the Center identifies as fundamental to a successful move to competition. Xenergy, an energy consulting firm, recently released a report indicating that both competitive energy sellers and consumers are better off in the state’s competitive market. Although there were inevitable transitional difficulties, they are now diminishing. Other industry observers concur that the Texas transition has been less problematic than that in other states.
Electric competition has resulted in significant gains in business activity. As market forces have come into play, cost reductions have exceeded the legislative mandate of 6% in many areas. Customers have more freedom to negotiate with power providers, in some cases banding together through aggregation to save even more than they could individually. These cost savings have freed up dollars for other purposes—saving, investing, and spending. The Texas economy has benefited; a recent study by The Perryman Group quantifies those positive effects.
A major source of economic gains linked to electric competition is the facility construction encouraged by freeing the market. Even given conservative assumptions, the economic impact of facility construction since the onset of competition includes a notable $37.441 billion in total expenditures and 302,075 person-years of employment. The impact of facility construction in 2002 alone includes 67,703 person-years of employment. This stimulus, while already notable, can be expected to increase in the years to come as the economy gains momentum.
A second area of benefit from retail competition stems from cost savings to customers. These savings are typically spent for other types of goods and services, in turn generating additional economic activity. Similarly, industrial users and public entities are able to deploy substantial resources to increased production and the provision of needed services. Texas residential electric customers will see direct benefits of more than $300 million for 2002. In some areas, a household using an average of 1,000 kilowatt hours per month can save as much as $166 per year by switching to the lowest cost provider. If all eligible customers switched to lowest cost offers, savings could rise another $636 million.
One key source of savings to households stems from the low-income rate discount program. Concerted efforts involving the Public Utility Commission, Texas Department of Human Services, and other entities have led to rising enrollment of low-income customers and savings of an additional $68 million through October 2002, an average of $136 per customer.
Many commercial and industrial customers, as well as political subdivisions, have taken advantage of aggregation programs to pool purchasing power and achieve more favorable rates. Such purchasing methods have led to estimated savings of $123 million over the price to beat ($134 million over 2001 rates). The Texas Association of School Boards (with more than 190 school district members) estimates it will save $15 million through a collective contract; other municipal purchasing groups are expecting to save significantly as well. Texas Instruments signed an agreement involving provision of power to 24 facilities, with expected savings of about 20%.
The total residential impacts from cost savings (excluding direct fuel costs and surcharge savings of $677 million) include $603.8 million in annual spending and 4,176 permanent jobs. As noted, only a fraction of households eligible to switch have done so thus far; therefore, the benefits to customers in this category are projected to rise markedly over time. In the small commercial segment, the impact of cost savings includes $419.6 million in annual expenditures and 2,708 jobs. Cost savings to industrial customers contributes further stimulus of $554.8 million in yearly outlays as well as 1,063 permanent jobs. Public sector entities such as cities, counties, and school districts are also saving millions of dollars, bringing an overall injection of another $406.8 million in annual outlays and 3,421 permanent jobs.
The economy of Texas is better off for the introduction of competition to the electric utility industry. When the savings to all customer classes are combined, the direct cost reductions total nearly $815.0 million. These savings lead to a notable economic stimulus of $1.98 billion in spending each year and 11,368 permanent jobs. Furthermore, Texas is now in a more favorable position in the competition for quality corporate locations. Over time, innovations and options will increase markedly. Electric competition has also led to benefits in the areas of renewable energy and emissions reductions. In short, one year into the process, it is clear that opening the retail electric market was a well-conceived and highly effective public policy decision.
posted @ 07:58 AM CST [link]
Friday, January 10, 2003
Back in the Game The race for the national collegiate football championship is over, and the best pro football team will soon be decided in the Super Bowl. Unfortunately, Texas teams have not been involved in either race to any significant degree. Still, many people recall past glories and keep their football expectations high for the future. And, of course, we do have the Mavericks!
So how goes it with expectations for obtaining corporate locations in 2003? During the 1990s, the Texas economy performed extremely well. For the first half of that decade, the Lone Star State was the undisputed leader in new capital investments, job growth, and new and expanding facilities. Let me give you a little background.
Specifically, from 1990 to 1996, Texas was in first or second place among all states for the number of new manufacturing locations; by 1999, the state had dropped to fifth. Additionally, during a period in which total facilities in the US soared to record levels and some large states doubled or even tripled their numbers of new plants, Texas saw its annual gain tumble by 25%. The rate of expansion in all facilities (both manufacturing and non-manufacturing) also fell by almost the same percentage.
Following a very weak year in locations in 2000, Texas was ranked sixth in 2001 (behind Michigan, Illinois, California, New York, and Ohio) in the total number of new and expanded facilities. Today, the Lone Star State fails to appear even in the top ten when per capital measures are used for total new and expanded facilities, capital investment, or new jobs created.
Perhaps even more ominous is the decrease in major new projects with initial investments exceeding $500 million. These kinds of massive production complexes are critical to long-range growth and development as they spawn extensive supplier networks, typically implement multiple rounds of future expansion, and are a catalyst to other sizeable facilities. Large-scale locations of this nature can literally redefine the economy of an area, as seen in Gulf Coast petrochemicals, defense aviation in Fort Worth, and microelectronics in Austin.
Over the period from 1990 to 1996, Texas attracted 12 new investments of this magnitude, as well as 11 comparable expansions and modernizations in the petrochemical sector. Since 1996, there have been only two: an expansion of an existing facility (which required substantial local incentives and helped to preserve a significant employer) and the purchase and modification of an existing plant (which never reached capacity and recently announced closure).
Quite simply, Texas is falling behind. The state is getting a smaller absolute and relative share of a growing pool of manufacturers. Virtually all of the big ones are getting away (although we do have one on the line right now, with the hook almost set).
For example, California has attracted more new manufacturing plants than any other state in recent years, with the total number of new facilities rising by 385% between 1996 and 1999. This growth was the result of the state’s concerted efforts to create a more favorable business climate, in part by cutting bank and corporate taxes and expanding the research and development tax credit.
Another example is Michigan, which consistently ranks first in the nation in total new and expanded facilities and near the top in both new manufacturing plants and new and expanded global operations. The state has actively pursued a pro-business tax policy and its Legislature has removed some 3,000 outmoded regulations.
New York has also emerged recently as a formidable competitor for new manufacturing locations as a result of its aggressive business taxation strategy—the state’s corporate tax rate is steadily approaching its lowest level since 1970. Over the past five years, the fiscal cost of doing business in the Empire State has dropped by more than a third.
Similar examples can be found in Ohio, Illinois, and North Carolina. It’s evident that many states are being quite aggressive in implementing comprehensive and innovative programs to respond to the emerging forces shaping economic development in the new millennium. To remain in the race and get back on top, Texas needs to systematically examine its existing programs and implement an effective strategy for future competitiveness.
posted @ 07:55 AM CST [link]
Friday, January 3, 2003
New Year’s Resolutions While it’s too late to prepare a list of suggestions for Santa Claus, this is a perfect time to consider New Year’s Resolutions. In fact, I’ll bet you have a list. I’ll go one further and hazard a guess that many of your items are the same as mine: do better with my exercise routine, work through my inbox, clean out my files….sound familiar? Another thing we should have in common is a resolution to improve the economy of our great state. While you may not spend a lot of time thinking about such arcane issues, I do. My family and friends might even say that’s practically all I do. In the spirit of the New Year, I have compiled a list of key resolutions related to economic development; I believe they can prove to be of great value to Texas, and hence all Texans.
Despite their shortcomings, monetary incentives are a fact of life in modern economic development processes. No matter how distasteful they may be in principle, they are an integral part of the “market” for quality corporate locations, the economic engines we need to sustain employment and income growth.
There is certainly nothing new about economic incentives, and they are not without longstanding historical precedent in the Lone Star State. For example, the first settlers who migrated to Texas from Mexico (the legendary “Texicans”) received free land and tax incentives as inducements to inhabit this rugged territory.
Today, business concerns are being encouraged to consider Texas for locations, expansions, and retentions. As part of this inducement process, the state is attempting to improve its competitive position in the market. That’s what my list is all about—suggestions regarding better ways to make it happen. They are not presented by priority, and one is not necessarily dependent on the other. Here they are:
1) Create a Strike Force Capability or “Deal-Closing” Fund. The designation of a discretionary pool of money to secure key incentives on an expedited basis for major projects is one of the most significant opportunities facing Texas. Enabling the Governor (possibly with input from a few others) the ability to deploy such revenues as part of an overall state and local government inducement strategy can be (and often is) the difference between success and failure.
2) Increase Existing Research and Development Incentive Programs. Texas should raise the research and development tax credit to a higher percentage in order to be more competitive with other states in this critical area for future growth. The state should also allow the overhead allocation from university research grants to be used for the intended purpose, rather than being transferred to general revenue.
3) Expand and Simplify the Investment Tax Credit and Jobs Tax Credit Program. Texas should increase the level of credit associated with these programs to a range more in line with other states. Provisions that make it difficult to access should be eliminated. In addition, the coverage should be extended to the entire state, rather than limiting it to Strategic Investment Areas.
4) Simplify House Bill 1200 (HB1200). This measure is a major advance in development policy because it directly affects the disproportionate property tax liability of capital-intensive firms. As long as the property tax is the primary mechanism to fund public education, HB1200 is essential for competitiveness. However, the process for using the program needs to be simplified, made more predictable, and implemented in a way that does not involve undue risks to the recipients or participating school districts.
5) Maintain and Strengthen the Economic Development Sales Tax. This program is the major competitive mechanism currently in place and is key to effective efforts by hundreds of communities. Some inappropriate uses have occurred and need to be corrected. Training and education of those involved can be helpful in this respect. On the other hand, the permitted uses should be extended in areas that are clearly related to development and job creation.
6) Develop a More Equitable and Competitive Taxation System for Inventories. With continuing reliance on the property tax to fund public schools, a disproportionate burden falls on goods-in-transit relative to other states and leads to direct, quantifiable losses in business activity. Efforts to address this issue (while being cognizant of local fiscal needs) will bring important benefits to state business activity.
It’s a brief list of suggestions, but enacting programs such as these can serve as guidelines for enhancing Texas’ competitive position in the modern, global market for economic development. Happy New Year!
posted @ 08:31 AM CST [link]