Killing the Goose
By: Dr. M. Ray Perryman
Published in syndication February 15, 2017
Legislative noise has been heard in Austin about eliminating the Texas Enterprise Fund, a key aspect of the state's economic development incentives. The Governor has asked that it be retained. Let me be very clear: scrapping this "deal closing" fund would be a major blow to the state's future competitiveness, with the potential for major fallout over time. It would be like killing the goose that has been laying golden eggs (the same is true for the incentives for film and television productions in Texas, but that is a topic for another time).
I have been studying economic development and related policy for about 35 years, and my firm has been involved in hundreds of studies from both the community and the corporate perspective throughout the world. Through the course of my career, I have analyzed and come to understand the dynamics at work on both sides. I have also helped shape economic development legislation on many occasions, and I have seen the process at work.
Although in some sort of Utopian world, economic development incentives might not exist or be needed, that world is not where we live and work. Economic development is highly competitive, incentives are widely used, and Texas needs effective incentives to "level the playing field." In fact, incentives are becoming more important over time due to a number of structural changes.
For one thing, the mobility of both labor and capital continues to increase. Workers in key growth sectors relocate in response to enhanced opportunities, and financial markets efficiently move capital and money to their highest and best uses. This is good news if Texas is doing the attracting of the workers and capital, but it also means that skilled people and opportunities can be enticed away.
In addition, site selection is a very sophisticated process, and firms realize that they have significant "bargaining power" with state and local governments and are using it to effectively reduce overall costs. Most large firms use site selection consultants to assist in the location process. Because these consultants compete with one another and owe their livelihood to their ability to secure the best packages of incentives, areas without competitive programs are often shut out of the process entirely.
Costs are a major consideration for virtually every business operation. Globalization requires that firms, particularly in growth-oriented manufacturing sectors, offer a mix of output, innovation, and profits that is competitive on an international scale. In such an environment, even relatively minor variations in costs across geographic areas can be a key factor in location decisions, and incentives are an important part of the equation when areas are roughly equivalent in other respects (which is the typical situation).
Because companies are held to high levels of public scrutiny in debt and equity markets, lower tax levels and specific economic incentive packages bring with them a fiduciary duty to minimize overall outlays and maximize profits. Shareholders demand a high level of accountability, and companies must be aggressive in seeking out the most attractive packages.
As for the effectiveness of the Texas Enterprise Fund, the record is impressive. According to the most recent report to the Legislature, since its inception in 2004, a total of 146 projects have been funded. Nearly $610 million has been awarded, but about $27 billion in capital investment has been committed. Nearly 83,300 new direct jobs have been gained, more than 10,800 of them in manufacturing. The overall average wage for these jobs exceeds $59,500, and projects for the most recent year involved average wages of nearly $76,700.
With jobs of this quality and capital investments of this size, the multiplier effects are particularly large. Other Texas firms supplying goods and services to these companies are benefitting, as are the companies further down the supply chain. Job opportunities have been enhanced, and consumer spending has increased. The tax base has grown, to the benefit of the State and local governments.
The arguments for getting rid of the Enterprise Fund center on the idea that it's no longer needed and therefore represents a waste of taxpayer resources. Texas clearly has many advantages as a location for business ranging from workforce size and growth to resources (such as land, oil and gas reserves, and a decent climate). There are also factors which are more subject to control, such as certain aspects of the business climate, where Texas holds its own.
On the other hand, the state has some disadvantages. For example, Texas has a comparatively high property tax burden. For capital-intensive firms (such as advanced manufacturers), this can be a disadvantage of locating in the Lone Star State. Incentives related to property taxes are important, and the Texas Enterprise Fund can also help. While incentives are only a piece of the location decision process, they can be a crucial part. The Texas Economic Development Act (sometimes known as Chapter 313 for its tax code location) provides specific property tax relief. It has also come under attack of late, but is an essential component of our efforts.
Clearly, any incentives offered need to be structured such that they are in the best interest of communities and the state. At the same time, it is important to realize that any business stimulus generates multiple rounds of economic activity (which I have measured in thousands of different contexts), and this activity, in turn, leads to tax revenues. When the overall economic impacts and fiscal effects of a location are considered, incentives offered are often returned many times over.
The Texas Enterprise Fund is important to the future of Texas. The competition for locations is fierce, and we cannot afford to be without attractive incentives. To eliminate it would be like killing that proverbial goose. We might get a nice meal out of it, but the supply of golden eggs would definitely be severely and adversely affected.