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The Comptroller’s office has posted a new report evaluating existing state business incentives: An Analysis of Texas Economic Development Incentives 2010.

This first-of-its-kind report provides detailed information on state business incentives for legislators and others in preparation of the 82nd legislative session. The report looked at nine state incentive programs. These programs were selected because of the prevalence of their use.

The direct link to the report is: http://www.texasahead.org/reports/incentives/. An overview of the recommendations made in the report are pasted directly below: 

Texas Economic Development Act – Chapter 313 Program

The agency makes the following recommendations to the 82nd Legislature:

  • Eliminate supplemental payments by companies to districts. Most revenue losses for districts entering into Chapter 313 agreements are offset through the state school finance system. However, the statute also requires each limitation agreement to include a provision that protect owners make up any other possible school district revenue shortfalls out of their benefits. Supplemental payments are paid outside the school funding formula, and incentivize the districts to enter into agreements that may not be beneficial to the state. The value of supplemental payments was limited by the 81st Legislature, but in many cases the supplemental payments are still 40 percent of the tax benefit. Additionally, some agreements call for payments to foundations controlled by the district. Supplemental payments to districts are evidence that the incentives awarded are higher than necessary to attract these projects, and represent unnecessary cost to the state. These excess payments are estimated to total $457 million over the life of the 98 agreements, according to information provided by the districts.
  • Modify the requirements pertaining to renewable energy projects, with targets and benefits that more closely correlate to those projects. Renewable energy projects are projected to receive 38 percent of the projected lifetime tax benefits from Chapter 313, but only make up 27.6 percent of committed investments and eight percent of committed jobs. Additionally, renewable energy projects are paying supplemental payments to the districts at a rate that is twice that of the manufacturing sector.
  • Eliminate the local districts’ authority to waive minimum job creation requirements. A purpose of Chapter 313 is to “create new, high-paying jobs in this state.” Since the ability to waive the minimum job creation requirement was passed in 2007, more than 60 percent of all applications have been accompanied by a waiver of the minimum job requirement. The cost per job to the state for jobs created under Chapter 313 agreements is approximately 40 times higher than the cost per job for the Texas Enterprise Fund. While Chapter 313 targets capital investment, in addition to job creation, the legislature should take measures to increase job creation under Chapter 313 agreements.
  • Evaluate the program. Chapter 313 was passed in 2001 as an economic development tool to provide property tax benefits in return for large scale investments and new, high paying jobs. Chapter 313 has helped Texas attract a number of large manufacturing plants that have significant employment; however, due to subsequent amendments to the chapter, it has increasingly been used to over-incentivize projects that create few or no jobs. The program should be restructured towards its original intent.

Texas Enterprise Fund

  • Reporting. In addition to the biennial statutory report completed by the Governor’s office, it is recommended that the Texas Enterprise Fund adopt more frequent reporting to inform policy makers and the public about the progress of the program goals. Semi-annual or quarterly reports should include a summary of new contracts as well as a summary of amended contracts detailing the specific contracts amended and a short description of the nature of the amendment. Tables are provided in the report as examples of ongoing reports.

Economic Development Refund

  • Program Effectiveness. The legislature should evaluate the effectiveness of the program in consideration of the fact that 23 percent of the awards are supporting retail applicants.
  • Need for Additional Data. If this program is funded in the future, the Comptroller’s office should be authorized to report the specific payroll and appraised value increases reported by each applicant to assist in the evaluation of the program.

Texas Enterprise Zone Program

  • Review biennial allocations. The state authorizes a limited number of designations for each biennium. While this limits the state’s potential cost, it also makes it difficult for the state to maximize the benefit from the program, because worthy projects that apply too late in the biennium may not receive an authorization, even though the project could have a better return to the state than earlier projects.
    •  The legislature should evaluate the number of authorized biennial allocations, as well as the method of allocation to ensure that the program provides maximum benefits to both the state and the employers.

Texas Moving Image Industry Incentive Program

  • Broaden Approval Process. Consider broadening the incentive approval process to include more than the executive director of the Texas Film Commission.
  • Standardized Reporting. The information reported by the Texas Film Commission is of varying dates and information is not reported by fiscal year or calendar year. CPA recommends the Texas Film Commission standardize its reporting methods and report relevant information (industry, incentive, etc.) on a regular basis.
  • Review of Award Proportions by Industry Sector. The State should review the proportion of incentives awarded for each sector in comparison to the spending and job creation for that sector, to evaluate whether the funding is being utilized in the most efficient way to attract spending and permanent job creation.
    • The feature film industry is portable, and responds quickly to incentives — which means Texas will likely have to maintain or increase the level of incentives over time to continue to attract new projects.
    •  The effective sales tax rate vs. grant availability:
      • Feature Film Production: The effective sales tax rate, (the ratio of indirect business taxes to film production spending), is less than five percent. However, these companies could potentially receive up to 17.5 percent of their total Texas spending or up to 29.25 percent of their total wage payments to Texas film workers if they spend more than $5.16           
      • Video Games: Effective sales tax rate for video game productions is over seven percent, while these video game companies can receive only up to five percent of Texas spending in grants
  • While making up only 19 percent of the grant receipts, the game industry is responsible for 41 percent of the spending and 45 percent of jobs created.

Texas Emerging Technology Fund

  • Reporting. It is recommended that the Texas Emerging Technology Fund incorporate additional reporting on the approval process for awards, as well as annual reporting on fund expenditures and grantee performance (the ETF will release its first statutorily required report prior to the 82nd Legislative Session, which should include additional information to assist policy makers and the public in evaluating the program).
    • The Emerging Technology Fund posts information on each award on its webpage, however, due to the variety of award types, it is difficult to assess the success of the program.
    • Reporting should include, at a minimum, results for each of the three subprograms (Commercialization, Research Superiority and Research Award Matching).

Certified Capital Companies (CAPCO)

  • Geographic Diversity of Investments. If the legislature considers additional rounds of CAPCO Premium Tax Credits, an effort to promote geographic diversity to investments outside of Travis, Dallas and Harris counties. This could be as simple as requiring a more robust marketing or education program or implementing a threshold of investments that must be made outside the above mentioned counties.
  • Full Program Evaluation. Upon completion of Program I in 2011, a full evaluation of the CAPCO program should be done. Issues that should be considered in this analysis:
    • Multiple CAPCOs can invest in the same targeted business. If one CAPCO pays off the investment of another CAPCO, both CAPCOs get credit towards their targets, but there is no economic growth with the second investment.
    • CAPCOs with an aggressive investment strategy have a higher expenditure rate and run out of funds faster than other CAPCOs with different strategies, making overall program evaluation difficult.

Freeport Exemptions

  • Effectiveness Metrics. The Freeport exemption is the state’s largest economic development program in terms of total dollars. Since the program is administered and monitored at the local level, the state does not have sufficient information to evaluate the return on the taxable dollar value loss granted under the exemption. The Comptroller’s office recommends that the legislature evaluate the program, and develop metrics to determine its effectiveness.

Texas Workforce Commission

  • Skills Development Fund. CPA has no recommendation for this program