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Below is the HillCo client report from the July 23 House Select Committee on Economic Development Incentives.

The committee met for an overall examination of the use of incentives as an economic development tool.

Chairman Angie Chen Button noted that Texas is the number 1 ranked job creator in America and has been for years; much of this is due to Texas’ agreeable business climate but may also be attributable to economic development incentives within the state
There is a major difference between incentives and subsidies; subsidies merely provide funding for an activity regardless of the benefit provided; incentives are a way to bring business to the state while also achieving a benefit for the state.

Rep. Eddie Rodriguez noted he would like to determine the cost and benefit to the state of economic development funds at every level

The second meeting on August 12th will be in Plano and focus on incentive programs such as the Texas Enterprise Fund and the Emerging Technology fund.

The third meeting will be on August 27th and will focus on incentives such as film/music, special events, and local programs.
 
The fourth meeting will be in Houston on September 24th and will address energy related programs such as high-cost gas, renewable energy, as well as freeport exemption incentives, private space initiatives, cancer prevention and research general obligation bonds.
 
The fifth meeting will be in Austin on October 15th to review tax incentives discussed in previous committee hearings and will also look at financing tools such as the Economic Development Bank and the Texas Rural Investment Fund.  The committee will also address needs of small business.
 
The final meeting will be in Austin on November 6th to discuss findings & recommendations.
 
The goal of the committee is to have the summary report draft for committee members by the 1st week of December.
 
 
Greg Leroy, Executive Director, Good Jobs First

  • Incentives have a place in government and are appropriate when addressing known problems such as food deserts, or employment issues in an area
  • Incentives help things happen that should be happening but aren’t
  • Many incentives become subsidies as regulations and requirements are loosened; dollars become windfalls and companies are being paid to do things they would be doing anyway in the regular market
  • Incentives work when spending is used as an actual incentive and not government “pork”
  • Incentives work when they benefit all or many employers in a market, not just one or a few
    • Cluster strategies, where a niche of companies is chosen to be invested in, work in the same way; if some companies in the cluster fail, employees and ideas can move into another company in that cluster and continue to benefit the state
  • Toyota decided to move to San Antonio despite bigger incentives from other states because of certain factors within the state and declined to take a property tax incentive Texas offered
  • State and local taxes combined make up 2% or less of a company’s cost structure; shaving taxes almost never determines where a company locates
  • Texas is a high growth state right now; Texas should be concerned with harnessing growth to address geographic issues and high-quality employment; not incentivizing actual growth
    • Many current incentives in Texas do not have wage or benefit standards
  • Interstate job movements and piracy are something that governments should tune out; they are a microscopic portion of job impacts, maybe 1/100 of 1%
  • Incentives should be focused on expansion and targeted clusters
  • Button does not agree with Leroy’s views on job piracy and noted that competition is very important
  • Rep. Joe Deshotel noted it makes no difference nationwide what state a company is in but it is a big deal for communities who want companies to move in and bring jobs and growth
    • It is important to consider that most times a state comes to the table they have already determined that a state is a good place to do business; asking for a tax abatement is just a bonus for companies many times
  • Rep. Poncho Nevarez noted the committee should study what has been done to determine incentives that have turned into subsidies where the state is receiving no added benefit

 
Kelly Rendziperis, Site Selection Group

  • Even before the impetus of economic development incentives, Texas was doing great
  • Texas has captured 13% of total capital investment from 2005 to 2012
  • The projected $8 billion surplus in the near future allows for much flexibility and forward thinking in this regard
  • Many other states have begun using the Texas model for bringing in jobs and growth
  • Incentives matter; labor availability and labor cost is typically the number one factor in site selection but other factors still matter
  • Deshotel noted tax burden was separated from economic incentives in rankings
    • Incentives encompass more than just tax breaks, they also include training, cash grants, discounted land, etc.
  • Deshotel noted most economic incentives are tax breaks related to property and sales taxes
    • When weighting factors, tax burden without incentives is considered separately
  • Incentives are more important to certain industries such as manufacturing
  • Texas is unique in that many incentives come from the local level as opposed to the state level which does not hold true for other competitive states such as Louisiana and Arkansas; those two states have payroll rebate programs that Texas does not have
  • Rep. Trent Ashby asked for comments from a state perspective as a site selector and how Texas compares at the state level
    • One example of something Texas should change due to other state’s policies is that Texas discourages service industries from being in Texas because of sourcing rules; services performed in Texas are taxed doubly when businesses are performing services for people in other states; should be considered in the margins tax; Texas taxes services performed instead of services received as most other states assess the tax
  • Texas Enterprise Fund has a very large return on investment; the process is slow however and the timeline should be addressed; greater flexibility for special projects that do not meet the requirements should also be addressed
  • The Texas Enterprise Zone program has become increasingly difficult to use; benefiting around 100 companies in a biennium which may be more in favor of tax benefits; there are other ways to incentivize the behavior the program has set out to incent
  • The Skills Development Fund has become unfavorable because of the requirement to work with colleges and universities; other states provide training cash grants which are more favored; Texas also has a shortage of vocational schools which make the program unfavorable; the timeline for this fund should be addressed as well
  • Deshotel asked what programs are successful in that there is less abuse by the companies involved
    • Arizona has a good program that is more privatized because it is a reimbursement; it is audited and monitored which would be a key factor if Texas moved in that direction
  • Property tax relief should be reviewed; it may be possible to expand the programs; not sure why the categories of allowable industries is unnecessarily narrow
  • The Research and Development Credit should also contain a margins tax credit
  • The economic development sales tax is very much favored by Texans and does a great job of attracting investment to the state
  • Project management is lacking at the state level; other states have project leaders for the life of the project; can be overwhelming to deal with the many different levels of government that have control over incentives; could streamline the process
  • Increased transparency of funds would do a lot to fend off criticism they receive
  • The next big things Texas needs to be attracting are heavy export business and diversity at local levels
  • Rep. Drew Springer asked if there is an issue in moving training programs to private entities; could cause very specific training and if a company leaves, the trained employees could not move to another company and take that training; training become irrelevant
    • That is a possibility; training should not be moved completely away from colleges and universities
  • Texas also needs to do a better job at attracting smaller companies (20 jobs) because they grow into bigger companies many times
  • Rep. Jason Villalba noted this testimony is very different than the previous witness’; what kind of things do companies talk about when determining site selection
    • Project managers are a big part of the discussion; someone to guide the companies through the process
  • Villalba noted that if Texas removes some incentive programs it doesn’t mean other states will cancel their programs and Texas would still have to compete
  • Villalba asked what a company’s profit margin is on average
    • 6%
  • Villalba noted that 2% of cost structure could be a big portion of the net profit
  • Villalba asked if interstate piracy is a bad idea
    • No; Texas is not the only state involved in that; it would not be good policy for Texas to stop addressing interstate job relocation
  • Villalba asked what it means to “harness the growth” of the economy
    • Probably that Texas needs to be making investments in water, transportation and education to ensure the right resources are here to bring more jobs and economy
  • Springer asked how the state can show more interest in incentivizing businesses to come to certain communities over others; would like to preempt the site selection process so that particular communities are targeted
    • Enhanced credits for particular regions could achieve that goal
  • Nevarez asked if it is important to look after the fact at whether incentives ended up providing the return on investment they intended to provide
    • Yes; programs and contracts can always be rewritten to ensure the desired benefits are being achieved
  • Rodriguez asked what other taxes can be used for credits besides margins taxes, sales taxes and property taxes
    • Texas has some great incentives for sales taxes; the problem with the Texas Enterprise Zone is that it is a rebate of the sales tax which may not be enough; could add an income tax rebate  to make the program work better
  • Ashby asked about project management; what can be done differently or better
    • Adding resources would be a big help; just ensuring there is someone who can work with a company throughout the entire life of the project
  • Rep. Mary Ann Perez asked about paperwork in Texas compared to Louisiana
    • That is a huge issue; some companies have chosen Louisiana because of the delay in permitting issues in Texas; sometimes up to a year difference; Louisiana has the ability to expedite permitting; the fact that in Louisiana programs are run at a state level could be a contributing factor, helps to streamline processes

 
John Hockenyos, TXP, Inc.

  • Incentives policy should be predicated on goals; goals change all the time
  • Currently about $60 billion is estimated to be handed out in credits
  • Criticism is focused on perceived fairness and equitability in the system and programs
  • Most multiplier effects of economic incentives are felt by local communities, not the state
  • It is important to have clear parameters that companies receiving incentives can and will be judged by
    • Economic activity or tax revenue
  • It is important to ensure programs are readily accessible to smaller communities for smaller projects; not just mega-companies in large metropolitan areas
  • It is important to have good contract requirements that incentives must adhere to
  • Deshotel asked about expanding the manufacturing credit
    • It would be good; mainly because the definition of manufacturing is very fluid
  • Rodriguez asked about targeting incentives to market imperfections
    • Cities could determine that they want to incentivize a grocery store to locate in a food desert but that should be taken care of at the local level
  • Springer asked about companies being incentivized to move into an area and that a competitors tax dollars could be used to bring in competition
    • Do not want to advantage someone new to the community at the disadvantage of a community member; generally, retail companies should not receive incentives

 
Robert Wood, Office of the Comptroller

  • Incentives should have a clearly defined purpose; without such they can morph into something the state may not support in the future
  • Each incentive should be subject to a particular timeframe and not limitless
  • Incentives should have a maximum funding allocation
  • Each incentive should have a list of factors that their success will be measured by
  • Rodriguez asked about claw backs
    • They are contract provisions that say if a benefit is not received the state can ask for a portion of an incentive to be returned
  • Rodriguez asked about bankruptcy
    • In some cases a judgment could be placed against a company for the amount of the claw back if it is a contract provision
  • Ashby asked for an example of a situation where the state has seen negative benefit
    • With Ch. 313 agreements, projects go off the tax roll for ten years and no benefit is realized until they return to the tax rolls; the state will see a negative benefit if too many programs are participating and going off the tax rolls all around the same time
  • Incentives should be subject to periodic review

 
Tony Bennett, Texas Association of Manufacturers

  • The witness from Site Selection Group was very accurate in her remarks
  • There are almost 900,000 people employed in Texas by manufacturers; these are high paying jobs and are the core of the Texas economy
  • Manufacturing should be encouraged any reasonable way possible
  • Manufacturing contributes 15% of the state economy; 19% of all exports are goods manufactured in Texas
  • Every manufacturing job created also creates four additional related jobs
  • The key impediments to manufacturing growth
    • Heavy property tax burden for capital intensive companies
      • Texas is only 1 of 11 states that tax business inventory; this keeps certain industries out of the state entirely
    • There is room for some private training in the training incentive program; colleges and universities should still play a big role though
    • The lengthy environmental permitting process is a huge issue in being competitive with neighboring states
    • Inadequate water and transportation infrastructure
  • Property tax abatement provisions from the 83rd session were good but some of them caused an increase in paperwork which is getting to be onerous
  • The R&D initiative from the 83rd session was excellent; it is still early to determine the actual benefit that will be realized
  • Texas has a huge and diverse economy and at the same time must remain competitive with other states so a diverse portfolio of incentive programs helps the state to remain competitive
  • Ancillary jobs, retained jobs and spinoff jobs should be considered when analyzing the impact of incentive programs
  • May need to take a look at the definition of manufacturing as it relates to the manufacturing incentives; there is a whole new realm being discovered in the oil and gas sector and Texas should enjoy some of the new industries that come in to support oil and gas and chemical manufacturing
  • Nevarez asked if Texas’ workforce is getting younger but less skilled
    • Yes; must take into account that manufacturing is becoming more advanced at the same time

 
Nelson Salinas, Texas Association of Business

  • Very much in support of incentive programs
  • Texas must use all the tools in the toolbox to remain competitive in luring business to the state
  • Other states in competition with Texas are really the ones setting the bar for where incentive packages need to be in our state

 
Bill Peacock, Texas Public Policy Foundation

  • There are two approaches to economic development
    • Authoritarian
    • Free market development
  • Studies on economic development use questionable factors , far reaching economic multipliers, and do not consider that tax money left in the pockets of taxpayers could also be used for investment and economic development
  • States that spend a lot of money on economic development are not getting more jobs and economic growth than states that spend the least; Texas is around the bottom of the list for money spent on economic development
  • States that have a low income tax rate do better than the US average and better than states with high income tax rates regarding economic development
  • States that spend more on economic development also tend to spend more overall
  • Most programs are taking funds from people whether through personal property or money and giving it to businesses in the form of incentives; Ch. 313 is a great example of that; the program will cost taxpayers around $1.5 billion over the next ten years
  • The authoritarian approach ignores the real causes of poverty; suggests that the state systematically phase out many incentive programs; spending should be capped which would generate a surplus; the surplus should be used to cut taxes such as the margins tax and sales taxes
  • Villalba asked if any growth in Texas can be attributed to incentive programs
    • Low taxes, low regulation and less government bring most of the growth in the state
  • Villalba asked for a response to the idea that incentives in the state do have a lot to do with businesses coming to the state
    • For every company that comes to the state there are multiple that do not come despite the incentives; basically taking money from one group of people and giving it to another group is not the most efficient way to grow an economy

 
Dave Porter, Greater Austin Chamber of Commerce

  • Biggest obstacle is not the amount given, it is the timing
  • It recently took 94 days to navigate the Texas Enterprise Fund for a particular project
    • Other states may have a secretary of commerce where a project can walk in the door and within an hour, know exactly what incentive will be given; competition is beating Texas in that regard
  • Manufacturing jobs are the best way to increase average wage in a given community
  • Rodriguez asked about ideas for bringing manufacturing jobs to Austin as well as Texas as a whole
    • Local incentives are not enough to bring high paying manufacturing jobs to a community; the state should be doing more
    • Button noted a future meeting will consider local programs and coordination with the state

 
Public Testimony

Tom Kowalski, CEO, Texas Healthcare and Bioscience Institute

  • Texas does a wonderful job of bringing in federal research dollars
  • There are multiple incentives that are beneficial to bringing economy into the health and science industry