Questioning the wisdom of free-wheeling tax incentives

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Last week officials in the cities of Georgetown and Midland celebrated tax incentive deals totaling more than $11 million to lure Costco Wholesale supermarkets to town.

The $4.4 million sales tax rebate package approved last Tuesday by the Georgetown City Council is expected to create 235 jobs and provide a net benefit to the city of more than $11 million in the next decade, according to city estimates. The $7 million tax rebate deal passed on the same day in Midland is estimated to add 150 to 200 jobs. Midland officials provided the public with no benefits estimates.

“This is a big economic development win for our community, and we look forward to welcoming Costco to Georgetown,” Mayor Dale Ross said in a statement on the city’s website. “This Costco store will provide a significant sales and property tax benefit to the city, which will help to fund city services such as public safety, the library, and parks and recreation.”

Despite the enticing job promises, researchers are increasingly dubious about whether such tax packages are necessary in fast-growing cities like Georgetown and Midland where businesses like Costco already want to be.

They are also questioning the Texas Legislature’s promotion of programs at the state and local levels that give advantages to some businesses, while legislators at the same time are setting new limits on the ability of cities to raise taxes.

In the last session, a conservative legislature added $74 million to the $76 million already available in the once-controversial Texas Enterprise Fund. Lawmakers approved allowing for $110 million in hotel occupancy taxes to be siphoned away to promote tourism. And they included $50 million for the Moving Image Industry Incentive Program, which was once on the brink of extinction. 

The legislature also tweaked Chapter 312 of the Texas Tax Code to make it easier for cities like Georgetown and Midland to offer tax abatement deals to get businesses to come to town.

There is, however, a growing body of academic research casting doubt on the value of these deals, particularly in places with little economic hardship where governments offer incentives to successful companies that already have a competitive edge.

“The research shows the vast majority of these companies would have located in those communities anyway,” Nathan Jensen, professor of government at the University of Texas in Austin, told The Texas Monitor. “The research also shows these companies don’t create new jobs, but cannibalize jobs from existing local businesses that are already being taxed at their full value.” 

Jensen said politicians at all levels find incentive giveaways irresistible because they can point to having done something concrete for their constituencies. He’s the co-author of  “Incentives to Pander: How Politicians Use Corporate Welfare for Political Gain.”

There is little hard evidence that communities that have granted tax reduction packages actually review the results of those deals to analyze whether taxpayers benefitted, Jensen said. Moreover, the officials who approve the deals are often long gone by the time the incentive deals have expired.

Georgetown is one of the fastest growing cities in Texas. Midland is one of the fastest growing cities in the country. Their economies are outstripping many other communities in a state that brags about its population boom and economic vigor.

The tax rebates offered to Costco in the last six years and reviewed by The Texas Monitor came from economic boomtowns — Katy in 2013, Pearland in 2015 and Dallas in 2016.

Round Rock, Hutto and Pflugerville — fast-growing satellite cities just north of Austin —  have been much more aggressive with their incentive programs over the past decade .

From 2000 to 2008, the City of Round Rock entered into development deals with five separate companies. City data shows that in the time since, Round Rock has signed 32 such agreements, according to a review of those deals by Community Impact Newspapers early this year.

The companies with incentive deals in those three cities include Dell, Ikea, Marriott and Costco.

And yet these kinds of up-and-coming cities, where retailers want to be, are the cities most likely to be granting tax rebates or abatements. 

In July 2018, Timothy Bartik, a senior economist with the Upjohn Institute for Employment Research in Kalamazoo, Mich., surveyed 30 research papers on the topic of incentives and concluded that between 75 percent and 98 percent of the companies would have located in their communities regardless of the tax incentives.

There is no documented evidence in either Georgetown or Midland that Costco officials threatened to go somewhere else if they did not get the incentives. The Texas Monitor posed the question in an email to the public information office in Georgetown but received no reply.

Councilmember Kevin Pitts also did not respond to a request for comment. Pitts said following the vote that he thought the public supported the deal. “This will bring in people from all over the place,” Pitts said.

Mike Triggs, the only council member to oppose the deal, told The Texas Monitor he was convinced Costco wanted to be in Georgetown regardless of the incentive.

Costco never told council members that the company wouldn’t build in Georgetown without the incentives, Triggs said. All negotiating with Costco was done by the Georgetown Economic Development Department, he said.

“It’s a corrupted form of capitalism,” Triggs, a retired banker, said. “I have no problem with Costco, but you’re picking winners and losers and you’re helping them compete. And it’s detrimental to the businesses that have to compete with them.”

The public has little idea if or how the incentive packages might benefit taxpayers, or how the deals actually work. Much of Jensen’s recent work, some of it chronicled earlier this year by The Texas Monitor, is critical of the secrecy of such dealmaking.

In the case of the Texas Enterprise Fund, Jensen found companies agreeing publicly to incentive packages and then renegotiating better deals in private with the state.

Jensen said he can find very little in the way of cost/benefit analyses of the incentive packages being done by the states or the cities.

“In most cases it looks more like just opening up the cash register and giving companies as much as they thought they could justify,” Jensen said.

Jensen said the generosity of cities might change now that the legislature has passed a law that requires governing bodies to get voter approval for any property tax increase above 3.5 percent. Giving up taxes that could cost a community valuable city services might make elected officials think twice, he said.

In late July the Travis County Commissioners Court voted to stop accepting applications from companies asking for tax incentives while it tries to figure out the impact that the 3.5 percent limit will have on its ability to fund current programs.

County Judge Sarah Eckhardt, head of the commissioners court, said after the vote, “We simply cannot afford to give preferential tax treatment to our wealthiest corporate citizens, or prospective wealthy corporate citizens, under a 3.5 percent revenue cap. This is a like-to-have that we simply can’t afford under this new normal.”

Mark Lisheron can be reached at [email protected].

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