California vs. Texas in fight to attract and retain businesses
When California rolled out a $750-million plan this year to attract and retain businesses, many aspects mirrored longtime perks used by Texas — where officials love nothing more than stealing jobs from the Golden State.
For more than a decade, Texas Gov. Rick Perry has touted the “deal-closing” Texas Enterprise Fund and other cash incentives as a “job-creation machine.” A fifth of the companies that Texas attracted during the last funding cycle, in 2011 and 2012, were based in California.
Now California is firing back. In the state’s first tax credit awards in June, more than 40% of the $29-million package went to companies that have gotten similar offers from Texas: Samsung, Petco and Amazon.
But as California embarks on a major effort to woo businesses, a decade’s worth of experience in Texas raises questions about the wisdom of buying jobs from corporations with taxpayer dollars.
Texas has given out more than $500 million from the Enterprise Fund — and hundreds of millions of dollars more in local property tax breaks — to entice businesses to the Lone Star State. But many legislators there now question why Texas has paid so much to companies that account for a tiny fraction of the state’s job growth.
Outside groups for years have alleged that Perry has overstated the number of jobs created; failed to recoup money from companies that break job-creation promises; and steered funds toward well-connected campaign donors.
The Texas Enterprise Fund showered $40 million this year on Toyota Motor Corp. when the company announced plans to move its North American headquarters from Torrance to Plano.
But as Toyota officials made clear, incentives had little if anything to do with the decision. Rather, the company — the world’s largest automaker — wanted to consolidate its U.S. operations closer to many of its manufacturing plants in the South.
Economists and public policy experts also point to the fairness issues — and potential for corruption — that are inherent in giving government officials the power to pick companies for multimillion-dollar grants. They also question how much such gifts affect corporate decisions to relocate or expand.
“The incentive structure is all in favor of spending too much, and spending it when you don’t need to,” said Peter Fisher, a professor emeritus of urban and regional planning at the University of Iowa who is an expert on state tax incentives.
But the incentives have become so commonplace that it is difficult for politicians to sit on the sidelines.
“It’s human nature,” said Bill Peacock, vice president of the conservative Texas Public Policy Foundation, which disapproves of such incentives. “When they see all these other states with all these different programs, it’s hard to just leave job creation and attracting new jobs to the marketplace.”
California’s new system has some key differences from Texas’ programs. The so-called California Competes program is structured as a tax credit rather than an upfront cash grant. That gives the state more leverage if companies don’t come through on their end of the agreement, California economic development officials say.
“We’re not writing a check,” said Will Koch, a deputy director who oversees the program in Gov. Jerry Brown’s Office of Business and Economic Development, during a June meeting.
The program also has more specific requirements outlining the salary levels required to obtain funding.
Both programs, however, favor companies that may be weighing offers from other states. It’s a popular political strategy nationwide, but research has shown that interstate movement of jobs and firms has a microscopic effect on economic growth.
The policy group Good Jobs First, which is critical of such incentives, found that the net gain of jobs from relocations to Texas amounted to about 0.03% each year. A similar 2005 study by the Public Policy Institute of California found that, even when California was losing the most jobs to other states, those losses amounted to less than one-tenth of 1% of total jobs.
“It’s a little rock in a very big pond,” said Thomas Cafcas, a research analyst with Good Jobs First. “Any state that actually thinks the poaching strategy is the best strategy is putting their policy efforts in the wrong basket.”
Texas-sized payments to firms
Texas’ efforts to attract businesses date to 2003, when the state nearly lost a bid for Toyota to build a manufacturing plant in San Antonio. Perry convinced legislators that the state needed extra sweeteners to compete.
Lawmakers that year allocated nearly $300 million from the state’s rainy day fund to create the Texas Enterprise Fund. At the time, Texas was facing a budget shortfall for Medicaid and the Children’s Health Insurance Program, and critics charged that starving those programs would have a greater economic effect on the state.
As the money flowed, Perry’s office had ample fodder for speeches and news releases. A major early grant of $40 million went to Sematech, an Austin computer chip research company that agreed not to shift jobs to Albany, N.Y.
Perry credited the Enterprise Fund for other major corporate expansions by Texas Instruments, Citgo and Dow Chemical.
But as the years went by — and some companies missed deadlines for promised job creation — legislators and advocacy groups raised questions.
A 2010 report from a government watchdog group, Texans for Public Justice, analyzed 50 Enterprise Fund projects that had job creation targets in 2008 and 2009. The group found that two-thirds of the projects either had failed to meet job goals, had employment targets reduced or had contracts canceled by the state.
One of those cancellations was Calabasas-based Countrywide Financial, which received $20 million in 2004 from the Enterprise Fund — an award that Perry called the “crowning jewel” of the program. When the high-risk mortgage lender collapsed in mid-2008 and was acquired by Bank of America, it had failed to meet job-creation goals and ended up paying back only a fraction of Texas taxpayers’ money.
The same 2010 report found that the so-called clawback penalties amounted to only about 1% of the total disbursements for firms that failed to meet job-creation goals.
Over the last two years, as Perry’s tenure nears an end, legislators have called the fund a prime example of skewed marketplace incentives. Lawmakers last year chose not to approve additional money.
Greg Abbott — Texas’ attorney general and the GOP nominee for this year’s gubernatorial race — said the state should “get out of the business of picking winners and losers.” Conservative groups have called it a departure from the state’s small-government, free-market values.
“Economic development programs are really a net loss, no matter how many jobs you attract,” said Peacock of the Texas Public Policy Foundation. “The jobs that these kinds of programs produce are dwarfed by the overall job growth in Texas.”
A spokeswoman for Perry, Lucy Nashed, said in a statement that the fund has created nearly 76,000 jobs over the last decade and led to more than $24 billion in capital investment.
“For years, the Texas Enterprise Fund has been an effective tool to help our state close the deal with businesses seeking to take advantage of Texas’ low taxes, fair courts, smart regulations and world-class workforce,” she said.
Economists also point out that state payments can’t make up for a company’s workforce needs.
Sematech — the Austin microchip firm Texas wooed with $40 million in 2003 — pulled up stakes in 2011, moving its employees to
Albany, where it had developed a growing partnership with local universities.
“We’re not talking about leveling the playing field and letting the market work,” said Mike Davis, a professor of economics at Southern Methodist University in Dallas. “This is very much government supporting the businesses they believe they should support. Are they
all that good at picking out who the real winners should be?”
California takes a stab at reform
California’s new slate of business tax incentives comes after a lengthy and troubled experiment with community development programs.
Beginning in 1984, state lawmakers created a series of “enterprise zones” in economically depressed areas, looking to boost job creation. The program ballooned from $15.6 million in 1993 to more than $800 million by 2011. Gov. Brown succeeded in killing it last year amid widespread criticism — including the disclosure that a Sacramento-area strip club collected tens of thousands of dollars in tax credits.
The program targeted small businesses, but 40% of the money went to corporations with more than $1 billion in revenue, the state legislative analyst’s office found in 2011. Other reports found that the enterprise zones had virtually no effect on job creation.
Because the program gave tax credits for new hires — not necessarily for increasing the total number of positions — critics argued that companies had an incentive to claim credits, fire workers and then rehire replacements to claim more credits.
The replacement economic development program, launched this year, offers a trio of new incentives: a tax abatement for research and development in manufacturing and biotech; a credit for increasing the number of full-time workers; and a California Competes tax credit allocated to companies chosen by the governor’s Cabinet and legislative appointees.
On the surface, the California Competes program resembles the discretionary Texas Enterprise Fund. But officials with the governor’s office cite important distinctions.
The California Competes program is expected to grow to $150 million this fiscal year and $200 million in the following years, giving the state a chance to iron out any problems, according to the governor’s office.
By structuring the program as a tax credit, rather than a cash grant, the state avoids having to claw back money from the companies if they fail to meet certain goals.
California’s program also has specific milestones that companies must hit every year, in contrast to the historically flexible targets in Texas.
In addition, California has a 25% set-aside for small businesses.
Brook Taylor, a spokesman for the Governor’s Office of Business and Economic Development, brushed off the notion of competing with other states.
“California is the eighth-largest economy in the world,” he said. “When we’re talking about California’s competitiveness, it’s about continuing to attract the best and brightest. We want to recruit companies and people from around the world.”
And no matter how many protections a state builds into its programs, experts argue that taxpayers and politicians never know what’s happening inside corporate boardrooms. Companies can always threaten to leave to shake more money out of state governments — regardless of whether it really makes business sense to move, said Fisher, the tax incentive expert.
“The company still holds all the cards,” he said.
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