In recent years, the public’s awareness of crony capitalism, whereby government picks winners and losers, has increased tremendously. This is a good thing for advocates of free markets, because no market can be free where politicians use the power and largesse of government to benefit the well-connected.
Unfortunately, many see the federal government’s favoritism towards companies like Solyndra and assume that Washington D.C. is where the problem begins and ends. In truth, the problem is just as bad in Texas, particularly at the local level.
Every year, Texas cities spend untold sums on corporate welfare under the guise of “economic development.”Worse, they’re often spending it to “compete” against other Texas cities.
In early October, San Antonio and Bexar County approved over $2 million in incentives for CST Brands, the company that operates Valero convenience stores. They were already in San Antonio, but they considered moving to Schertz, a small town located next to San Antonio. It’s unlikely anyone would have lost their jobs had the company moved a few miles up the road to Schertz, but such has become the environment in Texas. It’s become common for elected officials to claim that jobs will be lost if they don’t throw public money at private businesses.
Perhaps the most common incentive is the property tax abatement, whereby a given percentage of the favored firm’s property tax burden is temporarily reduced or eliminated on any improved value. Needless to say, this is not good policy.
The newly released Texas Public Policy Foundation study The Failure of Tax Abatements: Corporate Handouts that Just Don’t Work for Taxpayers takes a critical look at tax abatements and finds fault in the current norm among Texas cities. For one, tax abatements don’t work as planned and are often ineffective, as illustrated by both real-life examples and academic research.
Consider Corsicana, Texas.
In 2006, Corsicana offered a tax abatement agreement to Home Depot to setup a distribution center in the city. In November 2011, however, Home Depot moved to Dallas where they secured a more lucrative taxpayer-funded deal. Making matters worse, another business, which had also become dependent on a tax abatement agreement, closed that same week. When the dust cleared, businesses closed, jobs were lost, and too many Texas families worried how they would put food on the table.
These policies are not only ineffective over the long-term, but they also shift the tax burden to other taxpayers. If someone is not paying their share of taxes because of a special break, then other taxpayers must pick up the tab. That means homeowners and other businesses—including competitors—will see their tax burden raised as a result.
In other words, businesses that have been around for years through bad times and good, creating jobs for the community, pay for the benefits bestowed on the well-connected corporate interests who reach their hands out with the promise of creating jobs and investment. They’re on the losing end of a wealth transfer from hard-working mom-and-pops to companies who shop around cities looking for who will give the biggest incentive. That’s the opposite of a free market.
Those with a vested interest in seeing a proliferation of economic development deals will tell you that their way is the only sure way to create jobs and lure companies, but that’s nonsense. Texas has succeeded because, on balance, it has the best tax and regulatory environment in the nation. Businesses know that if they move to Texas, they won’t be moving to a state that will suddenly institute an income tax or hit them with tons of red tape. That’s not true for most states, where political winds shift all the time. As a result, Texas leads the nation in job creation since the recession.
Texas’ cities are already in a favorable position to attract jobs without taxpayer money. If cities want to do more to encourage job creation and investment, then lower local taxes and provide a smooth path for business investment and development by eliminating permit fees and unnecessary codes and ordinances.
Boiling it down, Texas cities can help their economies grow by getting out of the way, as the state has largely done. There’s no need to use tax abatements, because they are ineffective, cost taxpayers a great deal to pick up the tab for favored firms, and transfer wealth from the average small business to the well-connected few.
Tax abatements allow government to be involved in picking winners and losers. And that’ s no role for a city to play.
The Honorable Jess Fields is the Senior Policy Analyst in the Center for Local Governance at the Texas Public Policy Foundation, one of the nation’s leading free market think tanks, and a former College Station city councilman. He can be reached at jfields@TexasPolicy.com.