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Study: Texas, other states should rethink use of economic incentives

Taxpayer-funded incentives for economic development are most cost-effective when they’re temporary, focused on high-wage employers and mandate specific criteria such as customized job training, according to a new report that dings Texas and other states for a scattershot approach to business recruitment.

“There’s not enough targeting going on,” said Timothy Bartik, senior economist with the W.E. Upjohn Institute for Employment Research in Kalamazoo, Mich., who conducted the study released on Tuesday. “Incentives don’t seem to show a very large effect” in terms of spurring job or wage growth as a result.

The study, as well as an incentives database that is free to access, is available on the organization’s website at The Upjohn Institute is a private, nonprofit research organization that bills itself as nonpartisan.

Texas is in the midst of a debate over one of the state government’s central tools to lure in new businesses, the Texas Enterprise Fund. Gov. Greg Abbott is seeking $108 million over the next two years for the incentives fund, an uptick from $90 million in the previous two-year budget cycle and well above House and Senate proposals for $43 million this time.

Meanwhile, the city of Austin is considering revamping its use of business incentives in an attempt to boost good jobs in lower-income areas of the city, among other goals. The Austin City Council approved a resolution last week calling for the city manager to develop recommendations to accomplish the plan.

Bartik’s study analyzed taxpayer-funded business incentives — including state and local property tax abatements and investment tax credits — handed out from 1990 to 2015 in 33 states comprising over 90 percent of U.S. economic output.

The study extrapolated the value of such incentives nationwide to $45.2 billion annually, a figure that includes incentives newly issued in 2015 as well as the value of incentives awarded during the time period of the study that had yet to expire.

Texas ranked slightly below average in its reliance on incentives, relative to the size of its economy, with about $3.1 billion in cumulative annual value. For comparison, Louisiana’s incentives were valued at $1.45 billion and New Mexico’s incentives were valued at $511 million, but both of those states have much smaller economies than Texas so their relative use of incentives was significantly higher in Bartik’s study.

He said such patterns are indicative of the limits of incentives as they’re currently deployed by most state and local governments, as well as evidence that they aren’t “a miracle elixir” for economic development.

Texas has been a top state for job creation since the recession, although it recently has been hurt by the downturn in the oil-and-gas sector. Still, the state’s unemployment rate averaged 4.6 percent in 2016, according to the Bureau of Labor Statistics, compared to a national average of 4.9 percent last year and 6.1 percent in Louisiana.

“Louisiana should be doing much better than Texas, if (incentives) was all that mattered,” Bartik said.

State and local governments — meaning taxpayers overall — would get more bang for the buck from the incentives they offer if they tied them to programs that increase worker skills and local wages, such as tax credits for job training or research and development, Bartik said. He also advocated aiming incentives at industries that meet specific criteria, such as high wages, and structuring them to expire relatively quickly.

Corporate decision-makers “look mostly at what happens in the first few years” of a deal, he said. In addition, “it’s bad to give away the next governor’s, or the next mayor’s, tax base” through long-term incentive deals.

Texas, with a relatively strong economy, would do well to be more choosy when it comes to the types of businesses it attempts to lure to the state with taxpayer dollars, Bartik said.

“The issue that people in Texas should be debating is, given that the overall growth of the economy is not that bad, do you want to focus in more on increasing the quality of the jobs and then training workers to access them,” or simply on numbers of jobs created, he said.

Access to incentives through the Texas Enterprise Fund isn’t restricted to certain industries or businesses, although there are a number of criteria that applicants have to meet, including a mandate that new jobs created under the deals must pay “above the average wage of the county where the project would be located.” Bartik called that a low bar.

Gov. Abbott’s office did not make a spokesperson available for comment.

Created in 2003, the Texas Enterprise Fund is the largest tax-incentive program of its type in the nation and is meant to lure new businesses to the state.

Through Jan. 31, the Texas Enterprise Fund has dispersed $464.1 million in incentives, according to the governor’s office. The state estimates the economic impact of the projects that received that funding at $13.7 billion. A number of projects in Central Texas have been awarded funding from the Texas Enterprise Fund, including Apple Inc.’s new Austin campus, which is set to receive $21 million from the fund over a decade.

Bartik’s study did not specifically examine the economic impact of individual state incentive funds or programs. On the whole, however, his study concluded that there does not appear to be a major impact “of incentives on state business output” nationwide. Still, he called the results preliminary and said the database is being made free to the public partly so that other researches can continue to study the issue.

Chris Wallace, president of the Texas Association of Business and an advocate for increased funding for the Texas Enterprise Fund, said high-quality, high-wage jobs definitely are a goal but noted that Texas workers have a wide range of job skills and the state must try to look out for all of them. He had not seen Bartik’s study.

“We can be selective and we want to spend our dollars wisely,” Wallace said. But “we have to have a wide variety of jobs” that Texas workers with varying skills can access.

He also said only targeting specific industries could put Texas at a competitive disadvantage when it comes to economic development, as well as being a political non-starter in a state with diverse business interests.

Bartik acknowledged that restricting incentives to certain industries could be politically dicey. But as things stand, he said state and local business incentives appear to be something of a zero-sum game for the nation overall, meaning they’re mainly causing existing jobs to move across political boundaries instead of spurring new ones or lifting U.S. productivity.

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