Over the past decade, the city of Austin has paid more than $43.7 million in incentives to a handful of private companies.
Those 10 companies subsequently have created or retained more than 4,000 local jobs and invested at least $5.3 billion, according to an analysis by the American-Statesman. But some of those jobs are no longer in Austin, as at least one of the companies scaled down its operations. And more than half of those incentives deals are no longer active, as the companies have either backed out or the city has canceled the contracts for noncompliance.
For the city’s incentives program – which was created in 2003 in the wake of the dot-com bust that eliminated thousands of local jobs — the bottom-line question is: Has the return been worth the money the city has spent?
Your answer probably depends on your beliefs about incentives in general.
While critics maintain that Austin shouldn’t be in the incentives business, city leaders and economists interviewed by the American-Statesman say that the program has been a success. Supporters say incentives deals are just a fact of life in the current economic environment, as more and more communities compete for jobs.
But skeptics say the city is helping companies evade taxes in exchange for jobs that might have come to town anyway. The city’s incentives deals have included waiving some taxes and fees and reimbursing companies for property taxes and business taxes.
Mayor Lee Leffingwell says the program has been worth the money.
“It has proven to be a valuable tool in attracting targeted businesses and creating jobs,” he said in an email to the Statesman. “The city has realized a net gain as a result of the completed deals.”
Others, like former Travis County Judge Bill Aleshire, disagree.
“Recruiting tax-dodging companies to locate here has not made Austin more affordable for existing residents,” said Aleshire, who has been a frequent critic of incentives. “The fact is that subsidizing growth with tax incentives just raises the cost of government and the cost of living for the rest of us who pay taxes.”
Who got what
Most of the city’s incentives deals have involved amounts of less than $1 million going to private companies. The major exception has been the incentives deal with South Korea-based Samsung Electronics Co., which has received the lion’s share of the incentives money the city has paid out — more than $33 million since 2003.
In return, Samsung has made a historically large manufacturing investment in Central Texas and created one of the biggest chip manufacturing complexes in North America, with at least $15 billion in investment. The company — which also has a separate multimillion-dollar incentives deal with the Manor school district — employs about 2,600 people locally and produces, among other things, advanced low-power processors that are used in mobile devices such as phones and tablets.
A 2010 study by the TXP Inc. consulting firm estimated that Samsung directly generated about $800 million a year into the Austin area economy. When “ripple effects” are included, the firm estimated that Samsung accounted for about $1.4 billion in annual economic activity, 6,500 total jobs and $296 million in annual worker earnings.
Other incentives deals have not fared as well for the city. Solar energy company HelioVolt Corp. received more than $160,000 in incentives, but this year it suspended manufacturing operations and laid off most of its employees after a major investor pulled its support. In its last compliance report to the city in 2012, HelioVolt reported 64 employees and more than $68 million in investment. Earlier this year, the company said it employed more than 100 workers.
The largest of the city’s discontinued incentives deals was for Home Depot Inc., which proposed to invest $404 million and employ 500 people in an Austin technology center in 2005. The city made three years’ worth of incentive payments to the company totaling slightly more than $400,000, but it stopped those payments in 2008 after Home Depot stopped providing sufficient information to the city. During the first four years of the term of Home Depot’s agreement, however, city officials say they verified Home Depot’s investment of $253.7 million.
In another deal in 2005, the city agreed to $6.3 million in property tax abatements plus other incentives for the Advanced Technology Development Facility, which formerly was a silicon processing center for the Sematech research consortium. In return for the incentives, Sematech promised to invest $100 million in the chip fabrication center and create 100 jobs.
But payments for that project were halted after the city paid $226,456 over the first three years. Sematech sold the facility to a private company in 2007. During the first three years of the term of that agreement, the city verified the facility’s investment of $54.4 million, officials said.
The production company behind the TV series “Friday Night Lights” received more than $157,000 in incentives and employed more than 600 cast and crew members in its fifth season before the show was canceled.
Other incentive deals with online documentation service LegalZoom and computer maker Hewlett-Packard Co. have also been canceled. And current active deals that the city hasn’t paid incentives on yet include agreements with tech giants Apple and Facebook, HID Global, heath information technology firm Athenahealth, Visa and cybersecurity company Websense.
Origins and controversies
Austin’s incentives program started in 2003 in the wake of the dot-com bust.
“We were at the top of our game, but then we suddenly lost like 45,000 jobs,” recalled Rodney Gonzales, deputy director of the city’s Economic Development Department.
The key goal of the incentives program, Gonzales said, was to diversify the city’s jobs portfolio.
“The strategy that we employ is developing a resilient economy,” Gonzales said. “And I think that’s really important in today’s economy, because getting to the top is no longer good enough. It’s staying at the top, staying resilient, which is what matters. And we proved that through the ’08 recession.”
Austin City Council Member Kathie Tovo has voted against some recent incentives deals, including one for Michigan-based auto parts supplier U.S. Farathane, but nevertheless says the city’s incentives program has helped create jobs.
“I think the incentives program has been successful, in terms of attracting a range of companies to Austin that offer good jobs for Austinites,” Tovo said.
Still, Tovo said she wasn’t a fan of the incentives package the city offered for the Domain retail and office project in North Austin — a deal that was made before Tovo was on the City Council.
The 20-year, $37 million tax break package continues to generate political heat for the city.
That’s partly because the jobs created by the project are lower-paying retail positions and partly because the project is a luxury mall that doesn’t have the same economic impact as a manufacturing plant or high-tech company. According to its most recent compliance report with the city, the Domain employs more than 1,100 full-time employees. As of the end of 2013, the Domain project had generated about $17 million in city sales and property tax. The city has refunded $9.25 million of that in incentives payments.
A ballot proposal to revoke the Domain’s incentives package failed by a narrow margin in 2008, but it led to new city policies that, among other things, ban offering incentives for retail projects.
Earlier this year, the City Council put in a wage floor as a requirement on new incentives deals. The city now requires some businesses it contracts with, and offers tax incentives to, to pay their employees at least $11 an hour.
“We want the new jobs that are created — we want them to be good jobs,” Tovo said. “We want the people who hold those jobs to be able to support themselves and their families without other public subsidies.”
Some of those restrictions, including the wage floor, have drawn criticism recently, after news broke that three companies — U.S. Farathane, online storage company Dropbox and Austin-based tech company National Instruments — pulled out of their incentives deals with the city.
Although both Dropbox and U.S. Farathane said they still plan to grow locally, their cancellations of the deals prompted Leffingwell to criticize some of the city’s policies on economic incentives, specifically those related to minimum living wages.
Dave Porter, senior vice president for economic development at the Greater Austin Chamber of Commerce, said the new restrictions will hurt Austin’s ability to compete in attracting businesses.
“I believe you will see more (businesses) terminate their city incentive agreements, as this council has become more anti-business and added more burden on these companies which is outweighing the local incentive,” Porter said. “None of our peer cities have such onerous policies.”
Do incentives work?
As for incentives in general, Porter says they are a fact of life if Austin wants to remain competitive in luring new businesses to the area. He said the city’s incentives program has been a net positive for the local economy.
“Most cities offer incentives for job creation and investment; it is an extremely competitive competition to win jobs,” Porter said. “It’s a win/win for all in Austin as the incentives are performance-based; the city gains more tax base, good paying jobs and the incentives are a net positive cash flow to the city.”
The incentives payments are also a fraction of the city’s total budget outlay. Since the beginning of 2006, the city has paid an average of $4.8 million in incentives payments per year to private companies. By comparison, the city’s total budget for the current fiscal year is $3.3 billion, of which $799.8 million is the general fund, which pays for most city services, including library, parks, police, etc. So the average annual incentives payments would account for about one-half of 1 percent of the city’s typical general fund budget.
After reviewing some of the city’s incentives deals, Jon Roberts, principal of Austin economics development firm TIP Strategies, said that Austin is seeing a good return on investment.
There’s no easy way to determine if various projects would have come to Austin without incentives, Roberts said. But it’s clear that Austin is doing well from a national perspective, he said.
“The incentives are generally well-managed and encourage growth that is both sustainable and appropriate,” Roberts said. “’Friday Night Lights’ helps encourage film and video growth. Samsung is an important component in an otherwise slow-growing domestic fab sector, and so on.”
Austin will continue to grow, with or without incentives, Gonzales said. But incentives allow city leaders to shape some of that growth.
“With the use of incentives, we get to catalyze these industry sectors,” Gonzales said. “We get to diversify Austin’s economy in a resilient manner, and you get to give Austinites job opportunities that they otherwise wouldn’t have.”
By the numbers:
A look at the city of Austin’s incentives deals with private companies since 2003:
Incentives payments made by city: $43.7 million
Jobs created or retained by companies receiving incentives: more than 4,000*
Investments: More than $5.3 billion*
Biggest incentive recipient: Samsung — $33 million
Number of companies that have received incentive money: 10
Number of currently active deals: 10
*(not including deals whose jobs or investment totals weren’t verified by city officials)
Source: City of Austin, American-Statesman research
How we reported this story
American-Statesman business reporter Brian Gaar went through a decade’s worth of paperwork related to the city of Austin’s incentives deals to total up the amount of incentives payments the city has made and the number of jobs and amount of investment the companies getting those incentives have brought to the area.