Pro-Free Market vs. Pro-Business in Texas

Pro-Free Market vs. Pro-Business in Texas

Why in order to become the freest market in the country, Texas should rethink corporate incentive policies.

Texas has long been touted as being one of the most business-friendly states in the nation. In many ways this could be argued as true. While companies are not completely free from state taxation in our state, the lack of a state personal income tax makes Texas appealing to businesses, especially when compared to other states with extremely burdensome tax policies such as California and New York.

Generally, logic would have it that companies would prefer to operate in states with free-market policies.  States with lower taxes and fewer regulations allow businesses a better opportunity to grow, thrive, and create jobs for those they employ. While state leaders tout these aspects of state policy as reasons why businesses should stay or move here (although Texas has much room to improve in both of these areas), one other policy that they employ is of the use of tax incentives and grants to lure businesses to the state. These incentives, they argue, give Texas a competitive advantage over other states as businesses are more likely to set up shop in Texas if they are given a lower tax burden – and in many cases, taxpayer-funded grants – that they wouldn’t get in other states. While it’s fair to say that some businesses may have moved here due to these incentives, it’s completely unfair to argue that this policy reflects any sort of free-market principles. Moreover, it’s hard to argue that this policy has a high success rate and has the necessary transparency that the use of public funds should have.

State–Run Economics

Texas’s biggest corporate incentive program, the Texas Enterprise Fund (TEF), has doled out over $609,553,696 in tax dollars to companies since its inception in 2003. In this program, companies that are planning a new project including a facility opening or expansion, and where a single site in Texas is actively competing with at least one viable state option, can apply to receive publicly-funded grants for choosing Texas as their project site. To be eligible, companies are supposed to meet other levels of criteria such as certain job creation and wage thresholds.

Before diving into the numbers, it’s particularly interesting to view the policy through a political lens – especially in a state like Texas which is lauded (or condemned) for its laissez-faire, free-market, “conservative” economic policies. Texas has been led by a politically conservative legislature and executive over the past two decades and these leaders have encouraged the creation and funding year-over-year of the TEF since its inception. Despite the political leanings of those who created it, it’s fair to ask: Is there anything laissez-faire or economically conservative about giving public funds to multi-million or multi-billion dollar companies to lure them to the state?

It’s hard to argue an answer other than, “No.” Free market principles would be reflected in policies (or lack of policies) that promote minimal government intrusion in the economy.  Obviously, policies of economic government intrusion like high taxation and overregulation run directly opposed to free-market principles. Included in that set of policies would be anything that A) increases the state budget, B) gives the state the ability to give favor of certain private companies over others, and C) allows the state to distribute tax dollars with a lack of oversight. Given the TEF does all of these things, it’s fair to ask why it’s had so much support.

Proponents of the TEF, and of corporate incentives in general, argue that these grants give Texas a competitive advantage against other states in bringing companies to the state.  Once a company does move to the state and is given one of these grants, state leaders can then argue that without the use of incentives, X number of jobs, X amount of investment, and X amount in economic impact would have gone elsewhere (even though it’s very possible these companies would move to Texas without these additional grants). So, once these incentive policies are in place, they become a necessary tool to not only bring jobs, but to support the state’s economy in general.  Proponents can then argue that they are “pro-jobs” and “pro-business,” while detractors are argued to be just the opposite.

 

“Pro-Business” can mean a lot of things, but even if we can declare the TEF as such, there is no correlation in this case between being pro-business and pro-free market. In a free market, there is a free exchange of goods and services between people, without (or at least with minimal) government interference through taxation and regulation. And for whichever government involvement is in place, people and the companies they run, would be treated equally. Companies that succeed do so because they provide a good or service that people find enough value in to spend their money on. Companies that fail do so because they don’t provide enough value to the consumer base.

The use of publicly funded grants throws a wrench in the natural progression of a free market economy in a number of ways.  When companies are given public tax dollars that they didn’t earn on their own, they are arbitrarily given a leg up against other companies in their industry. Because of this, it can no longer be assumed that the companies creating the most value are the ones thriving – and conversely, it can’t be assumed that a failing company isn’t creating enough value. If Company A has been a mainstay in the state for decades, and the state gives its competitor Company B $10 million to set up shop in the state and compete against it, Company B is given an undue advantage and is given a better opportunity to thrive, even if it isn’t creating as much value as Company A.

While it’s especially important in a free market economy for there to be competition in every industry, it’s imperative that this competition is created naturally. Rather than acting like a private equity fund, the state should stay out of the business of “business” – not only for reasons of fairness, but also as we’ll argue below, the state just isn’t good at investing.

Promises Unfulfilled

 In order for a company to receive TEF funding, it must to commit to creating a certain number of jobs. According to the TEF 2017 Legislative Report, of all of the projects that we have both Jobs Committed and Jobs Created data for (as we’ll dive into later, there are many projects that don’t have these numbers reported), 31 companies that received funding met or exceeded the number of jobs they committed to, while 52 companies have not provided the number of jobs they committed to. Of these 52 projects that haven’t met their jobs commitment, nearly half (23) have provided 50% or less of the jobs committed to, and 15 have provided less than 25% of their commitment.

Table 1: Select examples of unfulfilled job commitments –  2017 Legislative Report

 

Company Date of Contract Award Jobs Committed Jobs Created Taxpayer cost per job created
Active Network 6/27/14  $8,600,000 1000 552  $15,579.71
athenahealth, inc. (reporting 2016) 1/31/14  $5,000,000 607 63  $79,365.08
BASF Corporation 10/9/15  $2,400,000 163 9  $266,666.67
Charles Schwab (Austin) 7/11/14  $4,500,000 823 353  $12,747.88
Chevron USA 6/25/13  $12,000,000 1752 427  $28,103.04
CITGO Petrolem Corp. 4/30/14  $5,000,000 820 285  $17,543.86
Dow Chemical Company 7/19/13  $1,500,000 96 44  $34,090.91
eBay Inc. 3/30/11  $2,800,000 1050 138  $20,289.86
Fritz Industries 1/1/13  ? 250 37  NA
G-Con, LLC 5/1/10  $3,000,000 408 3  $1,000,000.00
Gestamp Wind Steel U.S. Inc. 10/2/15  $1,800,000 339 1  $1,800,000.00
James Skinner Co. 12/19/12  ? 393 94  NA
Rackspace US, Inc. 8/1/07  $22,000,000 4000 2812  $7,823.61
Santana Textiles, LLC 8/4/08  $800,000 800 17  $47,058.82
Space Exploration Technologies Corp. 12/16/13  $2,300,000 300 10  $230,000.00
TBC (Maverick Tube Corporation and Tenaris Bay City, Inc.) 2/14/13  $6,000,000 600 146  $41,095.89
TD Ameritrade Holding Corporation 3/31/11  $600,000 490 174  $3,448.28
Toyota Motor North America, Inc. 3/10/06  $40,000,000 3650 422  $94,786.73
Triumph Aerostructures LLC 2/26/04  $35,000,000 3000 2292  NA
Vendor Resource Management, Inc. 9/24/09  $750,000 275 59  $12,711.86
VISA U.S.A. Inc. 1/1/13  $7,900,000 794 543  $14,548.80

 

The chart above includes examples from the TEF 2017 Legislative report of companies that are far from meeting their job goals. While it’s fair to note that with some of the more recent commitments that they might have given more time to meet these commitments, unfortunately the report doesn’t indicate any such deadlines. In either case, there are many examples of projects that are so far from their target they committed to, the taxpayer cost per job created is egregiously high. G-Con, LLC was awarded $3,000,000 in 2010 and has only 3 reported jobs created of the 408 they committed to, which adds up to a $1,000,000 price tag on each job created. Space Exploration Technologies Corp. was awarded $2,300,000 and has 10 jobs created of the 300 committed to, giving a $230,000 cost per job. Santana Textiles committed to 800 jobs and created 17 after receiving a $800,000 grant, while TBC (Maverick Tube Corporation and Tenaris Bay City, Inc.) was awarded $6,000,000 in 2013 and created 146 jobs of the 600 promised.

While there are provisions in place to claw back funding for underperformance, you’ll have to find that information in a separate report listed on the TEF website. And even then, the details of the claw backs aren’t made clear. According to the legislative report,

“Contract terminations, and non-performing contracts, typically result in money being returned to the Fund in one of three ways: through collection of liquidated damages for nonperformance; through payments resulting from early termination; and through the recovery of unencumbered funds not disbursed due to termination.”

For example, G-Con, LLC had $146,064 listed in Liquidated Damages (clawbacks) of the $3,000,000 they were awarded after creating 3 of the 400+ jobs they committed to. Space Exploration Technologies Corp. had $90,383 listed in liquidated damages and $334,130 in “Other Repayments.” Athenahealth, Inc. had $22,570 in liquidated damages of the $5,000,000 they were awarded. While it’s good to have some sort of clawback measures in place, and although the TEF has reportedly committed to hold companies more accountable through these after a 2014 audit found that the TEF fell short in collecting repayments they should have, it’s not as if any of these repayments are going back to the taxpayer. Instead, it’s just put back into the hands of state officials to dole out to the next company they want to bet on.

Lack of Transparency

 Of the nearly 150 companies listed on the 2017 legislative report, roughly 40% have no data included in at least one of the categories (i.e. jobs committed or jobs created) as they were noted that the “Grantee is not required to report on Job Target until 2017” or, more often, the “Agreement was either terminated or expired, active data management has ceased.” While the former reason may be fair, it’s hard to imagine why the state wouldn’t report these numbers on an exhaustive list of TEF projects just because the agreement is over.

 

Table 2: Select examples of TEF projects with unreported data – 2017 Legislative Report

 

Company Reason not reported Date of Contract Award Jobs Committed Jobs Created
Apple Inc. Too soon 3/5/12 $21,000,000 3,635 ?
Bank of America Ended ? $20,000,000 3876 ?
Board of Regents of UT Ended ? $50,000,000 ? ?
Continental Automotive Systems, Inc. Too soon 1/27/12 $1,200,000 300 ?
Corrigan OSB, LLC Too soon 12/22/14 $1,140,000 165 ?
Hewlett-Packard Ended ? $3,000,000 ? ?
Hilmar Cheese* Too soon 11/30/05  $7,500,000 1,962 ?
Home Depot* Ended 7/31/04  $8,500,000 843
James Skinner Co. Ended 12/19/12  ? 393 94
Learn & Tigre Ended 2/28/05  $9,781,000 ? ?
Lockheed Martin* Ended 4/15/07  $4,000,000 550 ?
Maxim Integrated Products Ended 12/22/04  $1,500,000 500 ?
Nationwide Mutual Insurance Ended ?  $1,200,000 ? ?
Prudential Insurance & HGS Ended 4/22/14  $1,200,000 300 ?
Raytheon Ended 8/31/05 $1,000,000 200 ?
Ruiz Foods* Ended 5/13/05 $1,500,000 423 ?
SunPower Corp. Ended 8/19/10 $1,000,000 ? ?
Texas Energy Center Ended 2/1/04 $3,600,000 1,500 ?
Thomson Reuters Ended 5/10/16 $1,538,000 250 ?
T-Mobile Ended 8/8/05 $2,150,000 855 ?
United Services Automobile Association Ended 7/18/13 $1,000,000 680 ?
VCE Ended 10/1/10 $1,000,000 130 ?

 

The list above includes just some examples of projects listed in the TEF 2017 Legislative report that have missing data. The lack of transparency is even more egregious considering the amount of tax dollars involved (and in many instances, this amount isn’t even listed). And given the lack of jobs data, it is very likely that the number of projects with a deficit between jobs committed and created is greater than reported.  Moreover, while companies who had recently ended or terminated contracts are listed in the report, the differentiation between ended and terminated contracts is not made clear for older projects.

After a deeper dive, you can find that some of the data not listed in the 2017 report is publicly available. The companies listed with “*” in the chart have some of this missing data outlined in the 2015 TEF Legislative Report in a section outlining the reasons behind the contract ending. For example, Home Depot and Ruiz Foods had contracts ended at their request after exceeding job requirements, while Hilmar Cheese (390 direct jobs verified) and Lockheed Martin (305 jobs verified) had contracts ended after failing to meet requirements and returning some funds in liquidated damages. Regardless of whether these companies met requirements, it stands to reason that this data should be listed in the report and reports going forward as that data is available.

Not listed in these reports is the $250 million that taxpayers are doling out to Formula 1, owned by billionaire Bernie Ecclestone. As part of luring Formula 1 to hold their annual race on a track to be built in Austin in 2010 (Circuit of the Americas), the state of Texas (through a letter from then Comptroller Susan Combs) dedicated to pay Ecclestone’s company $25 million each year over the next decade to hold their event at this track.

The 2014 TEF Audit

In September 2014, the State Auditor’s Office provided an audit report on the TEF. Among the findings, as reported by the Texas Tribune, were:

  • $170 million was awarded to recipients that never formally applied for the funds
  • It was not always possible to determine how the Office made awarding decisions
  • Of the forty-four percent of the $505.8 million doled out over 10 years, $223.3 million was given to 11 companies that either did not have to submit a formal application and/or did not have to promise to create a specific number of direct jobs.
  • Of 110 award agreements that auditors “tested,” 97% didn’t include a definition for “full time” jobs even though agreements required creation of full-time jobs.
  • While the office collected $14.5 million in “clawback penalties,” money may have been left on the table as it wasn’t clear that recipients were being consistently monitored.

While the audit report made a number of recommendations to tighten up TEF’s process of signing off on new deals and oversight of current projects, it remains to be seen if the Governor’s Office will follow most of these recommendations.  As recognized in the audit report, the Office already noted disagreement with several recommendations including the extending its record retention schedule related to the TEF fund awarding process from 5 to 8 years, arguing that it would result in additional costs and would result in an “excessive retention” period. And even if some recommendations are followed, there is always room for loopholes to get around any new stricter policies.

Creating a Business-Friendly Environment without the Gimmicks

 It’s understood, but unfortunate, that once a government program is created, it’s very difficult to get rid of it. Regardless, it stands to reason that for Texas to be a truly free market state, it needs to end these corporate grant incentive policies. And then there’s the “Don’t hate the player, hate the game,” argument from ostensibly economically conservative leaders who argue that all states employ these incentives and that in order for Texas to remain competitive, it must keep these policies in place. It’s true that most, if not all, states have implemented similar policies to lure companies through grants and tax exemptions.  This has created a constant bidding war between states with their citizens’ tax dollars to lure multi-million and multi-billion dollars to their state.

Texas, we’d argue, has the power to end this trend by setting an example for the rest of the country as to how states can still be business-friendly without company-specific grant and tax deals.  We should continue to encourage and welcome these companies like Amazon to our state, while creating an economic climate where all businesses want to move and stay hear, and have an equal opportunity to thrive. By having the lowest taxes in the country, fewest regulations, and the infrastructure and educated workforce these companies are looking for, companies will want to move and stay here even without these grants. While grants may be alluring to certain businesses, these are short term funds and don’t automatically set up businesses for long-term success. On the other hand, companies can save money long term by setting up shop in a state with lower taxes and lower regulatory costs.

If we can lose the gimmicks and continue to create a free-market climate that gives all companies the incentive to move here and thrive, Texas can become the most economically free and business-friendly state in the country.

Dillon Jones, Senior Policy Analyst

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