Bargaining and the effectiveness of economic development incentives: an evaluation of the Texas chapter 313 program

Abstract

Existing research has examined how the mobility of capital shapes bargains between firms and governments. The major barriers to examining bargaining behavior include the large number of dimensions to these bargains and differences in capacity and strategies firms and governments. In this paper, I examine data from a unique economic development incentive program in the state of Texas that holds almost all elements of bargaining constant, leaving only the ability of firms to walk away from a given location during the bargaining process. Using original data on the bargaining outcome as well as elite opinions, I document the extent to which firms that chose to locate in Texas made their decisions independent of this special economic development program. My findings suggest that only 15% of the firms participating in the program would have invested in another state without this incentive. The majority of these projects, and incentive dollars, were allocated to firms already committed to investing in Texas. Case studies of over 80 projects reveal that in many cases it was an open secret that companies had already committed to their investment locations prior to receiving the incentive. This implies that structure of the program encourages the overuse of incentives.

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Notes

  1. 1.

    In many cases, the incentives are for expansions of existing facilities. In other cases, school consultants have interacted with the same firms in previous negotiations. As noted in the case study section, in other cases the companies started construction prior to applying for the incentives. In all cases, local government officials and their consultants have considerable information on the activities of firms in their districts.

  2. 2.

    Rickard (2018) argues that electoral geography also shapes a state’s willingness to offer incentives to firms.

  3. 3.

    See Buss (2001) for a summary of 300 studies of the impact of economic development incentives. Jensen (2017) estimates the impact of incentives on Kansas relocation decisions and conducts a survey of firms. Both the statistical estimates and survey indicate most of the firms would have invested independent of the incentives.

  4. 4.

    This estimate is based on the New York Times’s public incentive database. The database, last updated in 2012, aggregates information on state and local incentives. Thomas (2011) estimates incentives’ costs at $70 billion in 2005.

  5. 5.

    For an overview of these programs see: https://texaswideopenforbusiness.com/sites/default/files/06/06/16/incentivessummary.pdf.

  6. 6.

    http://siteselection.com/onlineInsider/sealing-the-deal.cfm.

  7. 7.

    Senate Committee on Natural Resources and Economic Development (2016) provides additional details on the creation of the Chapter 313 program. One of the motivations for creating the program was based on Texas slipping in national site-selection ratings. It was later discovered that Texas’s decline in the rankings was caused by a typo. See Michaels (2016b) for a discussion.

  8. 8.

    Although job creation is one of the goals of the program, the size of the incentive isn’t scaled to the number of jobs anticipated. Companies must meet a minimum number of jobs to qualify for the incentive, but additional job creation doesn’t yield additional incentives through the Chapter 313 program. Companies can petition for waivers of the job thresholds, in some cases qualifying for the program with just one or two jobs. This failure of the program to create jobs has been noted in numerous publications, including Michaels (2016a).

  9. 9.

    Requirements have changed over time and they include qualifying industries and wage requirements. For current 313 requirements, see Texas Comptroller of Public Accounts (2016).

  10. 10.

    Chapter 313 has been criticized for leading firms to understate job creation in order to qualify for the program. Firms are required to pay above the (average?) county wage, and by understating total jobs, firms can count the highest paying jobs to meet the job creation and wage standards (Legislative Budget Board 2011).

  11. 11.

    Investments are taxed on the first $10 million of plant, property and equipment in poorer districts and that value increases up to $100 million in the wealthiest districts. For a list of school districts and limitation amounts in 2017 see: https://comptroller.texas.gov/economy/local/ch313/limitation-values-2017.php.

  12. 12.

    Numerous firms in Texas have sued to lower their property tax assessments on the basis of what is known as the “uniform and equal provision” or “equity provision”, which allows them to challenge assessments exceeding the median assessment of a comparison set of firms. Thus, the assessed value of the investment can drop considerably even in the first year of the firm’s operation.

  13. 13.

    What is controversial about the program is that it can discourage local governments from increasing their tax bases owing to “recapture” of taxes. Property rich school districts subject to recapture have even stronger incentives to use the program than property poor districts. Consultants proposing 313s to school districts often pitch the ability to limit recapture as one the main benefits of the program. In additional, supplemental payments are not part of the school funding formula and, thus, are not subject to recapture; nor are they considered part of the school districts’ local property tax bases.

  14. 14.

    The consulting contracts typically involve lump-sum payments along with fees for the annual filing of Chapter 313 paperwork. I am unaware of any school district consultants that charges fees as a percentage of supplemental payments.

  15. 15.

    https://osf.io/qnw55/.

  16. 16.

    In all cases school districts submit only one application for a single school district limiting a firm’s ability to induce competition across school districts within the State of Texas.

  17. 17.

    Sabina Petrochemicals indicates Deer Park, Texas, as the alternative location in its initial application. That information is reported in Sadasivam (2017).

  18. 18.

    The proposed energy-related investments include petroleum refineries (NAICS 324110), petroleum manufacturing (NAICS 325110), and industrial gas manufacturing (NAICS 325120).

  19. 19.

    This list included information only on the location company name and year of the application. Respondents were not given additional information on supplemental payments or any other information on the investment.

  20. 20.

    The University of Texas IRB determined that this was exempt research (IRB 2016-11-0008). Despite the high levels of expertise, a total of 11 projects produced conflicting opinions on whether a Chapter 313 agreement was necessary to attract the company to Texas. As a robustness test, I include only the Chapter 313 projects for which at least two experts expressed the same opinion on the agreement. That is a higher standard since many projects received an opinion by only one expert. Those observations were dropped in this robustness test.

  21. 21.

    In my estimates, controlling for factors such as industry and the date of the incentive (reforms in 2009 and 2010 capped supplemental payments to school districts), firms that were rated as having the ability to locate outside of Texas made supplemental payments between 11 and 13 percent points lower than otherwise. Agreements with some school districts are limited by 2009 and 2010 caps on supplemental payments ($100 per student or $50,000 in total). Since 2009, many companies and districts have signed agreements that allow supplemental payments to rise automatically to 40% of the company’s net tax benefit if this cap is lifted legislatively in the future. Thus, the analysis overestimates the number of companies that located to Texas because of the 313 program and underestimates the revenues lost by the state.

  22. 22.

    These are known as Chapter 41 school districts.

  23. 23.

    Results available from the author.

  24. 24.

    In their revised application (#249), the company’s representative noted that “After an extensive review of various locations in Texas we have selected Bovina as the site for the new manufacturing facility. Bovina’s geographic position is centrally located in the heart of our customer’s feed yard business”.

  25. 25.

    A full video of this groundbreaking can be found here: https://www.youtube.com/watch?v=VxSjmq3fgVc.

  26. 26.

    Footnote 1 states: “Please be aware that Dow has announced the probable closure of its PMDI production facilities at the LaPorte, Texas, plant sometime in the 2005 time frame as these facilities will no longer be able to compete with the newer technology facility mentioned above. Although approximately 90 jobs are anticipated to be affected by such closure, Dow is and will be making every effort to redeploy those jobs within the company. It is our belief that we will create at least 10 new qualifying jobs at this new plant location as required to meet the stipulations of a value limitation agreement and we will re-examine this issue at the end of the 2-year qualifying period to ensure compliance”.

  27. 27.

    For example, see Agreements 1064, 1065, 1066, and 1069.

  28. 28.

    For example, see Agreements 1012, 1028, 1030, 1048, 1116, 1122, 1128, 1132, 1133, 1137, 1142, 1144, 1147, 1148, 1149, 1157, 1172, 1173, 1177, 1178, 1185, 1191.

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Acknowledgements

Thanks to Cam Powell and Lila Al-Kassem for excellent research assistance. Thanks to the staff at the Texas Comptroller’s Office for help with their publicly available data and their prompt fulfillment of an open records request that included all of the original 313 applications. Seminar participants at the University of Texas-Austin and Texas A&M provided excellent feedback. Numerous economic development professionals provided background information and participated in an elite survey. The research was funded by the Laura and John Arnold Foundation. The views expressed are those of the author and do not necessarily represent those of the funder.

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Correspondence to Nathan M. Jensen.

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Jensen, N.M. Bargaining and the effectiveness of economic development incentives: an evaluation of the Texas chapter 313 program. Public Choice 177, 29–51 (2018). https://doi.org/10.1007/s11127-018-0583-8

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Keywords

  • Economic development incentives
  • Tax abatement
  • Investment location decisions
  • Rent seeking