Smart Business spoke to Robert Winningham, Executive Director/CEO of the Allen Economic Development Corporation (AEDC), about the current economic climate in Texas.
With most of the motivation for corporate real estate decisions is still focused on cost reduction and consolidation, the justification for incentives to support business relocations and expansions is stronger than ever. This is at odds with the traditional motivations for granting incentives.
The changing incentive environment is truly the result of today’s “business not as usual” climate. With increased leasing and reliance on landlord tenant improvement budgets versus significant real property investment, many projects fall short of the qualifying thresholds outlined in outdated policies. In response to continuing economic uncertainty, incentive policies are currently in transition in seven states, with others surveying ways to increase their competitiveness.
According to the Texas Comptroller’s Economic Outlook, the “Texas economy has emerged from the recent recession” with job growth and sales tax collections up from business and consumer purchases. Private sector employment benefitted, as expected, from the strong performance of mining and energy industries. The state economy also benefitted from aggressive, flexible incentive programs geared toward recruitment, expansion and retention. In a down economy, retention can be the equivalent of growth and has become increasingly important to municipalities experiencing revenue shortfalls and shrinking budgets. Although most communities’ policies for incentives do not apply to retention projects, the reality today is that many communities are using incentives to retain or expand businesses. Texas is one of the few states where there are local and state incentives that can be adapted for this purpose. These same flexible programs came under fire this year by some state legislators, however, the argument by proponents is that incentives, whether for retention or new business, are needed to help our struggling economy prevailed.
Texas’ state and local incentive programs survived this year’s 82nd Texas Legislative session despite a massive $27 billion state budget deficit.* Texas added 537,500 nonfarm jobs between June 2006 and June 2011, based on the latest seasonally adjusted figures from the U.S. Bureau of Labor Statistics. That’s nearly 10 times larger than the second-biggest increase by any state over the same five-year span, which is Louisiana’s gain of 55,900 nonfarm jobs. Texas also became the second-largest economy, passing New York and coming in second to California, per data released by the U.S. Department of Commerce Bureau of Economic Analysis.
Texas communities tend to work with performance-based incentives where a project is evaluated based on job creation, capital investment, and/or sales tax generation. Performance-based incentives are becoming increasingly popular nationally where the long term trend has been to offer tax credits rather than grants. Most of these newer performance-based incentive programs are limited and usually tied to recruitment, screening and job training costs. Texas’ Economic Development Sales Tax, which allows local communities to use up to a half-cent of their sales tax for economic development efforts, serves as the backbone of local economic development efforts in more than 500 communities. These sales tax economic development corporations have become a model program by which communities can provide businesses with cash grants for relocation, tenant improvement costs, job training and assistance with infrastructure costs.
The credit crunch, coupled with the continued pursuit for bottom line revenue and cost reductions, has made locales with discretionary grant and financing-driven incentive programs increasingly attractive. There are new opportunities on the incentive front with nearby states, such as Oklahoma, Louisiana and Arkansas, following the lead of Texas with its discretionary cash grants, tax rebates and deal-closing fund either in place or in discussion.
Incentive programs may also face more scrutiny during the 2013 State Legislative session as a result of the review by the Legislature’s newly created Select Committee on Economic Development, whose role it will be to study and make recommendations on incentives. Add in the potential competition from the surrounding states’ incentive programs and it will mean added pressure for Texas. Continued global economic instability and intense competition abroad and at home for jobs and capital investment will have us watching to see if Texas can stay at the forefront of economic recovery.
*The Texas Legislature meets in odd-numbered years.
Robert Winningham is Executive Director/CEO of the Allen Economic Development Corporation (AEDC), in the Dallas-Ft. Worth MSA. In January 1992, the citizens of Allen passed a citywide half-cent Economic Development Sales Tax in support of economic recruitment, expansion and retention. A board of directors, appointed by the City Council, oversees the corporation’s operations.