Not everything’s bigger in Texas, and sometimes it doesn’t have to be.
Contrary to conventional wisdom, Texas is not the biggest spender in doling out taxpayer money to lure companies here. Yet it consistently ranks among the leading states in attracting corporate relocations and expansions.
Credit some built-in advantages, including a central location in the Sun Belt and a pro-business climate that helps with operating costs. And don’t underestimate the appeal of growth itself; success breeds success, creating its own momentum.
All this is worth remembering as the competition heats up for the right to host Amazon’s second headquarters.
Amazon’s search for HQ2 is expected to trigger a bidding war among the states and major metros. It’s one of the largest economic development deals ever, with Amazon looking to add up to 50,000 workers and invest $5 billion in new facilities.
How much will it take?
By announcing the search and publishing a request for proposals, Amazon has effectively created a public auction.
Other states will certainly offer more money and tax breaks than Texas — hundreds of millions of dollars more. In late September, New Jersey’s governor proposed dangling up to $5 billion in incentives over a decade, a mind-boggling number for a corporate headquarters.
(Manufacturing facilities, such as the Foxconn factory planned for Wisconsin and the Tesla plant in Nevada, usually attract the largest incentives because they have a greater multiplier effect on an economy.)
Every incentive package is different, and every government agency has its own policies. Some governments try to limit public contributions to 10 percent of the private investment. In Amazon’s case, that would mean about $500 million in taxpayer support.
Alternatively, the funding formula can be based on job numbers. The Texas Enterprise Fund, a state pool of money used to close corporate deals, awards about $10,000 per high-paying job. By that method, Amazon’s incentive would be the same, about $500 million.
That’s a big number, even if it’s a far cry from New Jersey’s.
For perspective, consider that the Texas Enterprise Fund has passed out a total of $482 million since it started doling out incentives over a decade ago. And that was for about 150 companies.
An Amazon deal would test the incentive limits of both the state and local municipalities.
The enterprise fund has to be replenished every two years by the Legislature. Today, it totals $115 million to $120 million, according to the governor’s office.
That’s well short of what it will probably take to land Amazon, but Texas bids aren’t doomed. The Amazon expansion will take over a decade, so state incentives would be spread out. More important, state and local officials have many other tools, from property tax abatements to sales tax rebates to worker-training funds.
“The governor and his team can be very creative, and there are many ways to skin a cat,” said state Rep. Jason Villalba, R-Dallas. A House economic development committee member, Villalba insists the state will be competitive in the Amazon sweepstakes.
“I can’t think of a single instance where we’ve lost a deal because our incentive wasn’t as big as somewhere else’s,” he said.
Not all incentives are equal
One reason is that all incentive dollars are not equal. Many states have higher taxes, including taxes on corporate and personal income, and their abatements are needed to help level the playing field — and make them competitive with Texas.
The Dallas-Fort Worth region has other advantages, including a central location, the Central time zone and a bounty of air travel connections at two airports. Those factors help reduce operating costs and improve efficiency for business travelers.
The costs of labor, real estate, business services, energy, logistics, etc., account for 98 percent of most companies’ costs, according to Greg LeRoy, executive director of Good Jobs First, a Washington research firm that tracks corporate incentives.
“Texas has an advantage on the 98 percent part,” said LeRoy, who urges officials to focus on their assets, not their incentives.
For most employers, state and local taxes account for a tiny share of total costs. Why let the tail wag the dog?
When Toyota chose Plano for its North American headquarters, it passed on $100 million in incentives from North Carolina. That package was about $36 million richer than the offer from North Texas, which included 20 years of property tax breaks from Plano.
Choosing a new headquarters is a strategic decision that plays out over decades, and Toyota wasn’t going to let incentives drive it.
“That would be foolish to do,” Toyota North America CEO Jim Lentz said two years ago.
Toyota followed a similar playbook when it selected San Antonio for its Tundra truck plant in 2003.
Other states offered $150 million to $500 million in incentives, according to published reports, while San Antonio and Texas pitched in a combined $133 million.
Toyota said it wanted to be closer to Texas truck buyers, a giant consumer market, and to Mexico. The North American Free Trade Agreement was creating a vibrant auto-production sector between Texas and Mexico.
The state incentives included $27 million for worker training. But Toyota refused an offer for a tax abatement on schools and hospitals, saying it would be penny-wise and dollar-foolish to shortchange its new community.
Amazon will probably reach the same conclusion on HQ2: Some things are more important than money.