Local “Economic Development”: Subsidies All The Way Down

By The Banker | Blog Posts, Texas
21 Dec 2012
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solar panels money

“The earth isn’t floating in space, it just rests on a Giant Turtle,” said the lady. “But what,” the scientist asked gamely, “does the Giant Turtle rest on?” “My dear boy,” she replied as if to a child, “It’s just turtles all the way down!”

 

My local city council recently approved more than $12 Million in tax abatement subsidies to attract a Korean solar-panel manufacturer Nexolon America LLC to a repurposed area of land called Brooks City Base.  This kind of deal makes my morning coffee taste particularly bitter and I’ve been trying to figure out why.  I realize it comes down to math.

Now, there are two kinds of unfortunate math in the deal the City cut for Nexolon and Brooks City Base.

First is the mathematic equation that I’ve been teaching my 7-year-old daughter: when you subtract a negative, the result is a positive. How does that relate to Nexolon? When you remove the obligation to pay taxes, you’ve “subtracted a negative” and the taxpayer undoubtedly receives a mathematically positive benefit: they get to keep more of their money than they would have without the abatement.

Mathematically, this also means that public coffers are poorer by that same amount because the businesses that receive abatements aren’t paying into the system.[1]

In plain English, when public officials award a tax abatement, it’s the same thing, in math and money terms, as handing out cash from the public coffers.[2]

I find this math noncontroversial, but everybody I’ve talked to who works in “economic development” in San Antonio refuses to agree that tax abatements equal public handouts for private gain.

The second kind of math associated with Nexolon gets even worse. The Express-News quotes Mayor Castro, who supports the deal because of the “400 good paying manufacturing jobs” it is supposed to bring to San Antonio in return for the incentives.

Let’s briefly examine the math that the Mayor has not clarified for the public: The City is willing to pledge more than $12 million over 10 years to incentivize Nexolon’s move. That’s $30,000 per job.

Why does this make sense to anyone?

I’ve got a different proposal. We count out the amount to be spent to “create” one job – $30,000 in $1 bills – we make a huge pile in the middle of HemisFair Park during Luminaria, and light it on fire as a public spectacle. I suspect the economic impact of that performance art will be greater than these “green manufacturing jobs” being touted on the South Side.

But allow me to step back from the Nexolon deal for a moment and discuss the larger issue that’s really bothering me. San Antonio and Texas have a pervasive pattern of awarding benefit to private entities from public coffers.

I acknowledge the need, sometimes, to confer, sell, or award public goods to private entities for the public benefit. But in those cases, government officials ought to be careful to observe a process that ensures a clear, compelling, public benefit from the privatization of the public good, and maximizes the price of the privatization, for the benefit of the public budget.

Too often we watch as a group of insiders conducts public policy by awarding private benefits without maximizing the public good, or even without feeling the need to justify the use of scarce public resources – otherwise needed for schools and roads and public safety and courts and parks – in the form of private handouts.

When I talk to economic development experts in San Antonio, they argue in favor of these schemes from two angles. They argue that San Antonio cannot attract the kind of companies we need without dangling sweet tax subsidies to lure companies away from perceived municipal competitors like Denver, Austin, and Portland. And they insist tax incentives and grants pay for themselves over time, as the new corporate residents eventually pay higher taxes, phased in over years.

In my business experience, however, successful for-profit businesses do not make important decisions like where to locate based on tax incentives.[3]

In my opinion, if economic development experts want to attract sustainable, for-profit companies rather than future tax-welfare recipients, they’re going about it the wrong way. Because guess what?  When you dangle generous tax incentives to convince companies to move to your city, you attract companies that make decisions for the wrong reasons. You attract companies interested in tax-avoidance decisions, rather than sound business decisions.

City leaders talk about encouraging an entrepreneurial, tech-oriented city, but what they incentivize through deals like Nexolon almost by design are lobbyist-driven, private-handout-oriented companies.

What if our leaders focused on building a city that attracts companies and people on its own merits – through top-notch public amenities, an educated work-force, and transparency in public-private negotiations – instead of public giveaways to private entities? If you do the big stuff right you don’t need to cut your local tax rates to be attractive.

I want to be careful to point out that the type of corporate welfare exemplified by the Nexolon deal is not a Democrat v. Republican or a Right v. Left problem in San Antonio, or in Texas.

While Nexolon bears the indelible mark of Democratic patronage (note attractive phrases like “South Side”, “Manufacturing Jobs”, and “Green Energy”) we know from excellent New York Times reporting that Republican Governor Rick Perry’s Texas is a virtual candy store of corporate goodies.

If you care about a consistent political philosophy,[4] Perry’s corporate welfare policy is gross. He professes a belief in free markets, but believes government needs to intervene in markets through bigger business incentives – $19 Billion per year – than any other state in the nation. Tax consultant G. Brint Ryan stars in the New York Times article as the successful state lobbyist for tax breaks for private corporations who just coincidentally fundraises for Governor Perry ($250,000), Comptroller Susan Combs ($600,000), and Lt. Governor David Dewhurst ($150,000) – all of whom insist donations have no influence on them.  Seriously.  That’s what they said.

Perry’s version of Texas capitalism encourages the worst sort of influence-peddling, in which public goods get privatized, and then private companies pay him back directly to keep him in office. Similarly, when you’ve got a local project like Nexolon[5] on Brooks City Base built entirely on tax abatements, my spidey sense just starts tingling about the opportunities for local public officials. [6]



[1] For example, if you offered me a tax abatement of $10K on my property taxes this year, would you like to know how much I’d pay for that abatement?  Um, well, I’d pay up to $9,999 cold hard cash for that.  So, yeah, it’s the same thing as handing out free money.

[2] Sometimes the cash handout is a good thing.  Sometimes the cash handout is a bad thing.  But it’s a cash handout, obscured slightly, and called a tax abatement.

[3] As my accountant first told me when I started my own business: “Never make a business decision based on the tax implications.  Just focus on making money, and the taxes will take care of themselves.”   In a related story, have you wondered why San Antonio doesn’t have a grocery store downtown despite at least a $1 million incentive package from the City?  It’s because local grocery company H.E.B. is run like a successful, for-profit business, and they know that a downtown grocery story is a money loser right now.  Not enough people live downtown to make it profitable, despite the sweet government incentives.  Companies like HEB don’t let local governments make important decisions for them.

[4] I know, it’s kind of quaint, but still, I do care about these things.

[5] I haven’t even gotten into the issue that a big public investment in solar panel manufacturing, right next door to the Eagle Ford’s Natural Gas Revolution, makes about as much business sense in 2012 as investing in Ty Beanie Babies collectibles, for profit.

[6] The solar energy market – and by extension a solar panel manufacturer like Nexolon – is entirely driven by public subsidies.  The Federal government offers tax breaks to electric utilities (via Investment Tax Credits, or  ITCs) to purchase solar power, bringing it to within twice the cost of other energy sources.  From there a package of Federal ,State, and Local subsidies helpfully described here and here try to make up the difference and incentivize the purchase of solar power.  It’s a pile of subsidies on top of subsidies, with nary a market-clearing foundation in sight.  Which is a perfect opportunity for influence peddling, since everything depends on government largesse all up and down the chain.  I’m reminded of Dr. Seuss’ Yurtle the Turtle story, a reference to the old saw about the Earth resting on Turtles, and it just being ‘Turtles All The Way Down.”  With the addition of Nexolon at Brooks City Base, it’s just “Subsidies All The Way Down.”

turtles all the way down

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8 Comments

  1. Alonissos says:

    In our town, we used the state and federal government subsidies to purchase wind turbines for creating electricity for town operations. Now it turns out the turbines make so much noise that some neighbors are sickened, but since we had to spend some of the town’s money as well as the subsidy money, we can’t afford to turn them off.

  2. richard adams says:

    Another very informative piece. Gives me a contrast to what I see and hear in my own town. A blessed Christmas and holiday season to you and your family.

  3. The Banker says:

    And, here’s the follow-up story, about the Korean company Nexelon, that came out 2 weeks after my post. I’m disgusted, but not surprised. http://www.mysanantonio.com/news/energy/article/CPS-partner-lost-60-million-4173634.php

  4. Student says:

    You visited our class this afternoon–I’m a student at UTSA–thank you for taking the time to speak with us. I’m also now a fan of your website!

    I had a quick question regarding your statement: “In my business experience, however, successful for-profit businesses do not make important decisions like where to locate based on tax incentives.”

    In your opinion, what are other reasons businesses move into a city, especially since tax incentives are the norm more and more here in Texas. What incentive do businesses have without tax incentives? Are we now slaves to expected tax incentives?

    • The Banker says:

      Lorna,

      Thanks for your question and for looking into my site.

      My view is city officials interested in attracting businesses should focus on the big picture things that attract workers and business owners to start businesses, keep businesses and attract businesses. That can be quality-of-life things like public parks, good schools, or safe attractive downtowns, etc. Maybe its going to be world-class amenities, a place-specific cultural life, or a stock of available housing at good prices. Usually its going to involve the city having an educated pool of talent that matches the businesses’ needs. Maybe it takes longer to put this stuff together, but you’ll have more loyal companies when they do grow or relocate to your city. At the same time that you’re doing this to attract and build new businesses, most importantly you’re also building a better city for your citizens, which is your main job as a city official.
      Frankly the most vibrant economic drivers are not companies that you can poach from other places, but businesses that you grow organically from your own talent pool and offshoots of existing industries. New York City doesn’t need to poach finance companies from around the world. On the contrary, finance companies decide they need to start, build, or move to NYC because of all that it offers.

      In my opinion, tax incentives attract companies that 1. Want to extract private benefit from the public trough 2. Don’t make decisions based on profitability so much as tax benefits 3. Can be counter-incentivized by the next most attractive city offer elsewhere.
      On top of that, the opportunities to privately gain using public funds go in both directions: To the private company, and to the public officials. At the expense, frankly, of ordinary citizen who aren’t on the inside track. I’m not saying this happens in every deal. But I am saying I’ve been around long enough to know that where the opportunity for private benefit exists at the expense of the public good, some public officials will be tempted. The more temptation you make available, the more it will happen. City ‘economic incentives’ are ripe opportunities for this. The New York Times article I reference in the story, on the practices going on at the State of Texas level is extraordinarily good journalism. They should win a Pulitzer Prize.

      The Nexelon deal in particular, in my opinion, involves layers upon layers of govt incentives for doing the wrong thing, and I have no doubt its a terrible deal for ordinary citizens:
      1. Money to Brooks City to ‘make whole’ their giveaway of valuable public land to a private company
      2. Money to a South Korean manufacturing company Nexelon LLC that is in financial trouble
      3. Money to an industry overwhelmed and awash in cheap Chinese manufactured competition, such that this domestic manufacturing company is unlikely to ever be able to legitimately compete without public incentives
      4. Money to an industry (solar) which will not compete on market price with other sources of energy (natural gas) in our lifetime
      5. Money to build solar panels which only make sense if you continue to renew govt incentives for solar energy.

  5. The Banker says:

    And then there’s this, which makes me want to light myself on fire. Even the Chinese are unwilling to send more money down a rat hole. http://www.bloomberg.com/news/2013-03-18/china-may-cancel-some-solar-subsidies-industry-official-says.html

  6. The Banker says:

    And then there’s this update to the story, in which the local paper digs deeper. http://www.expressnews.com/news/energy/article/More-questions-on-city-s-vetting-of-Nexolon-4507179.php

  7. The Banker says:

    And another follow-up to the story. The financial side does not get better: http://www.expressnews.com/news/energy/article/Beleaguered-Nexolon-reports-another-decline-4573215.php

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