Local “Economic Development”: Subsidies All The Way Down

“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.”