1. Bob Bland University of North Texas April 17, 2012 Tax Incentives as Economic Development Tools: Do They Really Work? GFOAT Spring Institute

2. Tax Incentives Available to Texas Cities and Towns   Property taxes – –Tax increment financing (Chapter 311) – –Tax abatement (Chapter 312) – –Freeport exemption Source: texasahead.org/tax_programs/

3. Tax Incentives (continued)  Special assessments and other incentives  Economic Development Agreements (Chapter 380/381)  Public Improvement Districts (Chapter 372)  Municipal Management Districts (Chapter 375)  Neighborhood Empowerment Zones (Chapter 378)  NAFTA Impact Zones (Chapter 379)

4. Tax Incentives (continued)  Sales Tax  Economic Development Corporations (A and B)  Municipal Development Districts (Chapter 377)  County Assistance Districts (Chapter 387)  Enterprise Zones  Manufacturing Exemptions

5. Other Tax Incentives Benefiting Households  Sales tax holiday  Property tax freeze for seniors  Homestead exemptions  Property assessment limits

6. What Types of Cities Use Tax Incentives?

7. Why do Local Governments get Involved in Economic Development?  Perception that businesses “pay their own way” –Common assumption: Tax incentives pay for themselves  To create a favorable business environment  Interlocal competition (Tiebout Hypothesis)  For most, the question is not whether to offer incentives, but under what circumstances.

8. The Downside to Tax Incentives  Market interference  Spillover benefits  Opportunity cost of tax expenditure  Mobility of capital (Dell Computers leaving NC after four years, $240M in incentives)  Administrative cost of monitoring compliance

9. What Criteria do Businesses Use When Making Location Decisions? Research not consistent, but general findings are:   Non tax factors rank highest during the initial research phase when choosing a location. – – Labor supply/cost/education – – Proximity to suppliers/markets – –Other firms in same industry – –Energy costs – –Transportation networks

10. Criteria Businesses Use (continued)   Local taxes increase in importance as number of alternative location sites is narrowed.   Manufacturing and wholesale more sensitive to nominal property tax rate   Complex tradeoff between quality and quantity of public services and lower tax burdens.   Commercial development follows residential migration.

11. Do Increased Sales Taxes Lower Property Taxes? Research from 93 largest Texas cities (Bland/Laosirirat)  Higher per capita sales taxes receipts do not lower per capita M&O property taxes. (No substitution effect)  Rising sales tax revenue occurs concurrently with rising property values  Higher per capita I&S property taxes result in lower per capita M&O property taxes (substitution effect)  Lower per capita property taxes are associated with higher per capita excise taxes and service charges (substitution effect)

12. What Does Research Say About Effectiveness of Tax Incentives?  Most defensible at the margin.  Most appropriate in states with higher unemployment/stagnant growth.  Make the most economic sense for businesses with low demand for public services.  Once agglomeration economies are established, no further need for incentives.  The larger the geographical region for the incentive, the few the spillover effects.  Governments with access two broad taxes better able to recoup revenue benefits of incentive.

13. How Competitive is Texas’ Business Climate? State Business Tax Climate Index (Tax Foundation, Inc.) Texas ranked 2011:13 th 201011 th 2009 9 th 2006 7 th Components of the SBTCI : Corporate Tax rank:46 th (17 th in 2006) Individual Income Tax: n/a Sales Tax:37 th (33 rd in 2006) Unemploy Insurance Tax:15 th (6 th in 2006) Property Tax:29 th (36 th in 2006) Source: Kail M. Padgitt, “2011 State Business Tax Climate Index,” Tax Foundation, Inc., October 2010, Number 60.

14. Recommendations for Promoting Economic Growth  Essential that cities and counties have a strategic plan, including SWOT analysis, benchmarks, and outcome measures.  Maintaining property tax rates at competitive levels is preferable to targeted tax incentives.  Use tax incentives sparingly and strategically to build agglomeration economies.  Tax incentives are no substitute for prudent budget and revenue policies.