California fires back at Texas in fight to attract businesses

08/29/2014 3:14 PM

08/29/2014 3:16 PM

When California rolled out a $750 million plan this year to attract and retain businesses, many aspects mirrored longtime perks used by Texas, where officials love nothing more than stealing jobs from the Golden State.

For more than a decade, Texas Gov. Rick Perry has touted the “deal-closing” Texas Enterprise Fund and other cash incentives as a “job creation machine.” A fifth of the companies that Texas attracted during the last funding cycle, in 2011 and 2012, were based in California.

Now California is firing back. In the state’s first tax credit awards in June, more than 40 percent of the $29 million package went to companies that have gotten similar offers from Texas: Samsung, Petco and Amazon.

But as California embarks on a major effort to woo businesses, a decade’s worth of experience in Texas raises questions about the wisdom of buying jobs from corporations with taxpayer dollars.

Texas has given out more than $500 million from the Enterprise Fund — and hundreds of millions more in local property tax breaks — to entice businesses to the Lone Star State. But many legislators now question why Texas has paid so much to companies that account for a tiny fraction of the job growth.

For years, outside groups have alleged that Perry has overstated the number of jobs created, failed to recoup money from companies that break job creation promises and steered money toward well-connected campaign donors.

The Texas Enterprise Fund showered $40 million this year on Toyota Motor Corp. when the company announced plans to move its North American headquarters from Torrance, Calif., to Plano.

But as Toyota officials made clear, incentives had little to do with the decision. Rather, the world’s largest automaker wanted to consolidate its U.S. operations closer to many of its plants in the South.

Economists and public policy experts also point to the fairness issues — and the potential for corruption — that are inherent in giving government officials the power to pick companies for multimillion-dollar grants. They also question how much such gifts affect corporate decisions to move or expand.

“The incentive structure is all in favor of spending too much and spending it when you don’t need to,” said Peter Fisher, a professor emeritus of urban and regional planning at the University of Iowa, who is an expert on state tax incentives.

But incentives have become so common that it’s hard for politicians to sit on the sidelines.

“It’s human nature,” said Bill Peacock, vice president of the conservative Texas Public Policy Foundation, which disapproves of such incentives. “When they see all these other states with all these different programs, it’s hard to just leave job creation and attracting new jobs to the marketplace.”

California’s new system has some key differences from Texas’ programs. The so-called California Competes program is structured as a tax credit rather than an upfront cash grant. That gives the state more leverage if companies don’t hold up their end of the agreement, California economic development officials say.

“We’re not writing a check,” Will Koch, a deputy director who oversees the program in Gov. Jerry Brown’s Office of Business and Economic Development, said during a June meeting.

The program also has more specific requirements outlining the salary levels required to obtain funding.

Both programs, however, favor companies that may be weighing offers from other states. It’s a popular political strategy nationwide, but research has shown that interstate movement of jobs and firms has a microscopic effect on economic growth.

California reforms

California’s new slate of business tax incentives comes after a lengthy and troubled experiment with community development programs.

Beginning in 1984, state lawmakers created a series of “enterprise zones” in economically depressed areas, looking to boost job creation. The program ballooned from $15.6 million in 1993 to more than $800 million by 2011. Brown succeeded in killing it last year amid widespread criticism, including the disclosure that a Sacramento-area strip club collected tens of thousands of dollars in tax credits.

The program targeted small businesses, but 40 percent of the money went to corporations with more than $1 billion in revenue, the state legislative analyst’s office found in 2011. Other reports found that the enterprise zones had virtually no effect on job creation.

Because the program gave tax credits for new hires — not necessarily for an increase in total positions — critics argued that companies had an incentive to claim credits, fire workers and then rehire replacements to claim more credits.

The replacement economic development program, launched this year, offers a trio of new incentives: a tax abatement for research and development in manufacturing and biotech; a credit for increasing the number of full-time workers; and a California Competes tax credit allocated to companies chosen by the governor’s Cabinet and legislative appointees.

On the surface, the California Competes program resembles the discretionary Texas Enterprise Fund. But officials with the governor’s office cite important distinctions.

The California Competes program is expected to grow to $150 million this fiscal year and $200 million in later years, giving the state a chance to iron out any problems, according to the governor’s office.

By structuring the program as a tax credit rather than a cash grant, the state avoids having to claw back money from companies that fail to meet certain goals.

California’s program also has specific milestones that companies must hit every year, in contrast to the historically flexible targets in Texas.

In addition, California has 25 percent set aside for small businesses.

Brook Taylor, a spokesman for the Office of Business and Economic Development, brushed off the notion of competing with other states.

“California is the eighth-largest economy in the world,” he said. “When we’re talking about California’s competitiveness, it’s about continuing to attract the best and brightest. We want to recruit companies and people from around the world.”

And no matter how many protections a state builds into its programs, experts argue that taxpayers and politicians never know what’s happening inside corporate boardrooms. Companies can always threaten to leave to shake more money out of state governments — regardless of whether it makes business sense to move, said Fisher, the tax incentive expert.

“The company still holds all the cards,” he said.

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