WACO, Texas – Some 25 years ago, on the heels of a major economic downturn in the state, the Texas Legislature passed legislation allowing local areas to vote to collect extra sales tax to be used for economic development.

Voters in hundreds of communities across the state have since passed measures approving the tax, and the billions of dollars collected have been used for projects enhancing opportunities for Texans in communities large and small.

The hundreds of projects undertaken by economic development corporations across Texas (funded by sales tax for economic development proceeds) have enhanced the performance of the state economy, thereby increasing job opportunities, business investment, and tax receipts. We recently measured the economic benefits of projects made possible by the tax and found that they are huge. (More on those results next week.)

The analysis also highlights the fact that economic development incentives are crucial. The highly competitive environment characterizing modern economic development virtually demands that communities and regions seeking continuing success be competitive with incentives and other location requirements. Incentives, marketing efforts, and other enhancements are widely used, and communities need such tools to “level the playing field.” In fact, a variety of factors have coalesced in recent years to make them even more significant.

First, labor and capital mobility has greatly increased. Skilled workers in key growth sectors have shown a willingness to relocate in response to enhanced opportunities, and financial markets efficiently move capital and money to their highest and best uses.

Second, the site selection process has become more sophisticated. Firms have come to recognize that they have significant “bargaining power” with state and local governments and are using it to effectively reduce overall costs.

Third, increasing globalization has brought greater attention to all aspects of costs. Firms, particularly in growth-oriented manufacturing sectors, must offer a mix of output, innovation, and profits that is competitive on an international scale. In such an environment, even relatively minor variations in costs across geographic areas can be a key factor in location decisions, and incentives are an important part of the equation when areas are roughly equivalent in other respects (which is the typical situation).

Fourth, firms are now held to higher levels of public scrutiny in debt and equity markets than has been the case historically. In seeking new locations, lower tax levels and specific economic incentive packages bring with them a fiduciary duty to minimize overall outlays and maximize profits; shareholders demand a higher level of accountability. Therefore, it is necessary to be aggressive and creative in structuring attractive packages to compete with other communities.

Fifth, most large firms now employ agents (site selection consultants) to assist in the location process. Because these firms largely compete with one another based on their ability to secure incentives, areas without competitive programs are often shut out of the process entirely (a fate which often befell Texas prior to the passage of the economic development sales tax and later legislation for State incentives in the early 2000s).

It must be remembered that economic development is a high stakes process in which winners receive very significant rewards of jobs, investments, and tax revenues; on the other hand, second place (even a very close second place) gets nothing (maybe a fruit basket). The availability of funds to support economic development efforts is essential, and the sales tax for that purpose has enabled communities across the state to improve their ability to compete for new business activity and retain existing firms.

In many cases, Texas’ economic development incentive options are making the difference between being on the short list of potential locations and sealing the deal. The result is a steady inflow of desirable corporate locations. The new commercial and industrial ventures offer jobs for Texans and tax receipts for the State and local governments. Many of the new positions are well paying, and there is evidence that Texas leads in job gains across all levels of wages.

One objective measure of this success is Site Selection magazine’s Governor’s Cup, which ranks states by the number of major corporate location and expansion projects. To be counted, a project has to either involve a capital commercial investment of at least $1 million, 50 or more new jobs, or 20,000 square feet of new construction. Last year, Texas had 657 such projects, far outpacing second-place Ohio (which had 480). Others near the top of the list include Illinois (with 383), Pennsylvania (348), and Michigan (312). The win is not a first for Texas; the state also won in 2004, 2005, 2010, 2012, and 2013 and was a close second in several of the intervening years and consistently among the top five.

The state’s success is based on building on strengths to develop the kind of business climate that companies find attractive. There are other places with similar resources (such as California) that are unable to retain existing firms, much less expand. The Lone Star State’s success increased markedly when funding for economic development became available and incentives were implemented. The economic development sales tax was an early “game-changer” in that process.

Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.