WACO, Texas – Successfully developing an economy requires a business environment where companies want to locate.
Even after these basic prerequisites are met, however, the level of competition among states and even nations for quality corporate locations and expansions requires concerted efforts to attract new activity, including incentives.
Some 25 years ago, as noted last week, the Texas Legislature passed legislation allowing local areas to vote to collect extra sales tax to be used for economic development. Since the legislation was passed, an estimated $7 billion has been collected by communities across the state.
Projects undertaken with these funds have included not only direct incentives to locating, expanding, or retaining firms, but also workforce training, higher education programs, sports venues, and various enhancements to local infrastructure or quality of life with the potential to result in economic development. We were recently asked to estimate the economic and fiscal benefits of projects facilitated by funds from the sales tax for economic development.
Based on a representative sample of economic development corporations, our analysis indicates that projects receiving location, expansion, or retention assistance from the sales tax for economic development generate an overall impact (including multiplier effects) of $98.2 billion in gross product each year and almost 971,900 permanent jobs in Texas.
It is important to note that it would be inappropriate to attribute all of this activity exclusively to the sales tax because myriad factors are involved in location, expansion, and retention decisions. Some firms receiving assistance would have likely located, expanded, or remained in Texas even in the absence of incentives. However, many assisted businesses would not be here without the concerted economic development efforts funded by the sales tax for economic development
This economic growth has also helped schools, Counties, Cities, and the State. Any increase in business activity leads, in turn, to incremental tax receipts to the State and local governments through increased retail sales, property tax values, hotel/motel stays, and so on. We found that the receipts to the State and local taxing entities (City, County, and schools) stemming from business activity linked to projects facilitated by the sales tax for economic development are substantial, with annual gains of an estimated $5.1 billion to the State and $4.2 billion to local entities each year ($3.5 billion to local governments and $1.8 billion to cities when net of economic development (ED) sales tax collections.)
We also looked at the role of the sales tax for economic development in the context of overall growth in the economy and found that it has been a factor in 20.7% of net job growth in Texas since 1990. Moreover, every $1 in sales tax for economic development collected over the past 25 years returns a cumulative $10.84 in annual economic activity (gross product in 2014 dollars) from assisted projects. To say it another way, the annual real net rate of return of the cumulative payments over the entire period in terms of fiscal revenues associated with assisted projects is approximately 56.2 percent to the State, 38.3 percent to all local governments, and 19.7 percent to cities.
The benefits from project investments continue year after year, as assisted businesses continue to operate and generate opportunities. Sitting here today, in other words, we are reaping the economic gains of all past investments. Every dollar of sales tax for economic development currently collected each year is significantly exceeded by these ongoing cumulative benefits of the projects supported by the program, which have an annual impact of $277.67 in expenditures, $140.92 in gross product, $89.72 in personal income, and $3.57 in gross city tax revenue each year ($2.57 per year when net of ED sales tax collections).
Although there are many considerations in the location decision process, the initiatives undertaken by economic development professionals (and funded by economic development sales tax receipts) have been the major contributing factors in many cases, and the state economy has benefitted tremendously. The relative strength of the Texas economy is providing jobs for Texans, opportunities for the state’s businesses, and tax receipts to fund local and State priorities. Without a doubt, part of the reason for this success is efforts by local economic development corporations in communities across the state. Without the resources provided by ED sales tax collections, many of the projects undertaken would simply not have been possible.
Economic development projects are notably enhancing prosperity in the state. Assistance projects facilitated by the ED sales tax are also generating returns far in excess of what is collected. The sales tax for economic development is a true success story providing local taxpayers in communities across the Lone Star State with an extraordinary return on their investment.
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.