WACO, Texas – The most important key to success in economic development is to create an environment where companies want to locate.

This task is achieved through a favorable tax and regulatory climate, a fair and predictable judicial system, excellent education and training at all levels, infrastructure that can sustain a growing economy, and a desirable quality of life. Texas does quite well in some of these areas, but faces notable challenges in others, particularly over the long term.

Another crucial aspect of ongoing development of the Texas economy is a competitive package of incentives. The state’s economic development programs have recently been the subject of hearings, extensive press coverage, and debate, and I want to take this opportunity to offer a few thoughts.

In a perfect world with perfect information, most economic activity would tend to gravitate to its optimal (least cost) location, and there would be no role for incentives or aggressive marketing programs. In the “real” world, however, both are essential elements of competition for expanded investment and job opportunities. In fact, a variety of factors have coalesced in recent years to make them even more significant.

M. Ray Perryman
M. Ray Perryman

Labor and capital mobility has greatly increased, and global competition forces firms to pay extreme attention to costs. Also, the site selection process has become more sophisticated, with most large firms now employing agents (site selection consultants) to assist in the location process. Because these consultants 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 new legislation in the early 2000s). In addition, shareholders have become very aggressive in holding managements accountable, and firms are expected (and, in fact, are fiduciarily required) to obtain maximum value from locations and expansions.

The money invested by the State in the Texas Enterprise Fund (TEF) and the Texas Emerging Technology Fund (TETF) is paying off in terms of corporate activity. Local communities also offer competitive packages to attract prospective new businesses, a process that was transformed 25 years ago with the economic development sales tax. The property tax incentives afforded by the Texas Economic Development Act (Chapter 313) are critical in many locations (particularly for capital-intensive facilities) and other, smaller initiatives are also important. 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 ventures offer jobs for Texans and tax receipts for the State and local governments. Many of the added positions are well paying, and there is evidence that Texas leads in job gains across all levels of wages. During the past year, Texas has added 383,100 jobs, the largest job growth during a 12-month period in almost 17 years. Texas now accounts for about eight percent of total U.S. employment and more than 30 percent of the net new jobs created nationwide since 2000. One reason for this strong performance is the oil surge, but the current Texas strength derives from many other sources in addition to energy.

There are other places with similar resources (such as California) that are unable to retain existing firms, much less expand.  It is worthy of note that in the years just before Texas implemented its major economic development programs in 2003, the state was falling behind most others in landing major corporate locations and expansions. With a string of successes, it is easy to become complacent and say that incentives are no longer needed. The reality, however, is that the success did not come before the incentives were implemented, and it cannot be sustained if they are dismantled.

While there may be valid reasons to improve transparency or make other meaningful reforms in the state’s economic development incentive programs, it is crucial that we not underestimate their importance. The current environment demands incentives in order to stay competitive. If no one else was offering them, Texas might be able to continue to obtain expansions and relocations due to other benefits of locating here. However, incentives are essential in the current environment, particularly when firms are deciding between locations which are relatively equally attractive.

Texas’ strong performance in recent years is proof that these programs are working. Tweaking the specifics of the decision process, reporting requirements, or other aspects of administration of the incentive programs may be warranted. However, after three decades of analyzing the Texas economy and hundreds of economic development studies, I can say with certainty that a quality incentive program is essential to ongoing success. Moreover, it must be sufficiently flexible to allow it to evolve as the competitive landscape changes.

Perfection is not attainable, and even properly granted incentives will sometimes fall victim to changes in technology, contracting issues, shifts in consumer demand, economic fluctuations, or myriad other factors that can derail expectations. Moreover, programs such as the TETF that are designed to encourage emerging companies and technologies are, by their very nature, always subject to substantial risk, much as private early-stage funding efforts do not enjoy a high success rate. Even a few “wins,” however, can redefine the economic future of the state. Simply stated, Texas cannot afford to let the absence of perfection be the enemy of the very, very good. The track record speaks for itself.

<I>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.</I>