The Economist: Economic Development Sales Tax Turns 25
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M. Ray Perryman
The Texas Legislature made a very smart move 25 years ago: providing a mechanism to fund local economic development efforts. The Development Corporation Act had been passed in 1979, allowing cities to form economic development corporations (EDCs) to attempt to attract new businesses. However, funds available for this purpose were scarce. The Legislature amended the Act in 1989, and the sales tax for economic development was born.
Local areas can vote to add a local sales and use tax to fund economic development, and about 700 have done so. Rates can range from one-eighth to one-half of one percent. There are some restrictions on which cities are eligible, and the total local piece of the sales tax is capped at 2% (including the economic development portion). The EDCs are established by cities, with boards of directors named by city councils. City councils must also approve proposed expenditures by the EDC.
There are two basic types of structures: “Type A” and “Type B” (which used to be known as 4A and 4B). Type A EDCs have the authority to use funds primarily for industry and manufacturing development. Projects include buying land, building industrial buildings and other facilities, undertaking certain infrastructure improvements, and paying maintenance and operating costs associated with the projects. Type B sales taxes can be used to fund all of these things and more, including quality-of-life improvements such as sports and athletic facilities, parks, streets and roads, and various other types of infrastructure. Type A corporations can do Type B-type quality-of-life projects, but only with voter approval.
The 697 cities which filed required reports for fiscal 2011 range from tiny to large and are located all over the state. The EDCs had total revenue of $781 million, with $573 million stemming from the sales tax. They spent almost $736 million in fiscal 2011, with most of it going to capital costs (with capital assets involving things such as land, commercial buildings, industrial park sites, and equipment), debt service for prior investments, and direct business incentives. Primary objectives were job creation/retention and infrastructure projects.
We have studied the economic benefits for several cities and found that these taxpayer investments pay off. Economic development corporations choose projects to fund based on the likely opportunities offered to residents in the form of jobs and other benefits. The increased economic activity stemming from corporate locations, expansions, and retentions in turns generates tax receipts. It’s a virtuous cycle, with new activity stimulating further gains in related businesses and the overall economy.
Many of us remember all too well the dark economic days of the late 1980s. After an amazing boom spurred by oil prices and friendly tax treatment for certain real estate investments, the bottom fell out. Rig counts dropped dramatically when the global political situation changed and crude prices fell, and cities in the Permian Basin and other oil and natural gas-rich areas were battered. Tax law changes and other factors also led to a real estate (and later, savings and loan) crisis. These events caused substantial dislocations, with shrinking employment and major oversupplies of commercial real estate. Against the backdrop of this disruption, visionary legislation was born.
In an ideal world, economic incentives might not exist. However, incentives are a fact of life, and Texas communities must offer them to keep the playing field even or risk losing out on quality corporate locations and expansions. By allowing local areas to create and fund economic development corporations, state legislators made a bold move which is enhancing prosperity in communities large and small across the Lone Star State.
Texas is a center for job growth, outperforming the United States as a whole by a significant margin. Even other states with notable advantages can’t keep up. Part of the reason is that 25 years ago, Texas legislators, community leaders, and voters decided to invest in a better economic future. This investment benefits us all in the form of greater opportunities for Texans.
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.