Sealtite Building Fasteners reached its available manufacturing capacity in its 50,000-square-foot Tyler facility in 2007. Demand for product was exceeding the company’s ability to manufacture and distribute.
Sealtite CEO Bruce Crouch said Tyler was the company’s home, but expansion represented a major capital investment and a possible move. Crouch knew economic development incentives were a common tactic communities used to keep or attract employers, and that employees and investment held value.
The company’s owner didn’t want to leave Tyler, and Tyler’s economic development leaders didn’t want to lose its existing employees, property tax value or its growth potential.
But moving was a consideration, Crouch said, because it makes financial sense for a company to explore different options to grow.
“When you’re expanding, it means a large expenditure that is a drain on resources, and when you can get (an incentive) to mitigate that, it helps to continue what you began,” he said.
Tom Mullins said states and communities are attractive to companies for a variety of reasons, including low taxes, a business-friendly regulatory climate, an educated workforce and other quality of life measures, but that incentives can tip the scales in a location’s favor. Incentives are like an economic arms race pitting communities against each other for jobs, investment and growth.
“It is so competitive when you’re talking jobs and investment,” he said. “Some location consultants won’t even consider an area if incentives aren’t on the table.”
The Tyler Economic Development Council has several incentives available to employers to make locating or staying in Tyler/Smith County more appetizing. It can recommend tax abatements, which defers property taxes on new investment for an agreed-upon period, or provide loans up to $200,000 from the Smith County Revolving Loan Fund and offer discounted land inside its 100-acre Tyler Industrial and Business Park and 120-acre Bioscience Park.
Local government also contributes tax dollars, such as the city’s half-cent sales tax, to improve infrastructure, including water and road projects, to promote and develop new and expanded business investment.
Critics call incentives “corporate welfare” and contend company benefits exceed the influx of growth, such as jobs and indirect and direct economic impact to communities. They also view incentives as an advantage for some companies over already existing businesses.
But, economic development folks say the economic ripple effect employers have on a region far exceeds the cost.
Since 2004, the city of Tyler and Smith County have forgone taxing almost $185.5 million in new investment by 14 companies that either located or expanded their operations here. Twenty companies were involved in existing or new agreements during that time.
The city of Tyler spent $30.4 million on extending Grande Boulevard and $13.8 million to build Earl Campbell Parkway with the hopes both projects would generate opportunities for commercial and industrial growth. The projects funded by a half-cent sales tax specifically dedicated toward infrastructure improvements to draw commercial and industrial activity.
Economist Ray Perryman, of the Perryman Group, said incentives are absolutely essential for a viable and successful economic development program. Thousands of communities throughout the country and world use them, he said, making competing with those locations impossible without them.
Companies have a fiduciary responsibility to maximize value for shareholders, Perryman said. When communities offer incentives, it triggers the necessity of consideration.
Most consultants who aid companies with major site selections won’t even consider an area or town without incentives attached.
“Virtually all firms have multiple options on where to locate that are similar in most respects,” he said. “Incentives are, thus, the tipping point.”
TOUGH TO MEASURE
Retired The University of Texas at Tyler economics professor Tim Kane said there are questions as to the value of incentives. Kane said a simple way to look at incentives is the cost per job created.
By that measure, the $14.8 million in total incentives to bring the Target distribution center produced roughly 1,000 jobs. That’s roughly $14,800 per job.
The incentives included a 10-year 100 percent abatement ($6.6 million in taxes deferred), a $500,000 economic development grant; $4.7 million in public works improvements by the city of Lindale, such as roads and water infrastructure; setting up an enterprise zone for more than $1 million in sales and franchise tax rebates and the Texas Department of Transportation improving a bridge on Interstate 20 for $550,000,
Mullins said job creation alone isn’t a fair measuring stick.
The state spends hundreds of millions of dollars annually to promote the state to employers and improve business opportunity in a variety of ways.
For example, in fiscal year 2012, the Texas Workforce Commission awarded 50 grants totaling $22.4 million for 111 Texas businesses. The training supported creation of 5,108 new jobs and improved skills for 14,732 workers in existing jobs.
Kane said incentives also place value on some businesses over others. They provide breaks to a company to locate here or expand, while another existing business receives no benefit.
There’s also an assumption the locale here wouldn’t be the company’s choice based on Smith County’s property tax (the 25th lowest among 254 counties) and business-friendly regulatory climate, Kane said. There’s access to Interstate 20 and Tyler’s position as a regional commercial, education and medical hub, he added.
“This is an attractive area,” he said. “Business leaders say the amenities, the health care, the quality of local education, the crime statistics, all of those go into the mix when it comes to making a decision.”
But whether the company would locate here without an economic development incentive is unknown, Kane said.
Another unknown is calculating how much economic activity that follows an incentive package can be attributed to that company and how much is caused by other factors.
Mullins and Perryman subscribe to the notion employers have a ripple effect on a local economy.
The Tyler Economic Development Council reported Target’s impact was beyond expectations. They credit the company’s move with almost quadrupling the property tax base between 1997 and 2007, to $264 million compared to $74 million.
Lindale sales tax receipts also quadrupled to $1.8 million compared to $436,000 during the same time. The Lindale ISD property tax base tripled to more than $1 billion compared to $333 million in 1997.
“Some of that was obviously due to the new company but probably not all of it and it’s virtually impossible to untangle those things and pinpoint exactly what was due to its arrival and the multiplier effect of that versus other things happening,” he said.
The abatement ended in 2009. Target paid $2.3 million in local taxes to entities including the city of Lindale, it’s school district and emergency services district and Smith County in 2013.
OVER THE TOP
But not all companies that accept incentive packages meet expectations.
Mullins said there are clauses to make employers accountable. In the case of abatements, companies don’t get the full benefit of the incentive if they don’t perform. If a company reports its job creation at 80 percent of the agreed-upon number, an 80 percent abatement is given, he said.
Thirteen of 20 companies receiving abatements since 2004 failed to meet expectations at least once (between 10 percent and 98 percent compliance). One agreement was terminated.
Incentives are a questionable means to an end without a true measuring stick for outcomes, Kane said.
But it does show how the public sector can affect the private sector’s decision-making process when it comes to taxes and regulation.
Kane said that if the incentives, such as lower/rebated taxes, and reasonable regulatory controls encourage economic growth, common sense dictates they would spur a wider net of prosperity if applied to all businesses.
He also believes businesses choose locations based on how a location assists access to the marketplace that would maximize profit. They might consider a short-term incentive an advantage if it fits into the company’s long-term plan, he said.
Mullins said a community’s assets get it on a short list of possible locations but that incentives can “put a community over the top.”
Perryman said incentives are essential but that not all packages are good deals. He said communities should always evaluate the value. But deals are also subject to economic conditions, he added.
Kane said it might not be easy to quantify how incentives contribute to a community’s success, but that it’s human nature for economic development professionals to feel they play an important role.
“Being in their business they want to feel as though it was their action that nailed the deal down,” he said.
The incentives provided to Sealtite kept the company from looking at different options, Crouch said.
Crouch said the expansion doubled the company’s manufacturing capacity. Sales have doubled as a result.
Sealtite is one of the fastest growing companies in the industry, and Crouch said the owner is happy his company stayed where it began.
“It was a plus for us. It assists the growth process but now we’re back paying full taxes on all our facilities,” he said. “We’re writing some really big checks to the taxing entities now.”