April 22, 2012 Brian Kelsey

Tax Incentives

Nice article today in the Austin American-Statesman about the city’s recent experience with tax incentives: Amid debate, Austin incentive deals for businesses are fairly rare, closely monitored, documents show. But what the story doesn’t mention is how the City of Austin started using WebLOCI to analyze incentive agreements.

In 2008, Travis County asked the Capital Area Council of Governments (CAPCOG) to take an after-the-fact look at the county’s recent economic development deals, including the controversial agreement with The Domain. At CAPCOG we decided to use WebLOCI because of the software’s transparency and flexibility relative to other models. For example, one of the strongest criticisms of tax incentives is that the new jobs go to people moving to the community, not existing residents, which increases public costs for serving new households (more kids in schools, utilities, public safety, etc.). This is what most critics mean when they say projects financed with tax incentives don’t pay for themselves. WebLOCI allows the analyst to make adjustments to the assumptions used to estimate costs to the community. If the company is going to hire a greater percentage of local residents, then you can reduce the number of new households expected as a result of the project. If the company is a water or energy hog, then you can see the impact to local utilities. All models are, to some extent, black boxes. But WebLOCI at least provides a framework for an open debate about how costs and benefits of a proposed tax incentive agreement should be measured and accounted for. The lesson for practitioners: collect as much information from the company as possible, especially about local hires.

About the same time that CAPCOG was working with Travis County, Liveable City released a study on tax incentives in Austin. One of the recommendations was for a neutral third party cost-benefit analysis of proposed agreements, much like what CAPCOG was doing for Travis County, only to be published for public review and comment before deals were signed. Ultimately, City of Austin staff decided to keep the analysis in-house instead of using a third party. But they have been using WebLOCI ever since to generate reports that have been made available for public review on the city website before city council votes on the agreements. In addition, residents have two opportunities to weigh in on the proposed agreements during public meetings.

I think that CAPCOG’s work with Travis County, along with the Liveable City report, motivated improvements in the process that benefited everybody. Companies still have a time-certain process that they can count on, and the public can play a more active and informed role. Personally, I think there are a few improvements that still could be made to the way we handle tax incentives. But the current process is pretty good, especially compared to the way these deals are managed in many other communities, where analysis is superficial, or not done at all.

For regional councils, this is a service you should consider providing for your member governments. It can be a bit of a gamble–telling a dues-paying member that it needs to stand firm on an offer to a company or risk losing money on the deal is not for the faint-hearted. But in most cases, the communities that truly want to know the benefits and costs of tax incentive agreements will be easy to work with. The others will never ask you for help.

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