San Marcos Mercury | Local News from San Marcos and Hays County, Texas

December 8th, 2008
Freethought San Marcos: The magical thinking of development incentives

Freethought San Marcos: A Column
By LAMAR HANKINS
Mercury Columnist

For many years, many years ago, I worked for a crafty Aggie who made a significant amount of money in several businesses. He was the first person that I ever heard say that there are three factors in deciding where to locate a business: the first factor is location, the second is location, and the third is location.

For the past 20 years, I have marveled at the decision to give development incentives to the first outlet mall to open in San Marcos. Apparently, it did not occur to our city councilmembers back then that the reason that outlet mall wanted to locate on Interstate-35 near Centerpoint Road was because of its location. After the city council approved development incentives for the project, a petition was circulated forcing a vote by the people on the issue.  By the time the vote occurred, the project was nearly complete, yet the voters gave the developer the incentives first agreed to by the city council in spite of the obvious intent of the project developers to locate it where it has been ever since.

To me, this was proof positive that you can fool most of the people some of the time.  I’ve tried to learn as much as possible about business location decisions since then.

Normally, a site location consultant for the business does research to determine what factors are important to the company and then identifies locales that meet the selection criteria. That list may include from fifteen to a hundred communities if the project is a large one, or half a dozen for a medium-sized project, according to noted relocation consultant Robert Ady. The consultant then develops cost models for each locale, projecting costs for the operation of the business for a ten- to twenty-year period, much longer than economic incentives normally last.

After feedback from the company, the list may be narrowed down to three to five locales. Only then does the consultant begin visiting the locales to gather more information, including contacts with economic development groups in each locale. And only then does consideration of economic incentives begin.

The Cato Institute, a libertarian-founded, nonpartisan think-tank, reports that businesses usually make their location decisions in private and then negotiate for the best deals in incentives, pitting locales against one another. At this point, the prospective city is highly vulnerable in the economic incentive process because it does not know what the prospective company must receive to locate in the community. City officials are at a decided disadvantage when negotiations begin, not only from a lack of information about the company’s real needs, but also because all the big players in the economic incentives process at the local level labor under the false assumption that economic incentives are of the utmost importance in luring the company to that community.

Eight hundred corporate real estate executives and economic developers, surveyed in 1993 by the International Association of Corporate Real Estate Executives and the American Economic Development Council, rated economic incentives as 14th among 17 factors important to the site selection process.  In a 1996 report, the Cato Institute points out that “only 23 percent indicated that incentives played an ‘important’ role” in the location decision. These results are consistent with other surveys reported by Cato.

The pressures to give more and more to get a company to relocate to San Marcos come from political concerns faced by council members who want to have financial support from business leaders when they are up for reelection, and from the organized business community (the two chambers of commerce and Economic Development San Marcos), many members of which stand to gain financially from having the new company relocate to San Marcos. They have real estate to sell, buildings to build, building components to sell, furnishings to supply, maintenance items and services to sell, etc.

Vendors of every sort have financial incentives to bring more businesses into the community. But these opportunities do not exist so directly for the average San Marcos citizen.

Aside from such conflict considerations, however, is the fact that the only reason the company’s consultant has contacted economic development officials in San Marcos is that San Marcos has been identified as a profitable location for the company, one that has all the ingredients that will make the company successful. At this point the negotiation strategy for the company becomes very simple according to Dennis Donovan, a prominent site location consultant. He suggests that pitting communities against one another is the best and simplest approach.

The consultant doesn’t have to reveal the names of the other communities that the company is considering. Because whatever the consultant says about the incentives being offered can’t be verified, the city is at a disadvantage. The economic incentives system is clearly rigged in favor of the company.

Several years ago, Time Magazine, hardly an anti-business publication, did a series of reports concluding that development incentives are almost never worth the public money that they cost local and state governments, making them one of the biggest legal scams ever perpetrated on the taxpayer. Mere politicians can’t withstand the political heat to oppose the pressures to offer more and more incentives. After all, the incentives are promoted by some of the most upstanding citizens in the community, the sort of people who win awards for good citizenship given by the same groups that promote the development incentives.

But the worst thing about development incentives is that they are promoted without the ability of government officials to verify the claims made for them. The outlet malls would have been built here without incentives. We know this because the incentives were not finally approved until after the first mall was nearly complete.

The promoters of development incentives engage in magical thinking and invite each of us to accept such thinking at face value. It is magical because it has to be accepted on faith that it is true. It has become the new religion of the business class.

My undergraduate economics professor used to teach that the free market made this country great. Now, he would have to talk about the subsidized market, which is not a sign of greatness at all. More importantly, we have 25 years of studies by economists which, taken together, fail to show that development incentives are effective in attracting new businesses that will provide permanent, living-wage jobs to local citizens.

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6 thoughts on “Freethought San Marcos: The magical thinking of development incentives

  1. That’s what I’ve been thinkin’.
    Best write up on this racket I’ve ever read. Thank you.
    Follow the money.

  2. Well done, Lamar. Our elected officials will always be at a disadvantage when they try to negotiate with big business. Hopefully they’ll swallow their hubris and start doing their homework before gambling with our money.

  3. If the City of San Marcos was really interested in attracting business and helping the citizenry at the same time, it would be possible for the City to eliminate almost all collected property tax and fully function on sales tax. Eventually, the bonds would be paid off and the tax could be eliminated altogether. The economy would boom and new business would be attracted due solely to the new “incentive” that ALL property owners enjoy. However, many elected leaders wish to put up the road blocks and call the City closed for business. http://www.cityofstafford.com/home/welcome.htm.

  4. Dang, talk about necroposting. I was afraid for a minute that this column was being published again…..

  5. Lamar is correct! The strip mall that has Target, Penneys, and all of the shops that moved from Springtown was recently sold; The City had to re-validate the incentive agreements. If we want to stress retention of businesses for our public investment, as it should be, and to keep the dollars in circulation here longer….. What about Ed Bolten, who sits as chair of the San Marcos Economic Development Committee, getting incentives for his medical tech company and then moving from San Marcos to New Braunfels? Thanks Ed!

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