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"Economic Development:  On the Backs of Taxpayers or by Their Bootstraps?"  




Local governments are committing an ever greater share of their resources towards economic development, but do these policies make economic sense?  Join us as our panel of experts evaluates the pros and cons of local economic development in Texas.



JAMES QUINTERO  Director, Center for Local Governance

James Quintero is the director of the Center for Local Governance at the Texas Public Party Foundation.  He has been with the Foundation since March 2008.  During his time with the Foundation, his work has centered on the budget, spending, debt, taxes, transparency, and pensions.  Previously, Quintero was a Graduate Research Assistant at Texas State University, where he worked to educate students on financial aid and scholarships.  He received a B.A. in Sociology from the University of Texas at Austin and an M.P.A. with an emphasis in public finance from Texas State University.




ART MARTINEZ DE VARA Mayor of Von Ormy, Texas

Art Martinez de Vara is the mayor of Von Ormy, Texas, business attorney, historian, and publisher.  He attended the University of Texas at Austin, where he founded the internet service provider AustinNet.  In 2003, Martinez de Vara led the effort to organize the City of Von Ormy.  Elected as the town's first mayor, he was among the youngest serving Mayors in the United States.


BEN POWELL, PH.D.  Director, Free Market Institute, Texas Tech University

Dr. Benjamin Powell is the Director of the Free Market Institute at Texas Tech University and a Visiting Profession in the Rawls College of Business.  He is the North American Editor of the Review of Austrian Economics, past President of the Association of Private Enterprise Education, and a senior fellow with the Independent Institute.


BENNETT SANDLIN Executive DirectorTexas Municipal League

Bennett Sandlin is Executive Director of the Texas Municipal League (TML).  Prior to Executive Director, he was General Counsel for TML where he helped cities through issues primarily in the fields of tax, economic development, budget, and general finance.  Sandlin authored the Revenue Manual for Texas Cities, and serves as an instructor in Public Funds Investment Training.


CARLTON SCHWAB President, Texas Economic Development Council

Carlton Schwab has been President/CEO of the Texas Economic Development Council (TEDC) since 1999.  During that time, the 850-member TEDC has developed into a recognized leader in the professional development of its members and a powerful voice for economic development policy in the state of Texas.






James Quintero:


            Economic development–it's really an issue that we have not talked about at the foundation or as it relates to local governments and so I think this is going to cover a lot of new ground for us and really kind of open up a lot of new avenues.  I think most people will agree that a strong economy, robust job creation, rising incomes, these are all desirable goals these are all good public policy pursuits, but where there is less consensus is figuring out the best way to make these things come about.  Now here in Texas what we've seen is a growing number of local officials have turned to the use of economic development policies to try and create the, create an environment in which these things thrive, and so broadly speaking, economic development policies entail targeted incentives that are used in an effort to attract new jobs and new businesses to a particular area, and the use of these tools can include things like property-tax abatements or the creation of business parks or land transfers, the use of tax increment financing districts or economic development corporations.  There's a whole toolbox full of different economic development concepts, and when we look at the use of these tools in Texas, what we see is that they're becoming increasingly prevalent. 


Now according to the Texas Comptroller from 1997 to 2011 we saw the number of economic development corporations in the state grow from 336 to 697 representing roughly 106 percent increase.  On the property-tax abatement front we've seen the number of total property-tax-abatement agreements entered into by local governments grow from 758 in 2006 to roughly over 1,000 by 2011, and so the bottom line is that the use of economic development policies at the local level is growing and there is a rising trend, and so what we've done is we've asked our panel today to take a look and answer whether or not this is, whether the, the increasing use of these tools is cause for concern or whether this is something to be celebrated, and whether or not this is the right policy prescription for Texas, and so with that, let me get out of the way.  I'd like to introduce our first panelist who is Carlton Schwab, and Carlton actually is the president and CEO of Texas Economic Development Council and has been so since 1999.  During that time, the 850-member TEDC has developed into a recognized leader in the professional development of its members and a powerful voice for economic development policy in the State of Texas.  Please help me welcome Carlton Schwab. 



Carlton Schwab:        


Morning everyone.  Nice day.  No cedar fever on a day like today, right?  With James' comments, our organization represents the economic development professionals and corporations in the State of Texas, and we're the largest association of economic development professionals in the country with about 850 members, and this year is the 25th year that we've had the economic development sales tax, and I know you mentioned, the growth in the number of ED sales tax corporations in the state, up to, just under 700.  That law passed in 1989 has been the difference-maker in our state in terms of economic development because before the ED sales tax, most of our communities weren't involved in economic development in any way.  What economic development there was done in the communities and towns of the state was done by the Chambers of Commerce perhaps industrial foundations it was done in a decidedly old way, if you will. 


The ED sales tax has enabled us to compete in the very highly competitive market for jobs, and as such, it really has made a huge difference in a state as, as big and as vast as ours.  We don't have a centralized approach to economic development.  For example I used to work in the corporate site location world.  If you wanted to do a project in Georgia, you made one phone call and that was to Atlanta, and someone in Atlanta in the governor's office said okay, you're looking to build this kind of plant, for this kind of company, your sites are going to be in Athens, Augusta, Albany, I guess I can only think of the A-named towns in Georgia right, right off the top of my head, and then you went from there.  Can you imagine doing that in Texas?  It goes really against our tradition of local control and local support for, all of, most of the things that we do.  So we, we have now, since the passage of that law, this wonderful tool at the local level that if you want to have the tax and you want to be aggressive in economic development and you're in Ballinger, Texas or you're in Longview, Texas or even in Wichita Falls, Texas, you get to control your destiny there as much as, as anything.  It's on you and your community and the citizens of that community you elected officials and it's really set up quite beautifully.  Jess has written a paper about, transparency in economic development.  Well, it's, I would argue that the law, is its, could it use some tweaks?  Probably, but as it's written right now, provides a heck of a lot of transparency because the projects emanate from the boards and have to be approved by the councils and then as such move forward in their respective community. 


So, we've worked in the 25 years really, really hard on the economic development sales tax.  We owe a great deal of gratitude in our state to Governor Ratliff who was in the Senate at that time, sponsored that piece of legislation because it's enabled our communities to compete really with other states where the state might be more involved in the incentives that go into the project, whereas here we can bring to bear at the local level, based on local decision-making, what kind of incentives go into the project.  We're closer to the projects as a result and thereby I think really offer a great deal of transparency to the citizens in those communities.  So, our I guess, is that all you want from me are five minutes?  Let me just say that my, – and Bennett's going to talk about this, as well I'm sure, but from our standpoint, representing the EDCs, the ED sales tax has been a gift and for the communities that don't want it, they can always vote it out.  That's the bottom line.  If you're a community and you don't want the economic development sales tax, you think it's a waste of money, take it to the voters and vote it out.  It's been done, but if you want the sales tax and you want a strong economic development organization at the local level, then move forward with it, hire the best people, and do economic development to the best to the best of your ability at the local level, and that's again, absent a lot of state involvement at least until Governor Perry became governor, absent a lot of state involvement.  It's been a wonderful tool for the, for the citizens of our state.  Thank you. 




Good, well I'll introduce our next panelist who joins us from the Free Market Institute in Texas at Texas Tech University in Lubbock, Texas.  He is Dr. Benjamin Powell and he joins us today and, he is the North American Editor of the Review of Austrian Economics, past president of the Association of Private Enterprise Education and a senior fellow with the Independent Institute.  If you would, please help me welcome Dr. Benjamin Powell. 


Benjamin Powell:       


Well, thank you.  I'm happy to be here today to talk with you all.  This is my first time interacting with Texas Public Policy Foundation and I hope first of many more to come but just been a year in Texas now.  We just started the Free Market Institute last January.  We're adding new faculty members, doing a lot of programming in Lubbock.  We aspire to make Texas Tech one of the premiere places to do free market economics in the country and I can't imagine a better place for doing it than Tech so far.  That said, I also just spent three weeks in New England.  I literally flew in last night and immediately jumped a plane down here.  It's also nice to be back to Texas weather compared to New England.  So, I've done a lot of work on economic development.  Admittedly, most of it's not at the local level, it's at the national and state level that  I've done a lot of it, and I'd like to talk briefly about some of the lessons from that and then try to translate it back to the local level, which is the topic of our panel.  Overwhelmingly, when we look around the countries of the world, what we see is those who do best in terms of economic development are those that are the freest, the ones who interfere with their economies the least.  Not the ones who do national economic development planning.  Of course, there were some success stories if you think back to like the early Asian tigers of the Taiwans that did national economic planning, but what people miss in that often is, at the time when Taiwan, Singapore, Hong Kong for that matter, Japan, South Korea, when they were all transitioning post World War II and going from really a poverty standard of living to becoming rapidly in a generation of half of first world standard of living, there were also some of the freest economies in the world.  They developed in spite of national economic planning, not because of it, because ultimately the national economic planners don't know what industry to promote. 


How do we know what industry needs to grow?  We need market price signals.  Market price signals are entrepreneurs' evaluations of how they can take some resources that are scarce and valuable to other people, transform them into something that's more valuable.  We use profit and loss as our signal mechanism to tell us did we do a good job with this or did we muck it up.  How did the national economic planners know in advance of that process which industries are in that nation's comparative advantage or in the terms that they use often, competitive advantage?  They don't.  We need a market process to tell them, to tell us.  When they want to point to an example of the success, simply pointing out that they subsidized an industry that is later in existence does not tell you that that was a success of planning.  It is either redundant, it's an industry that could have grown anyway and been profitable, or it's actually a failure in that it couldn't have been profitable, and what they did is they subsidized it, which nothing comes for free.  It means they took resources that would have gone into other industries and pushed it into that one and as a result the thing exists. 


Korean shipbuilding actually would be a great example of this.  Every time they go to take away the subsidies, the industry starts collapsing.  This is not a success of national economic planning, and in fact, actually, when we think of some of the great growth and success stories from those countries that were practicing development planning, they grew in despite of planning.  Japan, what do we think of as the two industries that are most successful export industries of Japan.  Electronics and cars probably, right?  Sony had to ask MITI, the Ministry for International Trade, I forget the initials, MITI, for permission multiple times in order to get an export license, and the government kept saying no, this is not actually in our nation's competitive advantage.  They finally relented to Sony as a success story.  Automobiles, the ministers at MITI thought they should collapse all of the Japanese car companies into one in the 1960s.  The industry fought against it, got around it, eventually became an export success story.  The national economic planners simply do not have access to the information, and it's not that they're not smart enough, they don't have a good enough computer, it's that the competitive market process is what generates the price signals that allow us to coordinate our scarce resources. 


Absent that process working, no planner, whether in socialist countries, in capitalistic countries, no planner has access to that information.  So how does this translate around as we look at the world in terms of economic development standards then?  We have something called the Economic Freedom of the World Annual Report, and it basically measures how governments interfere with their economies across kind of five broad areas:  The size of government, how well they protect property rights, your freedom to trade internationally, the degree of regulation, and how sound your monetary unit is.  What we find is overwhelmingly countries that are freer have higher standards of living, grow faster and basically actually outperform other countries on almost any margin we care about, be it literacy, be it infant mortality be, actually standards of living of the poor, so in the administration in Washington now is increasingly becoming popular to talk about inequality.  What we find across the countries actually inequality varies very little depending how free market vs. socialist you are.  It's pretty constant across the four.  What matters tremendously is how well do the poor live.  The poor is 10 percent of the population in very free countries, has a per capita income of around $11,000.00.  Drop down just to the next 25 percentile and that income drops to about $3,000.00.  Go to the least free countries and that's under $1,000.00.  Basically the poor do much better in more free countries. 


All right, let's leave the national level and come to the U.S. level between states.  The same problem that confronts planners on the national level confront, confronts them on the state level.  The planners in Texas, for the planners in Oklahoma know better, know what industry their state needs than the planners in Taiwan do.  And when we look across U.S. states we can measure the degree of government interference in those economies.  Happily, quite happily as I'm standing here in Texas, we are one of the freest states in the United States.  That is why Texas does so well or one of the main reasons why Texas is doing so well.  As measured by these indexes Texas is either the second or I think fifth depending which index you're using freest state in the United States.  Delaware comes in first, by the way.  No accident that you see so many Delaware corporations when people get to choose where to incorporate.  It's because they're free.  Not because they have great state development planners that attract the right corporations to Delaware.  That's not it at all.  They have low corporate tax rates, low overall burden of government and corporations come there.  Texas is experiencing much of the same.  So what then about the local level? 


My message might not be particularly appealing to some of you as I know much of this audience is staffers here in the state who your job is essentially to try to do something, but my message to you is give nothing a chance.  The less you do in terms of conscious development policy probably the better.  Provide an environment of low taxes, secure property rights.  So actually you want a development policy at the local level?  Pass restrictions against eminent domain.  Do not allow seizures of property.  That's a big one post-Kelo the way that economic, the eminent domain has been used in the United States and that, it's not just post-Kelo.  Actually it may go back to Poletown in Michigan, that thing's been going on for 50 years.  Kelo is not an anomaly.  It just was, caught a lot of attention.  Eminent domain for economic development is inefficient and I would also add on a, a moral level evil.  If you want to do something for economic development outlaw it and make sure your communities don't practice it because your development planners can't see someone's property and know that they have a higher and better use.  Incidentally by the way, the Kelo decision that's, of course, in New London, Connecticut, and it was seizing Susan Kelo's property among other people's property in order to plan a shopping mall for economic development because the justification was higher tax revenue would go to the community that's going to be the public purpose of this.  Do you know what became of that? 

A vacant lot.


It's a vacant lot.  Actually Reason did a great little thing where they showed a, I think the title was how to turn a nice neighborhood into a dump because when the hurricane came up the east coast two years ago it was the storm dump for the city as they put all the debris where they had seized Susan Kelo's property before.  So get rid of eminent domain.  But more generally, keep your taxes low, secure people and property rights, and let when businesses have a natural competitive advantage to come to your area do it.  You don't have a free gift in terms of the economic development tax.  It's not a gift.  It's stealing from some members of your community to give welfare to other members of your community.  That necessarily means discouraging some businesses at the cost of subsidizing others.  Unless you can solve the knowledge problem of which industries are the best for your community, which incidentally you can't, we've got something called a socialist calculation debate in economic theory that happened nearly 100 years ago now that says you can't solve this, then what you're doing is basically blindly interfering with the plans of some to promote your own agenda.  That's not economic development.  Whether it's stadiums for sports or your favorite shopping mall or bringing Wal-Mart to town or discouraging Wal-Mart from coming to town, that's not economic development.  It's just blind interference with the economy.  You want development, whether it be at the national level, the state level or the local level.  Provide a good environment for entrepreneurs to work in, development will follow.  Thank you.




Give nothing a chance.  Ben, I think I'm going to, I might borrow that a time or two.  Our next speaker, though we may not always agree, our next speaker brings a wealth of knowledge and experience.  Bennett Sandlin is the executive director of the Texas Municipal League.  Prior to being executive director he was the general counsel for TML where he helped cities through issues primarily in the fields of tax, economic development, budget and general public finance.  Mr. Sandlin also authored the Revenue Manual for Texas Cities and serves as an instructor in the Public Funds Investment Training Program.  Please help me welcome Bennett Sandlin.


Bennett Sandlin:        


Good morning.  Thank you for that introduction and thank you for coming to listen to this panel today.  You know, economic development when I saw the title of this topic I was very intrigued.  Is it on the backs of taxpayers?  That's a very, very valid question.  I speak to newly elected Texas city council members and mayors every year on the topic of economic development and the very first thing I tell them is I guarantee you everyone in this room did not get elected to engage in economic development.  In fact, half the folks in that room are opposed to the idea and I'm good with that.  I'm not here today to advocate for local or state-level economic development, but I am here to talk about why it might make sense if that's right for the city, in other words local control, or right for the county, which I think can be a valid topic if it's up your alley. 


Let me give you kind of a case study and I'm going to give you the worst-case scenario.  You know what I hear, when I hear about economic development critics they say it's a giveaway.  We're giving away public resources and I'm very open to that argument.  I think it can be a giveaway.  Let me tell you a story of one time.  I had a, I won't tell you which city member it was, but I had a city official call me and say we've got this new manufacturing facility in town, they've already broken ground, it's a done deal, they're building this facility and it dawned on us that we were going to give this facility a tax abatement but we just forgot to do it and they're here anyway and the question is, Bennett, is it too late to give them a tax abatement and I scratched my head and I said oh my gosh, this is trouble.  Of course it's too late.  They're already there.  That's the whole point.  The first lesson of economic development from a, from a local level that we teach is what I call the but-for test.  But for the incentive that you're thinking about giving is that business already coming to Von Ormy, Texas or to Seguin, Texas or to Texas in general and if the answer is yes you've got no business engaging in any kind of local incentive.  It makes no sense.  The whole point of economic development is incentivization for something that was not going to happen in the first place. 


Now if you take kind of a broad libertarian perspective you might say even under that scenario you should never incentivize business from a state-to-state basis or from a nation-to-nation basis.  I can't argue with that too much if that's your philosophy, but I do think that in some cases it's right to compete with other states.  I think it's certainly right to compete with Mexico and Canada and other countries and here's the case.  The, sort of the poster child of economic development is the Caterpillar manufacturing facility that came to Seguin, Texas, about five years ago.



Caterpillar was looking to build one new plant.  Caterpillar's not like a Wal-Mart.  They don't open 30 stores a year or 100 stores a year.  They build one new manufacturing facility a decade or, or less frequently and they had not only numerous states in the United States in mind, they had several countries in mind.  Mexico was in the mix, Canada was in the mix, United States was in the mix.  They're going to build one facility.  So naturally Texas and Texas cities were interested in attracting Caterpillar, and so this sort of puts it in perspective.  Is it proper in that perspective to say as Texans we're going to compete for that facility knowing there's only one?  It's not a fungible good.  There's not going to be multiple facilities.  Some city officials happen to believe it is and for them that's what economic development is about.  So let's take the incentive that probably gets the most criticism and that's tax abatement.  When I talk to city officials the first thing that comes to their mind is a giveaway.  I'm never going to give a tax abatement because I'm going to get criticized for giving away tax dollars.  I'm going to walk you through that process.  I may convince you, I may not convince you, but at least I'll tell you kind of how to, how that incentive works and, and put it in perspective of attracting a Caterpillar to Seguin or a Toyota manufacturing facility in San Antonio. 


The way tax abatement works is this.  If you're going to attract a manufacturing facility what kind of land is it, is Caterpillar looking for?  Are they looking for a big subdivision that they're going to raise?  Are they looking for the city to engage in eminent domain and tear down other facilities?  Probably not.  You're, those, those organizations are looking for empty land.  They're looking probably for ag-exempt land.  It's probably 500-plus acres that they're going to purchase and put one of these manufacturing facilities on.  So what Caterpillar does is they identify sites and different places.  They identify a site in Seguin, they identify a site in Seattle, site in Mexico and so forth.  How much taxes, property taxes do you think are being paid on a piece of ag-exempt land in Seguin, Texas, even 500 acres?  Miniscule.  Probably $5,000.00 of city property taxes.  Just tiny little fraction. 


Here's the way tax abatement works.  If Caterpillar decides to come to Seguin, Seguin gives a tax abatement, Caterpillar is forgiven or, or is not required to pay increased taxes on that land for up to ten years.  People think about a giveaway.  Well, let's walk through it.  If Caterpillar builds that plant which they did and they did get a tax abatement, they are still required to pay the underlying property taxes that the former owner were paid.  Tax abatement cannot forgive what we call the baseline tax burden.  So right away Seguin and the county that Seguin's in and the school district are still getting 100 percent of the property taxes it was getting before Caterpillar came.  What tax abatement does it forgives the increased taxes.  What, how, what happens to the value of that land after Caterpillar finishes its facility?  It goes up to $50 million.  I'm just making up a number.  So for ten years Caterpillar doesn't have to pay the property taxes, but only on the increase.  Then what happens at the end of ten years?  It all goes back on the rolls forever and ever.  You can never again give a tax abatement on that piece of land.  It's 100 percent on the rolls.  So backing up to my but-for test, what I tell city officials is you've got to do your due diligence.  You've got to convince yourself that but for this incentive Caterpillar's going to Monterey, Mexico.  But for this incentive Caterpillar's going to Ontario, Canada.  You've got to do that.  It's tough.  You've got to hire professionals, you've got to have people that know more than you do about the business climate, about site selection and so forth and if you answer the question yes, but for this incentive they're not coming to Seguin, then are you really giving away something you never had? 


If Caterpillar goes to Ontario what's going to happen to that piece of ag-exempt land?  Is, are other manufacturing facilities lining up out the door to move into Seguin, Texas?  Probably not.  It might sit fallow for the next 50 years.  It'll remain a farm and the jobs won't be there.  So if you answer that question correctly, if you say to yourself the incentive is necessary to get this plant here and not go to Monterey, Mexico, we're still going to get the same property taxes we were, we're just postponing the new economic development for five, ten years, whatever the term of the agreement.  You're really not giving away property taxes because you never had them in the first place.  They weren't coming to your town.  So that's the message I preach.  I still say at the end of that scenario it's not a city official's job to engage in economic development.  I don't encourage that.  I just present the sort of the framework for how these incentives work and that's the worst-case scenario.  Property tax abatement is the most unpopular of all the abatement, of all the tax incentives but I think there's a case to be made for that. 


One of the other, criticisms we hear is about land.  Texas is rich in land, but poor in other aspects in some cases and cities I represent, every city in Texas and probably even the newest cities, you'll hear from Von Ormy in a minute have numerous parcels of land that is unused.  Every one of those pieces of land could be used for attracting a business if possible.  What's interesting in Texas and I'll just throw this out there our legislature made it very difficult for cities to donate city-owned land to a business prospect and maybe there's something to that.  We are an oil and gas state and Texas land is paramount.  So what you don't see a lot of in Texas and I appreciate the doctor's comments, you don't see economic development eminent domain in Texas (a) it's illegal after the Kelo decision, but even prior to that it's very rare if ever that cities engaged in, in commercial and manufacturing economic development.  They have the opposite problem.  They have acres and acres of empty land that if they could give it away and on each one a Caterpillar plant is, plops down or a Toyota plant plops down they would do so, but interestingly our, our laws don't even permit that under current organizations. 


So I'm here today to tell you I'm not an advocate for economic development.  I think it's an issue of local control, but I think if it is something that a city or a county or a state wants to engage in, and by the way the Seguin story was not just the city, it was the city, it was the county, it was the school district and it was the governor's office that made that plant happen and you say, well, what's the end result of this.  Is it to create tax money?  No.  It's not.  Seguin wasn't interested in the property taxes so much as they were interested in the jobs. 


Think about how many jobs the Caterpillar manufacturing facility creates and they're permanent.  That facility can't be packed up and moved somewhere.  It's going to be there for the next 50 to 100 years at least.  It's good for the state and if you believe in competition amongst states and nations then economic development is in the mix.  If you don't believe in that, if you take more of a kind of libertarian point of view I probably don't have much for you today.  I appreciate that view and I'm not antagonistic towards it at all.  It makes a lot of sense.  But if you think that Texas ought to compete for certain limited manufacturing facilities and other things where there's not a fungible amount of them like a Wal-Mart or a, or something like that then I think there's a case to be made for wise economic development provided you follow that but-for test and that's what we teach city officials at, at our organization.  Thank you for your attention.




Very good.  Thank you, Bennett.  Our next speaker actually is a bit of a case study in the use of economic development but in a little bit more of a natural way.  Our next speaker is Mayor Art Martinez and he is the newly elected mayor of Von Ormy, Texas, a very unique city here about a little south of San  Antonio.  He's also a business attorney, a historian, publisher.  He attended the University of Texas at Austin, a fellow Longhorn, where he founded the Internet service provider Austin.net.  In 2003 the mayor led an effort to organize the City of Von Ormy and was quite successful.  He's the town's first mayor and among the youngest serving mayors in the United States.  Please help me welcome Mayor Art Martinez.




Good morning, everyone. 


Von Ormy is a, is a very unique city is a, as Mr. Quintero mentioned.  We're a suburb of San Antonio, southwest of San Antonio.  If you're familiar with San Antonio, we're on I-35 and Loop 1604, but on the southwest side, the part that most people don't go to.  If you're on the way to Laredo, it's the first town once you leave San Antonio.  I'm a sixth-generation Von Ormian.  We grew up there.  That's my hometown.  When we talk about economic development, it's important to understand and I think it's plainly obvious that every community is unique in its circumstances as far as where to locate it the city that it competes with on a very micro level or the ones that surround it, and for a lot of suburban and small towns such as ours we compete against large metropolitan areas, in our case the City of San Antonio, who have from our perspective an infinite amount of resources.  They could drop more money on an economic development project than we have in our entire city budget and so we had to take a very different approach to economic development in order to stimulate the tax base in our city and so we took a very minimalist approach.  We decided that there was no way we could compete on that level of dealing tax incentives and abatements so we set up a city where we have a public goal, we haven't got there yet, of zero property taxes but we've cut taxes, property taxes 10 percent each year for the last four years.  We have zero costs permitting, every permit in the city is free and we decided to structurally compete with San Antonio. 


 We've had a very large amount of success.  If we can go to the first slide, which is a video.  I don't know if you tap on it if it'll work.  There.  Yeah.  The first one it's actually, this is actually a campaign ad, so it's used as a political propaganda aspect, but I had no opponent.  I don't know if they're going to work.  If not, well, we'll skip over it, but it's a little introduction to the city.  I don't know if you just, just tap on the screen, hit play, I don't know if that's going to work.  That's fine, we'll skip over it.  This won't work.  Well, no political propaganda today.  Well, let me get back to Von Ormy.  Here we are Von Ormy.  That big highway in the middle is I-35.  We're 1,350 residents.  We're, we're now about 2.2 square miles through voluntary annexation.  We're the most Hispanic city in Bexar County 89.6 percent 57 percent speak Spanish in the household and our average drive time to work is 40 minutes.  There's not a lot of jobs in our town.  Get the next slide. 



Our community was very, or is very underdeveloped compared to the other intersection of I-35 and 1604.  If you look at the over here on your, I guess it'd be on your, on your right, is the north side of I-35 and 1604, fully developed around the Town of Live Oak.  The main difference is sewer and infrastructure and those types of things.  Von Ormy is primarily agricultural.  So we decided to go approach things differently when we formed our city which was in 2008.  We did zero cost permitting.  We eliminated some of these sales taxes that San Antonio imposes on its outer areas but doesn't provide service to it, the example being Villa which is the public transportation there's no buses that go out in the rural areas, but we still pay taxes on it or we used to pay taxes on it.  We decided to set up a, the most minimal regulatory environment that we could.  We spoke with some of our, um some of the large manufacturers that, that were near us and one of their main complaints with San Antonio was the time it took in order to get things processed.  They were saying things such as six and seven months and the, the cost of the delays were quite enormous. 


We run a virtual city hall.  There's no physical city hall.  We got a web site.  We're small enough if you need something we'll just go deliver it to your house.  Everyone's got the mayor's cell phone.  There's no need for, for that kind of infrastructure.  We took a, I was a volunteer firefighter before I was mayor.  It's one of the things everyone kinda does out in the country.  So we took that same model.  We have a reser- a city marshal's office and we have 25 officers, we have a paid marshal and 24 reserve officers that are volunteer, instead of a police department.  Compare that to one of our neighbors China Grove, similar size, similar budget, they have two officers for their city.  We have 25.  We're able to expand that.  We equip them, we train them and typically we have one retired guy who wants to do traffic patrol and we have a rookie who can't get job, we pair 'em together, works out pretty well. 


And another example is animal control which was one of the big issues in rural areas we partnered with the, this, yeah, a long line of, probably more people than in this room that would sign up as far as animal lovers and animal rights groups and so we partnered with some non-profit rescues and they function a no-kill animal shelter for the city which have, and we have a no-kill rate of like 85 or something like that which I hear is extremely high.  So, again as a brand new city we also have the additional burdens of setting up entire city services but also the advantage of not having any kind of legacy costs or legacy structures and so these are some of the things we put in.  We can skip over that but it's all your standard, city services and we also went about it, again, we have a, I guess a libertarian, I don't think people call themselves that they just call themselves country folk, whatever, but we're the only city in Bexar County that allows fireworks, we have no gun restrictions.  We had a nice constitutional showdown over a nighttime curfew which was fantastic.  One of our council members asked for a nighttime curfew like every other city in, in Bexar County and we had a nice discussion of the right to, constitutional right to travel.  Everything we had a, some high school kids even come in and explain how the slave codes were based upon restrictions of travel and that went down in flames, so we have no nighttime curfews.  One of the few places you can smoke a cigar, drink an oversize soda.  No fees for planning and subdivision which is a big, a big draw into our city, no fees for building permits.  Our most recent new business is a Pilot truck stop, one of those mega truck stops with the Subway and they paid a total of $50.00 in fees to build that.  It was, they needed a, they wanted a sign variance for their sign and when that occurred we didn't realize we actually had a fee for a sign variance and we repealed it, but they did pay the $50.00 and there's no fees for things like dog tags or whatever.  One of the little things that our residents like to call themselves is the freest little city in Texas.  Next slide. 


We also do zero-based budgeting.  We reevaluate our departments each budget cycle based upon what we utilize, what we need.  We were able to save a lot again by getting volunteers for a lot of our departments.  We consistently go under budget.  Again, we one of the videos that you would have seen is on KSAT-12 was an explanation of how the city operates using volunteers and it saves quite a bit of money.  We have no long-term debt.  We all, we pass all of our audits.  That's more of our residents there.  And we said some of that.  We'll go to the next slide.  This is the results of our minimalist approach to economic development I almost said minimal regulation.  These are our sales tax receipts.  You can see increasing dramatically over the last few years primarily due to sales-tax producing businesses moving into our community.  I know prior we talked about let the natural businesses come in into your area.  We're a corridor city on I-35.  The Pilot that I mentioned before was actually going to locate a couple exits down and San Antonio is actually a territorial jurisdiction, but then when they learned about our regulatory environment they said they saved approximately $50,000.00 in just construction costs and all of that and so they located on our exit instead of two exits down. 


So our sales tax revenue was up 45 percent this year and some of that's due to the oil boom and more people traveling down that highway, but also we have more locations to gather sales tax revenue and 260 percent since we really started.  And this is the result of our property tax valuation.  Again, we started our city with a goal of eliminating property taxes.  I don't like paying taxes, no one in our city likes paying property taxes and in rural areas in particular you have a lot of folks on fixed incomes who have inherited land or agricultural land and property taxes the, is the sole threat to continue home ownership so we see it as invasive.  Hopefully we'll get there in the next couple of years but each year that we actualize an increase in consumption taxes we in turn, reduce property taxes to reflect that.  And here's an example of what we've been able to accomplish again with the full fleet of municipal services.  It's not really fair to compare us to San Antonio because there are a million people but their tax rate.  If you look at their, their I&S rates for all their buy, long-term debt, but in more realistic are the other suburban cities  of our size and composition and still there Somerset and Poteet, again operating on a borrow and spend methodology with very high property tax rates in addition to the same sales tax rates that we have, the full 2 percent. 


And you know, we've been no, we've been getting noticed in the media um quite a bit about our, our, our approach to municipal finances.  I know we've had some other communities near us bring it up.  We have the City of Sandy Oaks.  I think they're going to incorporate in May inspired by us.  We have the City of Savannah which is on the Bexar County **** border, and I think people are starting to realize that there are other ways to go about city finances that doesn't place a heavy burden on the on the property owner, and, you can do things a little bit more smartly.  I know a lot of people ask us where did we get this.  Well we didn't have one professional city planner or one MPA in the entire city you know, it was very organic, very much a grassroots effort to come together and start developing our community after a century of being ignored by San Antonio and Bexar County and I think a little commonsense goes a long way.  Thank you very much.




I'm always delighted to hear about success stories like Von Ormy.  I think they paint such a great picture of the power of free market.  Well, the next part I'd like to include in our presentations an, an opportunity for the panelists to ask questions among themselves, so with that said, let me, let me open up the floor to the panelists.  If y'all have any questions among yourselves that you'd like to pose, please take this this opportunity now.




Sure.  I'll make this a question by saying don't you agree at the end or something like that.  But it's, it's more a reaction actually to the two presentations that came after mine particular, particularly with Mr. Sandlin and I imagine many people through there was a big contradiction between our message and I actually think it's less pronounced than what it probably sounded like because taxes are distortionary.  They stop businesses from locating in places where they should locate and why you would raise taxes because Caterpillar locates in a place that's agricultural farmland to me is probably insane unless you can justify it by the extra cost of subsidy of servicing that business in your community.  So an abatement on that does not amount to planning.  It amounts to not distorting the economy and letting firms come there that should come there.  Where the message would be slightly tweaked actually comes in from our last presentation from the mayor is the less servicing your city does of businesses, new residents or anything the better because then your tax rate can be overall lower and instead of picking whether we want Caterpillar or somebody else you should have that base low, low property tax, ideally zero or at least zero incremental for everybody and if that's the case you'll get the businesses to locate there that should be because the mayor didn't know whether Pilot should be there or Subway or Gulf or whoever and if you provide that right environment the right ones will, they'll come there.  But the majority of the message I actually think is consistent just get the rate low for everybody so your taxes don't distort.  Don't you agree?




I do agree with that for the most part.  I think that at the city level we're not advocates for one type of tax or another.  Texas for one, some reason has chosen sales and property tax to be sort of the two-legged stool and for that reason both of those tend to be average or slightly higher than nationwide and what we don't have in Texas is an income tax, so we have that advantage.  I think most city officials if the state legislature said we were going to swap out your, one for the other and pay for police and fire and roads that way they'd be fairly agnostic about that, so I don't disagree with that as a general premise.  Property taxes are at the city level actually are quite low.  The average city property tax is $.50 but Von Ormy's doing a good job at $.25.  The $.50 is just a fraction of what the state charges to finance schools, so we give you police, fire, roads and sewer for less than half the cost and when I say state, I think schools are a state obligation under the Constitution, so I consider it a state tax.  We're pretty good bang for your buck at the city level, so, but I don't disagree with, with that statement.  What type of tax you have is not really a city prerogative.  That comes to us from the state, so I know that this institute this group supports a fairly broad consumption tax, a switch.  That's worth looking at.  You're not going to get opposition from cities.  We still have to pay the police officers and the fire, so if you want to tinker with tax makeup we're open to that prospect.  We don't have any argument about that, but what we have now is property taxes and you got to go with what you got.





I would, I would agree with you, Professor Powell, with, and with Bennett's com- comments about what for.  But here's the real question.  Are we willing to lose Caterpillar?  Are local officials and state officials in this state willing to lose Caterpillar, because the way the site location process works when we in the State of Texas know that Caterpillar's looking at Seguin and at that point in time they're looking at three or four other locations on the planet and Caterpillar has determined at that point in time they can make money in Seguin, Texas, okay.  But they can also make money on that plant in Alabama, in Monterey, Mexico, or as Bennett threw out, Ontario, Canada.  Those places may not be playing our game of let's lower our taxes and if they need to be, if they want to be here or need to be here they're going to come.  They're going to write checks at that point in time or offer inducements for those comp-, are we willing to lose those projects?  That's the question.  Most city officials, most state officials aren't willing to lose projects when, when we get that close to them.  That's the question I ask you all.


Next Speaker:


I guess the question I would ask is, is why would a city or why should a city prefer Caterpillar over an agricultural business?  I think when we, when we look at the institution of property taxation, it, it's, it's, it comes out of an era of the state post-Civil War where the common medium of wealth was land ownership and so that was I guess at the time considered the most equitable way to tax.  I think in 2014, the most common medium of wealth is consumption and so that's where you get some of these anomalies of preferring a Caterpillar because it produces property taxation over an agricultural business and our community is three quarters ag-exempt, which we don't mind.  We have 30 agricultural workers eat lunch at our restaurants just like 30 Caterpillar workers would be and so I think at some point we need to reevaluate, the imbalance or we need to modernize or the way we go about trying to most equitably tax the residents of Texas.  And it's not through property taxes.




So I think that's great and, but keeping in mind, but my previous response, but we don't want our taxes, taxes to distort and drive away a business, so ideally like your city has done actually lowering it for everybody so you, you get the right ones in there.  With that said, if we're doing that would we be willing to, to use your phrase, to lose Caterpillar or anybody else.  I would say we win when we lose.  So indulge me as an academic for a little thought experiment here.  Let's use France, of course, as an example since they're socialist and evil.  Since they subsidize Airbus to make planes.  They sub – let's imagine though that they subsidize not just Airbus but every company that could possibly locate in say Austin, Texas and we've already given them a low property tax regime here, so we're not distorting them away and now France is saying we're going to subsidize you so much that you'll come and you'll make Caterpillar in France, you'll make all these other things in France and then you'll export it back to the United States.  What they're doing is they're stealing money from some French people to give it to people who are going to give us products.  Imagine they did that with every product we consume, wouldn't that be cool?  All of us would not have to work, we would get all the products for free.  We win.  Now, let's say no, we don't want that, we are going to steal money from each other in order to make Caterpillar come here and give them a subsidy.  No, we're losing when we do that.  The same is true on the margin as in the limit in the thought experiment.  So when someone else actually forces resources away from some people to others, and this isn't a libertarian ideological point, it's about an economic efficiency development point.  What you've done is distort development and actually retard your standard of living, not grow it, so we win when we lose.




Why don't we open it up for audience questions.  Uh yes, sir.


Next Speaker:


First of all a quick comment to the mayor.  Don't quit (unintelligible.)


Next Speaker:


But the thing that the but-for addressing that, it's a great example, and I'm happy for Seguin that they got the Caterpillar plant, but I've watched it in their neighbor, New Braunfels who would make a deal, to cut a deal to bring the biggest filling station, don't need to name their name, you probably know it, in the entire nation, entire world to New Braunfels where a friend of mine owned 13 filling stations in the same town got no break and that's what I'm saying.  It's the abuse of power when cities get it that becomes the concern, where you take a power, that large power plant and then they make a very lucrative deal to a big Austin developer to come make it into an apartment locator where it competes with everybody else that doesn't get the break and that's the thing that I think Professor Powell's point now is that it's great when you point out the but-for Caterpillar, but for 99 percent of the time it's go, it is taking money out of the pockets of the rest of the residents to do something that's already going to happen in Texas somewhere.  You know, they weren't going to put that filling station in Mexico.




Well, there's a, there's a huge difference between a Caterpillar job and Bucky's job.


Next Speaker:






Yeah and, I agree with you.  I don't think we should make, this is where the professor and I would agree wholeheartedly.  I don't think we should be incentivizing any retail, okay.  Retail actually operates in the freest of markets, in a more free market than the Caterpillars of the world I would argue.  I'm not a professor.  He could, he'll probably shoot me down on that, but retail locates its, the location decisions that they make and I, when I include retail I include restaurants, I include filling stations, I include the Wal-Marts and the Targets of the world, they locate based on rooftops, household income, disposable income.  They just don't Wal-Marts don't make mistakes.  They know where they need to be.  So when we incentivize them I think that's where we're really in trouble and it, and I don't know, there's a web site, I can't remember, I think it's Good Jobs First which is a little to the left of I think, most of the folks in this room, but they make the same argument.  Why are we giving Wal-Mart, I think the wealthiest corporation in the world, maybe with the old boom Exxon’s passed them again, why are we giving them billions in incentives?  That's a, that's a completely legitimate question in my mind.  So I couldn't agree – listen, I was born in New Braunfels.  There's a lot that if you notice right there on 35 next to Bucky's the, filling stations across the street not getting any business anymore and you're right, they didn't get any incentives to locate, right there at the corner of 306 and 35.




Yes, sir.


Next Speaker:


My question is for the mayor.  First things first, it's just really refreshing to hear an elected official with that sort of, an approach to economic growth as opposed to economic development and I notice that that was a subtle kind of difference there that I think we would be all well served by.  My question for you is, being in Bexar County, I'm going to resist the temptation to ask if the mayor of San Antonio has tried to break your legs over this, but to what degree has what your town has done had a spillover effect and influenced or restrained the amount of shenanigans that your neighbors are able to pull off because if they try to pull too much of this kind of central planning shenanigans business owners can move to your town?



Well, I think it has had a, it has diffused into the neighboring communities.  I wasn't present but I heard a story recently that Lytle which is I think the next town south of us on I-35, they were proposing a tax increase and one of the residents came to the council meeting and said, well, Von Ormy's cutting theirs and he got cut off real quick by the major who said, well, we're not Von Ormy.  But it is, we've got a city newspaper that kind of chronicles and kind of what we do and it's interesting we talk about, a lot of times we talk about public policy with regard to party.  We had an interesting debate just the past year where our democratic precinct chair was one of the council members and he got into a heated debate with one of our republican precinct chairs also on the council over how much to cut taxes.  He said we didn't cut enough and I had one of those moments where I had to stop the council meeting and I was like hallelujah, everyone's working together towards the same goal.  So it has changed the public discourse. 


As far as San Antonio goes, San, suburban cities are often we don't have all the tools of economic growth or development mainly utilities.  Our electricity, our sewer, our water all comes, is controlled by the City of San Antonio and where we see them working against us is where they take our utility rates or the rates that we pay, put it into their general fund and they use it against us when it comes to economic development.  Case in point being with the oil booms Halliburton Weatherford, Slumber J, all those big companies, prefer to locate in south Bexar County closer to oil fields but away from the traffic and all of that in San Antonio and each of those three two located, one located in Von Ormy, two located in Elmendorf were all pulled aside by San Antonio and offered more incentives to move into San Antonio and utility incentives and again one of the complaints we have is that if they're going to be a regional utility provider they need to use, utilize those resources on a regional level, which they don't.  They use them against us.  So we're looking at ways to form our own water supply and sewer is just a bigger project than we can chew ri-, right now.