Government may soon decide whether a major multinational corporation should pay no taxes on a chip-making plant planned for the Austin area, stirring concerns that economic development programs are being abused.
Samsung Semiconductor plans to build a new plant, and Austin, where it already has facilities, is on the short list. But Samsung is requesting incentives from all levels of government: a 100% property tax rebate from the city for more than 25 years, a Chapter 313 tax abatement from Manor ISD, a tax incentive package from Travis County, and possibly additional help from the state (Texas Enterprise Fund) and federal levels. The plant would represent a $17bn investment and could create nearly 2,000 jobs.
Here’s the problem: Samsung wants special tax treatments and subsidies, but we don’t know whether it would build in Austin without the incentives.
Every year, state and local governments give away billions of dollars in tax abatements, subsidies, and other government goodies to attract or keep specific businesses. However, several studies on targeted business incentives, like the ones Samsung claims it needs to pick Austin, reach an almost unanimous conclusion: They are rarely the determining factor.
First, businesses make location decisions based on a variety of factors, including the labor market, industry hubs and geographic relevance to supply chain or customers. Incentives, while they can reduce the cost of a project, are rarely at the top of the list.
Nathan Jensen, a professor at UT-Austin, has studied Chapter 313 agreements, in which Texas school districts offer tax abatements to businesses, and concluded that only about 15% of businesses that received such deals would have located elsewhere without them. Timothy Bartik, an economist at the W.E. Upjohn Institute, found that at least 75% of businesses that received incentives in the U.S. would have located where they did without them. In cases where incentives are requested and granted, but not necessary, governments lose revenues and taxpayers can bear the additional cost.
Samsung already has a large presence in Austin, which it has developed since the 1990s, investing in various ways in the area over the years. It recently bought new land next to its existing facility. Additionally, it is already under three active tax incentive agreements—one with the city of Austin, one with Travis County and one with Manor ISD.
If the argument is that property taxes in Texas are too high, the same holds true for all taxpayers—and it’s hard to understand how reducing the taxes of a select few well-connected businesses will help fix the problem—especially when the cost of providing services falls to the rest of us.
Government-directed tax breaks and subsidies do more harm than good. They create a culture in which businesses focus on seeking favors from government instead of creating value for their customers. This puts non-favored businesses at a disadvantage and often costs taxpayers money.
But what if Samsung builds elsewhere? Will it mean billions of dollars and jobs lost to Austin?
Research suggests that Samsung will seek to locate where it will be most profitable and have the best chance to succeed, which does not hinge on tax incentives. The last thing Texas should do is grant government favors to businesses that claim to need them to succeed—this would be a bad investment, if true.
To be fair, government can play a greater role in encouraging economic development by reducing regulations and lowering taxes (hint: property tax) for everyone. Minimizing the footprint of government and creating a level playing field for all is the absolute best way to attract Samsung and everyone else to Texas.