Tuesday, May 26, 2015

Sweet Jesus, $47 Million? - ctd

Some people's view of the world is black and white and isn't troubled by the complexities of a case like this. Not me. My head hurts thinking about all the angles to this deal. I start with Eric Nicholson's reaction: "Sweet Jesus, $47 million?" But I end up torn. It might not be the best deal Richardson could have swung. But it might not be such a bad deal, either. I'm sorry if you've read this far and are disappointed in that wishy washy answer.
Source: The Wheel.
That's what I wrote when I first covered the topic of the $47 million tax rebate Richardson granted to the developer of Palisades. I'm back to make up for my wishy washy answer.

My earlier answer was premised on the assumption that we agreed on the value of offering selective economic incentives for the right projects and that Palisades was one of the right projects. I was interested in the follow-up question: did we pay too much?

Today I want to back up and challenge those assumptions. In fact, I don't think we ought to be offering selective economic incentives. Nor do I think Palisades is the right project for such incentives.

My thinking is based not so much on Palisades in particular, but economic development incentives in general. Matthew Yglesias, in a Vox article on May 19, 2015, spells out the case against these common tax breaks.
As Mark Robyn writes for the Tax Foundation, "Larger firms have a level of political and economic influence that is not enjoyed by smaller firms, and are more likely to secure special treatment" even as "tax incentives in one area means that the revenue will have to be made up in another area."
This is a simple matter of physics. If you press down on one side of a seesaw, the other side goes up. If you give a targeted tax break to one party, the (relative) tax burden on everyone else goes up. It's also a matter of fairness. People who live and work in tax-favored Palisades benefit at the (relative) expense of everyone else in Richardson.

Similarly, Richardson's Home Improvement Incentive Program gives a tax break to people who upgrade their home. People who can't afford to do so don't get a tax break. Dollar for appraised dollar, the better off pay less in property taxes for the homes they live in than the less well off.

But at least the Home Improvement Incentive Program is open to everyone (who can afford it). The targeted tax break for Palisades isn't. There are no hard and fast rules for who will be given a tax break and what size tax break they will get. That makes it doubly unfair. Not only does it shift the tax burden, it does so in an arbitrary manner.
And yet, for all the consensus that exists about the evils of targeted tax breaks, they are devilishly hard to do away with. The basic problem is competition. As long as a city or state fears that its neighbors may offer a targeted tax incentive to poach a big employer, it needs to be prepared to offer its own to stay in the game.
Even if you're OK with the unfairness of targeted tax breaks, Palisades is the wrong kind of development to target. If Plano hadn't offered Toyota a tax break, Toyota could have gone to, say, Frisco or Allen. Same thing with State Farm at CityLine. But that doesn't apply to Palisades. There's no "whale" of a company we landed with the tax break that could have gone somewhere else. A developer can't pick up that land and move it to Frisco. That gives Richardson leverage that doesn't exist in the other cases. And yet the price Richardson paid is in line or even exceeds what was offered in the other cases. That tells me Richardson overpaid.

Richardson has a new mayor. It has a new council member with experience in real estate law. It will have another new council member when the current vacancy is filled. Let's hope it's someone who also brings some expertise to this problem. Let's hope the new council manages to restrain themselves in the future before handing out significant tax breaks.
If all the different localities in America were able to band together in a cartel and categorically reject targeted tax breaks, the whole country would end up better off. Fortunately, while business cartels to restrain competition are illegal, there's nothing wrong with governments banding together in this way. It could happen voluntarily at the regional level, but even better would be federal action.
The Texas legislature is showing keen interest on restraining cities with regard to local regulation of oil and gas fracking. Perhaps Richardson (and surrounding cities) ought to lobby the legislature to restrain cities in a way that actually benefits cities: end the self-destructive sibling rivalry leading to tax giveaways. Tie all cities' hands so businesses can't play one off against the other. "Stop us all before we give away still more taxpayer money."

Not that I expect cities to recognize their inherent weakness and see the value in having their hands bound. Not that I expect the state legislature to make it harder to give away tax breaks to favored businesses. But I can dream anyway. In the meantime, we'll continue to have situations like Richardson's $47 million tax break for Palisades.


Anonymous said...

The biggest problem I have with this view is that it fails to recognize that the tax rebate is based on marginal tax revenue increases, nor absolute dollars. The City of Richardson is not giving away $47 Million dollars. In fact, over the life of the deal, it is expected that the City will take in over $55 million over and above the $47 million that gets rebated. That far exceeds the amount that is being paid today in taxes and assures a viable project -- as opposed to a auto garage or some other low value business using the property. Moreover, it fails to address the increase in business property and sales tax that will necessarily be over and above just the real estate taxes which form the basis of the rebate.

Peggy Cordell Beil said...

Thank you for your follow-up on this, Mark, and for finding and sharing the link to the Vox article. It is amazing how all of these diverse institutes and think tanks are all on the same page with regard to tax breaks and incentives.

Mark Steger said...

Anonymous at 2:59 pm, anonymous comments are discouraged here. Please identify yourself.

I'm aware that the city is not "giving away $47 million." That's why I wrote "relative" where I talked about the tax shift. Total tax revenues may go up, but the proportion paid by the newcomers will be less relative to the proportion being paid by those already here.

Anonymous said...

“Taxation isn’t really reduced; It’s merely pushed off the shoulders of well-connected companies working on prestige products and onto the shoulders of small businesses that can’t afford lobbyists”

There seems to be an assumption by writer Yglesias here that the added costs from the subsidized development outweigh the added revenues and that difference needs to be made up by other taxpayers. Later in the article this premise is stated outright in a quote of the Tax Foundation’s Mark Robyn. I think this is a false premise. I think very few would describe development as a zero sum game.

“if all the different localities in America were able to band together in a cartel and categorically reject targeted tax breaks, the whole country would end up better off” Another false premise, assuming that development projects without tax incentives will always still be developed. If not developed then the city has lost the net revenue gained through the development.
Finally, there will likely be exceptions where a tax break incentive seems reasonable, would be generally supported, and without which the beneficial project couldn’t go forward. I don’t think we want a higher level government body putting a strait jacket on local economic decisions so that there was no judgement or flexibility allowed.

I am not arguing for tax break incentives. I’d like for local governments to maximize the revenue gained from development projects. I just think there can be reasons to favor some developments, so I can accept incentives that leave an uneven playing field. A very small business is unlikely to have any great effect on a community beyond the taxes it pays and a small number of customers served. Small businesses abound and if one doesn’t set up shop then another will. Large companies or large housing developments can have wide influence and a ripple effect. Those 8,000 or so new employees at Cityline are going to need services from other area businesses. They are likely to spin off new, smaller business. That large base of good employees is going to look attractive to other businesses that might locate in Richardson. Those employees are going to eat at restaurants, participate in and grow the arts and other activities, and fill homes and apartments. So these large development projects have potential to be beneficial beyond the development itself. I’d advocate for judgement to be allowed to the negotiators representing local government. Long, long ago I gave up the notion that the slices of pie being doled out to me and my siblings had to be exactly the same size for us all to benefit.

Steve Benson

dc-tm said...

Mark, we are in full agreement on this issue. That doesn't happen often. There are a few problem with richardson giving away taxpayer money on deals like this. 1. All property owners should be taxed the same. No abatement or refunds of any type. 2. It is very unfair to small business and home owners when the "big" companies pay a lower percentage in property tax or any other tax. Local government seems to enjoy spending other people's money too much. They need to show respect to ALL taxpayers and treat ALL taxpayers equally. The deal with laura and her affair with the palisades developer is a side show to a much bigger problem. Thanks for reconsidering and updating.

cara mengatasi asma said...

What do you think about it??

David said...

These taxpayer-subsidized economic deals aren't being done in some rural town in the Midwest, where we can be sure that all or most of the economic benefits will accrue to the town and the local people. While Richardson will undoubtedly experience some sales tax and other benefits from City Line and Palisades, a good percentage of these benefits may actually go to Plano or Frisco, etc. I'm not sure taxpayers who are being told to give away $47 million are interested in creating commerce for "other area businesses." Richardson only knows what it is giving, not what it is getting.