When it comes to spending public money to woo companies, there’s other states and then there’s Texas. The Texas Enterprise Fund, created at the behest of Texas Governor Rick Perry a decade ago, was funded to the tune of $285 million from the rainy day fund. During Perry’s tenure the Fund has given over $500 million in deal “sweeteners” to convince companies to move or expand operations in Texas. The Fund is under the Governor’s control, requiring the signoff only of the Texas Speaker of the House and Lieutenant Governor (which are – surprise – members of the same party in Texas).
The Fund supposedly helps Texas secure “close deals” by providing low cost loans to companies that otherwise would almost but not quite consider Texas. Already we can see the absurd logic – public officials pretend they have perfect insight into businesses’ decision making, and know just the right amount (and no more) to sway the companies’ interest. Defenders argue that the Fund helps bring jobs and creates a return on investment for taxpayers for doing so.
In fact, the Fund went unaudited for ten years. Rick Perry repeatedly accepted campaign donations from executives of companies that received subsidies. Now, even Perry’s Republican successor, Greg Abbott, is questioning whether the fund will continue under his leadership (we’ll see: it’s easy to criticize Perry for “picking winners and losers,” more difficult to give up the privilege oneself).
Texas could take a huge step to deescalating the Economic Development dollars arms race by discontinuing the TEF. Texas is probably the only state that could have a major effect by unilaterally disarming.
Let’s take a step back. Almost every state has a shadowy, poorly understood network of public dollars that are used to woo companies – whether with outright cash grants, energy price deals, tax abatements, or any number of other fuzzy and opaque methods.
Texas under Perry has elevated this style of business to an art form. Beyond ensuring that his state has low energy prices and regulations – fair game for a Governor – Perry has also famously gone on whistle-stop tours of California and New York, encouraging businesses to relocate to the promised land of Texas.
Some interested parties theorize that it is the Texas Enterprise Fund that really fuels the “Texas Miracle” of recent high job growth. Eliminating it, they say, would hurt the Governor’s ability to hustle for Texas like the auctioneer at a county fair.
There’s a lot of problems with this line of thinking. First, without a public audit, there’s little evidence to suggest taxpayer dollars are helpful, let alone decisive, in convincing the companies to expand in Texas. Second, the combination slush fund/glad-handing business development method is based on an outmoded, beggar-thy-neighbor view of economic growth.
For decades, economic development professionals learned how to lure companies over state lines with bigger and bigger offers of public dollars. It’s this dynamic that created a proliferating arms race of economic development spending at the state, regional and local level. Although under more scrutiny in recent years, the trend reached an absurd crescendo in Reno’s wooing of the Tesla “Gigafactory” to Nevada. I strongly encourage you to read this Fortune piece on the bizarre dance of a company savvy at exploiting $1.5 billion in public funds.
Slowly, people are starting to realize that this development strategy is an overall loser for taxpayers, the country and even the states themselves. Spending a declining amount of public investment dollars on wooing footloose companies can be an unwise investment undermining regional growth and cooperation, which is seen as a more important engine of success than gains and losses over state borders. If you zoom out to the US perspective, moving a company from California to Texas at significant public expense is obviously a net loss.
Texas can afford to ignore some of these trends. It’s doing well economically, propelled by gas and oil, healthcare and technology. The rainy day fund is so flush Texans are spending it on road repairs. Its cities are largely within, rather than straddling, state borders. It already has an attractive argument for multinational corporations: base your business here and you’ll have cheap labor and a government that doesn’t get in the way.
These same factors make it possible for Texas to lead the way on the path away from the arms race. First of all, a curious left-right coalition is emerging against the “crony capitalism” or “picking winners and losers” (depending on your political party) of the Perry Governorship. Texas is doing well now and can afford to take the hit – if there actually is one – of not paying companies to relocate there. If Greg Abbott and the Texas Legislature can work together to loudly rebuke the model, it may just provide a precedent that could spill over to other states.
It is certainly true that other states might redouble their efforts to fill the Texas-sized hole, but other states don’t have the cash or appeal of Texas. Texas politicians can seize this moment of left-right disenchantment with corporate subsidies to their own political advantage, which might make politicians from other states reluctant to double down on the old strategy. Playing on the selfish desires of Texas politicians has never gone wrong, has it?
Another concern – that Texas will continue to use other, more shadowy funds in TEF’s absence – is almost certain. The Good Jobs First Subsidy Tracker shows that many companies received hundreds of millions in public dollars from outside the TEF. A Berkshire Hathaway subsidiary, for example, received a staggering $800 million in Tax Increment Financing benefits, independent of the TEF.
While not a comprehensive solution, eliminating the Texas Enterprise Fund is still a good first step to refocusing the conversation. It is the most transparently politically connected fund with some chance of affecting the national trend. Call a truce, Texas.