Before dismantling public pensions, a new report suggests recouping money lost through corporate subsidies

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  • On: 11/15/2017 11:34:43
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If Texas were to stop granting corporate subsidies, earnings would be enough to pay roughly 66.3 percent of the taxpayer cost required to fund retirement benefits for current public employees belonging to the main state-administered public pensions, according to a new report from Good Jobs First, a national policy resource center.

Not everyone is in agreement with the report's findings, however. Some trade associations and corporate development officers fear that ending corporate subsidies will damage Texas' reputation as a business-friendly state and ruin its economic standing.

By Allen Jones, 
TEXPERS Communications Manager

According to Good Jobs First, state legislators are working to increase contributions to ensure funding stability of the state's pension systems. To do that, however, some are advocating for a reduction of benefits or moving workers to less-secure 401(k)-like plans. During Texas' recent legislative session, Sen. Paul Bettencourt, R-Houston, authored a bill that would have studied the cost-effectiveness of implementing a hybrid retirement plan for newly hired state employees and teachers, partially moving them away from more secure defined benefits. Although Bettencourt's bill died, Greg LeRoy, executive director of Good Jobs First, says these types of legislative actions taken while giving tax breaks to major corporations are not sound value statements.

Before dismantling secure retirement for teachers, corrections officers and other public employees, Good Jobs First indicates there are state expenditures, such as the costs of corporate subsidies, which should be considered as a source of pension funding. The Lone Star State isn't alone in facing the threat of public pension dismantlement.

“In statehouses across the country, public employees' retirements are often used as a bargaining chip when budgets are assembled,” says Bailey Childers, executive director of the National Public Pension Coalition, in a news release regarding Good Jobs First's new report. “States will often defer, skip, or underfund pension systems while handing out hundreds of millions of dollars in corporate welfare. State lawmakers need to put their priorities in order and stop the giveaways and protect their employees' retirements.”
A subsidy is a benefit given to a business in the form of a cash payment or a tax reduction, usually to remove some burden. A subsidy may lower tax burdens placed on struggling industries or encourage new developments by providing financial support for the endeavors.

“Market forces are causing states to grossly overspend on individual company ‘megadeals like Foxconn, Apple and Amazon's HQ2,” LeRoy says in a news release announcing the center's new report. “Our national economy would be stronger if those funds were used for retirement security and other investments that benefit all employers, such as education and infrastructure.”

Good Jobs First compared pension costs in Texas and 11 other states with the amount of revenue those states lose each year through economic development subsidies offered to corporations as well as the tax preferences and accounting loopholes used by companies. Among the 12 states, more than $20.4 billion is given away in tax breaks and loopholes. A better deal, according to the nonpartisan Good Jobs First, would be to utilize the annual cost of these subsidies to cover the entirety of most states' yearly pension system contributions, which provide retirement security for millions of public employees. The study was done in conjunction with the National Public Pension Coalition, a nonprofit group that works to protect the financial security of working families that rely on public pensions.

Texas Subsidies
In Texas, a lack of a state corporate income tax means there are no income tax credits or exclusions, which are often the most significant expense in other states. Despite that, “the total of corporate subsidies, official tax breaks and unofficial tax dodging amount to about $1.2 billion per year,” according to the report's Texas-specific findings.

The report, released in October, bases its data on 2015 financial statements from the state's main public retirement plans: the Texas Employees' Retirement System, the Teachers Retirement System of Texas, the Law Enforcement and Custodial Officers Fund and the Judicial Retirement Fund, Plan II. The financial reports indicate annual employer normal costs of $871.1 million for ERS, $957 million for TRS, $31 million for LECOF and $17.1 million for the Judicial Fund. The figures, the most recent available, indicate how much is being taken each year to provide benefits for current government employees.
The totals equal to an annual normal cost of $1.82 billion. The center compared the annual normal cost to the financial losses resulting from economic development subsidies and other special tax provisions, which equals to about $1.2 billion per year.
“Corporate interests in the state continue to benefit from generous corporate subsidies and other tax breaks,” according to the Good Jobs First report. “And in February 2017, Gov. Greg Abbott asked the Legislature to increase funding for the state's economic development subsidies by $200 million.”
During 2015, two large state-authorized property tax programs kept more than $400 million in property taxes from flowing from private developers to local governments. A state economic development act appraised value limitation agreement allowed businesses to skip out on paying $221.5 million. The Texas Tax Increment Financial Act siphoned $186.7 million in property tax revenue from public accounts to benefits private development in tax increment financing districts. Other subsidy programs include Sales Tax Refunds on Enterprise Projects, which resulted in a loss of $44.2 million in taxes, and film production subsidies, which cost roughly $16 million.

Local economic development corporations spent $139.1 million in direct business incentives and $264 million to retire debt service of projects, all primarily sourced from sales tax revenues. Several industries also benefit from targeted tax breaks. Internet companies do not pay sales taxes on servers and equipment used in data centers, which cost the state $9.2 million in taxes. Special tax rates on new or enhanced recovery oil wells cost the state treasury $41.9 million. Other oil-related tax exemptions lose an additional $36 million. Also, the Texas Research and Development tax credit, available across industries, cut state tax revenue by $3 million.
Oil and gas producers also benefit from generous tax subsidies. However, according to Good Jobs First, the cost of those subsidies are not regularly reported.
Among retailers, a one-year Temporary Permissive Alternative Rates cost the state $232 million in lost revenue in 2015. Another rule that allows retailers to keep a portion of the sales tax revenues they collect from customers, known as a vendor discount, cost the state roughly $251 million in tax revenues.
Also, Texas is among the few states that allow corporations to allocate taxable income by methods other than the traditional payroll, property and sales weighting. It results in lost tax revenue, according to Good Jobs First. 
The report also recognizes that cities like Houston and Dallas are struggling to fund public pensions of local police, firefighters and municipal employees. Although Good Jobs First's new report only focuses on state subsidies, LeRoy, the center's executive director, suggests local governments should ask if their giveaways to corporations are the best way to provide services while fulfilling promises of secure retirements to their residents.

Recurring Theme
LeRoy spoke to TEXPERS about the new report and says he isn't naïve enough to think legislators in Texas will read the report and immediately change course and do away with corporate subsidies. However, he hopes lawmakers will begin to understand how tax breaks are working to undermine their budgets and are eroding the standard of living for retirees.

“If you look at the rest of our publications, we've published almost more than 100 studies over almost 20 years now, it's a recurring theme that these economic development tax breaks have really gotten to be too expensive and they are having collateral damage on state and local economies because they are undermining things that really do help grow the economy and really do benefit every family and employers,” LeRoy says. “By totaling up these numbers and juxtaposing them to things that might better help the economy, including better retirement incomes, we are trying to draw attention to better things to do with the money.”
The biggest corporate subsidy beneficiaries used to be manufacturing and industrial corporations, but are now joined by financial service corporations, biotech companies, research labs and large retailers. Good Jobs First keeps a public list of corporations receiving subsidies at the state and federal level on its website. Sporting goods retailer Cabela's has received subsidies in a few places in Texas as have Walmart and Amazon.

Berkshire Hathaway is the state's top subsidy earner having received more than $802 million in state and local awards. Rounding out Texas' top 10 subsidy earners are Texas Instruments ($604.8 million), Exxon Mobil ($533.3 million), NRG Energy ($417.6 million), Samsung ($317 million), Amazon ($269 million), Saudi Arabian Oil Co. ($257.4 million), FedEx ($250 million), E.ON ($192.1 million), Toyota ($188.3 million).
Nathan Jensen, a professor in the department of government at the University of Texas at Austin, has written critically about one of Texas' more expensive programs, Chapter 313. The program, created by the state legislature in 2001, provides funding to local governments to allocate tax abatements to firms for economic development purposes. Under the program, school districts lose revenue due to tax abatements but are “made whole” by the state for the lost tax revenue, Jensen says. Estimates are that the state will be shelling out $1 billion per year by 2025 to make up for the lost revenue.
“This comes either at reduced money for other services or increased taxes in other ways to make up for this lost revenue,” Jensen says.
According to Jensen's study, 85 to 90 percent of projects would have located in Texas anyway, regardless of the Chapter 313 program, and 80 percent of the program's dollars are lost revenue for the state's school finance system.
“This is touted as one of the most important incentive programs in the state and it has been associated with investments from companies like Samsung and Toyota,” Jensen says. “This program, along with the Texas Enterprise Fund, is the flagship programs funded by the state.”
But how does Jensen actually know companies he studied actually would have built or relocated to Texas without the tax abatement program? It's a prediction. But there are a lot of smoking guns, he says.
“In some cases, companies openly admitted that they had already begun construction before applying for the incentives,” he says. “This includes Caterpillar that has a YouTube video of their groundbreaking with then Gov. Rick Perry, before applying to Chapter 313, numerous wind farms that we have FAA data that their towers were already built before applying, to companies admitting in their application that they were only looking in Texas.”
There is a lot of skepticism regarding corporate incentive programs. Many perceive the programs to be “corporate welfare,” a transfer of wealth from taxpayers to companies that were already going to exist. Another issue opponents of corporate subsidies have is that these are high-cost programs targeted at a small number of companies.
And, corporate incentives, says LeRoy, almost never determine where a company builds or relocates. The reason, he says, is because IRS data that documents what companies spend money on, state and local taxes combined as a cost factor for the average company in America comes to less than 2 percent. The other 98 percent of cost structure, labor, occupancy, raw materials, logistics, input, energy, IT, CEO bonuses – numbers that vary a lot depending on the nature of the company – but are the numbers that determine where a company goes.

“It is the dirty little secret of economic development,” says LeRoy, who authored the 2015 book, “The Great American Jobs Scam: Corporate Tax Dodging and the Myth of Job Creation.” “It's what site developers don't want you to know, it's what politicians never seem to understand when they are negotiating. Look at the stump speech from the company's side of the table rather than the PR side of the table. There is no evidence that states curbing incentives or making incentives more transparent or accountable has ever harmed their business climate.”

In fact, LeRoy says there are a growing number of examples of states successfully pulling back corporate incentive programs and doing just fine. And, he says, it is being done by left- and right-leaning legislatures. He points to California, Michigan and Florida as examples where legislators have proven that corporate subsidies have never mattered, to begin with.

Economic Development
Corporate subsidies do matter, says Tony Bennett, president of the Texas Association of Manufacturing. He views subsidies as economic development tools that attract businesses to the state and create jobs.

The trade association worked during the state's legislative session to ensure tax abatement and the state's Enterprise Fund produce returns for communities. According to a slideshow presentation Bennett shared with TEXPERS, corporate subsidies “are critical because of Texas' high property tax rates.” According to the association, Texas is among five states with the highest property tax rates.

The rewards are evident, Bennett says – communities remain competitive, multiple new jobs are created and immediate tax revenue comes from corporations as well as vendors and suppliers that follow most large corporations.
“There are immediate sales and franchise taxes produced by companies looking to relocate or build in Texas using corporate subsidies,” he says. “Plus, there is philanthropy many corporations provide to their local communities. In addition to job creation, it is hardly corporate welfare.”
Bennet says there is a multiplier effect when it comes to jobs created by large new corporations that build or relocate in the state. He points to the U.S. Bureau of Economic Analysis data that allows legislators, investors, and economic development planners to assess the potential impact of various development projects.

“Look at petrochemical plants,” Bennet says. “For every job, around 5 jobs are created. That is more people employed, more people spending money, and more people paying taxes. When an automobile manufacturer came to San Antonio, guess who came to town? A seat manufacture, a tire manufacturer. Transportation jobs were also created. None of that would have resulted without tax abatements that allowed Texas to be competitive to attract the automobile company.”
In the manufacturing industry alone, Bennett's association represents more than 500 companies, including 70 of the state's largest employers. Manufacturers employ more than 866,000 people with an average compensation of more than $79,000 a year. Plus, Texas is the No. 1 exporting state for manufactured goods in the United States. That, Bennett says, was achieved with the help of tax abatements.

“Without tax abatements, Texas' aerospace, chemical and manufacturing sectors would just be on the losing end competitively,” Bennet says. “Competition is real and it is not going away. Companies will build someplace else. I've sat in their boardrooms and have heard first-hand how important these subsidies are to attracting them to our state and communities.”

Allen Jones

About the Author:
Allen Jones is the communications manager for the Texas Association of Public Employee Retirement Systems. Email him at or call 713-622-8018.


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