First, let’s start with “What is Economic Development?”
- It is the international practice of improving a community’s economic well-being and quality of life.
- It includes a broad range of activities to retain, create and attain jobs, and to foster the growth of a resilient tax base and an inclusive economy.
- It is a collaborative effort involving industry, government, and a myriad of community stakeholders.
In a nutshell, it takes all facets of a community pulling the cart in the same direction to build a better community!
Moving on to incentives and how they work. In Texas, a community is allowed to pass a ½ cent sales tax and that ½ cent must be used for economic development activities. Economic development activities boil down to the creation and retention of primary jobs. Primary jobs are jobs that create a good or service within the confines of the city and then sell that good or service outside of the city (example: Wichita Falls Company manufactures a jet engine component, when the component is complete the company exports said component to the engine builder located in Oklahoma (pick a state) or country where final assembly of the jet engine will be completed. The workers at Wichita Falls Company are an example of a primary job.
Definition of Primary Jobs:
A primary job is a job that produces goods and/or services for customers that are predominantly outside the community. This creates new “outside” dollars for the community. Once an employer is paid for the products and/or services, he redistributes that wealth in the community through wages paid to employees and through suppliers.
So, how do economic development incentives work?
- A community that passes the ½ cent sales tax must create a separate entity (commonly known as the 4A or 4B boards in Texas) that manages the sales tax dollars and how they are used to support the creation or retention of primary jobs.
- The 4A or 4B boards are public boards and they meet on a regular basis to discuss, approve or deny projects.
- In Wichita Falls, all economic development contracts (known as Performance Agreement contracts) are bilateral contracts which means the economic development board and the company receiving the incentive(s) each have obligations to perform certain duties before the monies can be released.
- Most of the Performance Agreements written in Wichita Falls are what we call “back-loaded” incentives wherein the company must perform their obligation in the contract first, or before, the incentive dollars are paid out. For example, a company must create and maintain 50 new jobs for a period certain before the economic development board will release any incentive dollars to the company.
- Every so often a company may need the Performance Agreement to allow for “front-loaded” incentives in which the money will be paid at the beginning of the agreement. In this case, the economic development board will obtain some type of collateral pledged to guarantee the money will be paid back if the company does not perform.
So how do incentives equate to growth?
- Simply answered: the company receiving the incentives will create or retain primary jobs. More primary jobs (usually higher wages and benefits) create more discretionary income that will be spent in the community. That spending creates indirect and induced jobs (I’ll save defining indirect and induced jobs for another blog).
- The payroll impact, the total amount a company will pay its employees every year, is the payroll impact in a community. The calculation is simple: We take the average annual wages for that company in our community and multiply it by the number of jobs created or retained. Example: Wichita Falls Company has 500 employees and the average annual wage for that company is $50,000, the annual payroll impact would be $25,000,000 (500 jobs X $50,000 per job = $25,000,000 annual payroll impact).
- Almost every economic development project also has a capital investment (improvements) by the company, meaning they typically expand their real estate footprint or buy new equipment which adds to the tax base in the community.
And that’s how economic development incentives turn into big payoffs as payroll impact for a community.
Have questions about this article? Email Travis today.