Monday, October 08, 2007

Economics of Giving Back

We have been putting most of our effort here on the charter amendments and the upcoming election. That doesn't mean we have forgotten about other key issues such as economic development. Much is happening on that front.

Multi-Chem just received a very large incentive package. I have major concerns about the wisdom of such subsidies, but if you are going to do it, this one makes more sense than most. The pay rate of the jobs is high, the number of jobs is good, the company is growing rapidly and it already has roots in the area. There are risks, of course. They are in a very competitive part of the oil industry. A new competitor could hurt their market share, which is not a very large risk. It is more likely they could be acquired by another company with no roots here. Good for them, bad for us. Still, it's probably one of the more rational subsidies made. During the discussion the idea was brought up of requiring the company to give back something like 1% of the subsidy to the city. I like the thought but think the method needs to be looked at.

I fully support the goal of making sure these companies we subsidize develop a strong connection with the city and give something back. I think that a 1% forced return is not an effective way to develop such a connection. First off, the 1% return ends up being little more than an additional tax or user fee to the company involved. Just another small, annoying, cost of doing business. Second, in terms of economic impact the 1% figure ends up being vanishingly small. Lets just do a little abbreviated table top economic analysis. The goal here is 145 jobs that pay an average of at least $50k per year. That's an annual payroll of $7.25 million per year. Over the 5 year life of the subsidy, that's $36.25 million. With no multiplier effects and assuming that only 1% of their payroll ends up coming back to us in tax revenues they will “give back” $362.5k, which is 25 times higher than the $14.5k asked for. Add in the various multiplier effects, permit fees, property taxes, etc. and their contribution to the tax base will far out weigh 1% of the subsidy. I would be surprised if a full economic analysis didn't put their taxes paid back into the area at least 3 times the subsidy. The real additional impact of the 1% set aside would be very small.

I think there is an even more fundamental flaw with this approach. Dollar figures are a poor way to measure connection with the community and what a company is giving back. It reduces the multi-dimensional space of human and community interaction to a single impersonal dimension of dollars and cents. Let's look at a couple hypothetical examples.

Spacely Sprockets, the multinational sprocket leader, comes to town on the promise of a $1 million incentive. They dutifully put 1% in a special fund, but otherwise remain disconnected from much that happens in the city. At the end of 5 years they move all of their local operation when Midland offers them $2million to put their new sprocktless sprocket plant in Midlands vacant industrial park building.

Wendals Widgets comes to town because one of the owners grew up in San Angelo, and they get a similar incentive. As the company gets established the management team joins various local organizations, the company joins the chamber of commerce and the CIO's husband runs for school board. They put the main office in an historic building downtown and get awards for how well it fits in to the area. Their employees are found everywhere being coaches and mentors.

Which company connected with San Angelo? Which company really gave back to San Angelo? Which one had the greatest benefit.

1 comment:

  1. Yes, Multi-Chem is, as these things go, still a bribe, but a good bribe. Rock-solid company, great pay and bennies, I personally know some employees, and they brag on the company. With $80 oil, this is a good investment.

    The one-percent give back, I understand the idea (I think), but it strikes me as an exercise in taking one's money out of the left pocket, putting that money in the right pocket, and pretending to have accomplished something in the process.

    My opinion, the voters decided we should play the corporate bribery game, if we are to play, let's play competently.

    This 1% give-back is so much window-dressing and effectively one more hoop a potential company has to jump through.