Are incentives necessary? Every deal is different


At an eye-popping $1.5 billion, Indigo Ridge — a master-planned, mixed-use retail project on 155 acres at the intersection of FM 1431 and Sam Bass Road — is projected to be the single largest project in Central Texas.

If the Cedar Park City Council approves it, the incentive package accompanying it will be an equally large: an eye-popping $60 million. Or more. 

According to a memorandum of understanding (MOU) inked earlier this month, the city will devise a 380 Economic Development Agreement that will kick in up to $60 million in tax incentives for the new development. This is in addition to possibly reimbursing construction costs of the development’s anchor tenant, the Texas headquarters of the United States Tennis Association. 

The performance-based incentive package envisions $138 million in net new tax revenues to the city over 20 years, even after the incentives are taken into account.

“This is a tremendous win for the city and we are excited beyond reason to be at this point,” said Cedar Park Economic Director Ben White. “This is the largest project in the area. It creates an employment hub center for the MSA right here in Cedar Park.”

Even with the potential up side, critics often slam incentives as being short-sighted or unnecessary.

“... when we’re thinking about using incentives to attract new investment, it’s really hard to think about the practical cases that have worked,” Nathan Jensen, a professor of government at the University of Texas, Austin, said last year in an interview published by CityLab. Jensen is the co-author of the book "Incentives to Pander: How Politicians Use Corporate Welfare for Political Gain."

“A traditional incentive program is largely giving money to companies to do what they would do anyway," said Jensen.

And, local economic development experts agree, to a point.

“When we talk with companies, almost all are conditioned to talk about incentives first,” said Mark Thomas, EDC director for the City of Taylor. Prior to working in Taylor, Thomas had been EDC director for the City of Georgetown for 13 years. "There are the things we’ve learned over time that are real and have a much bigger impact on a decision to locate a business than incentives. If you move because of incentives and there’s some critical factor — like you can’t get workers — then what good are the incentives?” 

Thomas likened economic development to Maslow’s hierarchy of needs.

“You have to have roads … workforce … infrastructure. Those are the real big development costs. Those are the challenges in finding the right site,” said Thomas. “As you go down the checklist, it gets more and more specific to the project. Let’s put the incentives on the back end and work on all the other issues. If all the building blocks, the basic DNA that makes it work, if those aren’t there, there will be no discussion. You have to make the other pieces work first.”

It’s only after the needs of the of the project are met do incentives make any sense whatsoever.

“There’s always a gap that emerges in the deal,” said Thomas. “The gap could be … well, it’s a lot more expensive than we thought it would be and we need to have some way to do cover it. But, if you have committed up front to an incentive package, you have nothing left to offer. You need to keep your powder dry so you’ll have it on the back end.”

He pointed out that every community is different and every deal is different. What makes sense for Indigo Ridge and Cedar Park might not make sense for Apple and Austin.

“There’s only one time frame in a community’s life where all of those things are available,” he said. “Like, the site where Apple’s going is uniquely available, uniquely situated. The number one benefit of that site is that it’s in the center of a technology-based workforce in Austin. Cedar Park has fast population growth and 183A is built out. So, for things like retail, it’s a project that makes a lot of sense for Cedar Park.”

So, do incentives work? Jensen insists they do, at least for those who offer the incentives.

“If you provide an incentive, you can actually get more credit for that,” he said. “It’s the opposite of what most economists would say. And it works even if the company doesn’t come. It’s an incredibly effective way to deflect blame, saying, ‘I put my best offer on the table. Clearly the company made the wrong choice, but it’s not my fault.’”

Cedar Park’s economic development team has about 90 days to flesh out the details of an agreement for the Indigo Ridge incentives according to the Memorandum of Understanding.