Texas: The Corporate Welfare State

At first glance, Countrywide Financial Corp. seems an unlikely candidate for public assistance.

It ranks as the nation’s No. 1 home mortgage lender. Headquartered in the tony Los Angeles suburb of Calabassas, California, the sprawling financial services company outsold such household names as Wells Fargo, JPMorgan Chase, and Bank of America last year, racking up annual revenues of $8.57 billion and net earnings of $2.20 billion. That’s an astonishing 25.6 cents of profit for every dollar of sales.

Though principally a mortgage lender, Countrywide is a shrewd cross-seller. Using its in-house commercial bank, which boasts a sturdy $43 billion in assets, as well as insurance and securities subsidiaries, the company can load up a single customer with a passel of financial products. That business strategy helped catapult the company to No. 146 on the list of Fortune 500 companies.

Any way you do the math, Countrywide adds up to a mean money machine. Even so, the company is not too proud to do a little money-grubbing. Last year, Countrywide put the touch on Texas’ taxpayers for a cool $20 million in cash subsidies. It also won an additional $2.2 million in the form of tax breaks over the next 10 years from local tax districts north of Dallas, according to city of Richardson officials.

And it’s not alone. Countrywide is just one of 16 companies that have gotten in on the corporate subsidy game in Texas whenever they expand or relocate. In the name of bringing jobs to Texas, beneficiaries that have collected $215 million in taxpayer largesse over the last 15 months include such companies as: Citgo Petroleum ($5 million), BP Chemical ($750,000), Cabela’s ($600,000), Home Depot ($8.5 million), Vought Aircraft ($35 million), and Sematech ($40 million). Another $10 million will go to Tyson Foods, although the final contracts for the deal have yet to be inked.

Critics of the practice say that providing such public subsidies and tax breaks to big business is like paying 17-year-old boys to think about sex.

Few states lavish money on big business with quite the same ardor that Texas does—one reason that Site Selection magazine, the industry bible, conferred on the Lone Star State the title of the state with the No. 1 business climate. The enabling legislation for the Enterprise Fund, passed in 2003 at the behest of Governor Rick Perry, authorizes the governor’s office to spend money on a range of activities: economic development, infrastructure development, community development, and job training programs. But as a practical matter, it is the “deal-closing” program that soaks up most of the attention—and money—of the Enterprise Fund. Under this program, money is disbursed by the governor’s office with the approval of the House speaker and lieutenant governor to “close the deal” and ensure that businesses remain, relocate to, or expand in Texas.

Most of the 50 states now play the corporate subsidies-cum-tax breaks game. But Texas is just one of eight states that actually doles out cash subsidies to business. Texas’ kitty is also the fattest—and probably the easiest to pick. In the hurried 2003 legislation, lawmakers placed economic development and tourism in the executive branch with few safeguards. To raise the $295 million for the Enterprise Fund, legislators raided the emergency “rainy day” fund—at the same time that they were slashing human services and education spending.

The trouble with such programs—as with most tax breaks, economic development bonds, tax-advantaged enterprise zones, and myriad other incentives and arrangements that states and communities employ to curry favor with major corporations—is that they seldom influence business’ behavior. “In most cases,” says Robert Lynch, chairman of the economics department at Washington College in Maryland and an expert on the subject, about which he recently gave a presentation at the National Governors Association, “tax incentives and subsidies are a waste of public money.”

Greg LeRoy, executive director of Good Jobs First, a Washington advocacy organization, likens such government subsidies and tax breaks to “putting icing on a cake that’s already been baked.” The author of a forthcoming book, The Great American Jobs Scam, LeRoy says: “Markets determine corporate behavior, not government tax breaks and subsidies. The overwhelming body of evidence is that incentives matter a microscopic percentage of the time, only two or three percent. The rest of the time it’s a windfall, and therefore a scam.”

State officials often trip over one another to provide the sweetest deals. And no one seems to be playing this zero-sum game more aggressively than Texas. As managed by Gov. Perry, a handsome, one-time College Station “yell leader”—Texas A&M University’s appellation for a male cheerleader—the quest for relocating companies and job creation is cast in terms of an interstate athletic contest. It’s Texas versus California or Texas versus Oklahoma.

Take, for example, Tyson Foods’ decision in late January to accept Texas’ offer of $7 million in cash and $3 million in worker training to renovate a vacant Oscar Meyer plant in Sherman, rather than open shop in nearby Oklahoma. In the governor’s hands, the pork-and-beef packaging plant’s location in Texas becomes revenge for the Texas Longhorns’ gridiron loss to the Sooners last autumn. “Beating Oklahoma was my favorite” of all the deals, Perry beamed to an approving audience of Austin burghers gathered at the Driskill Hotel in February. “We’ll take those 1,600 jobs.”

It’s a contest, though, that companies tilt to their advantage. Typically, they turn one state against another and, in the process, reckons Washington think-tanker LeRoy, wring a stunning $50 billion a year out of states and localities. That is the yearly total of tax breaks, cash incentives, land, property, and other forms of assistance collected by huge, often billion-dollar corporations. In Texas, this money is disbursed with a minimum of transparency and accountability. There are no firm guarantees, for example, that the companies pocketing state money must provide health insurance to employees and no requirements that the governor’s office issue any reports to the Legislature.

While the state of Texas is siphoning off scarce dollars for huge multinational corporations, which economists say distorts the marketplace by helping pick winners and losers, it is simultaneously neglecting important public services and quality-of-life concerns. Most experts say that state spending for transportation and infrastructure, education and job training, and public health—what economists call “public goods”—are areas where the state should concentrate its efforts.

Don Baylor, a policy analyst at the Center for Public Policy Priorities (CPPP), says that when money is handed over to big corporations “it kind of goes into a black hole. You’re never sure whether you overpaid for the jobs you get. But if you put the money into workforce development, you can see the end result. It’s measurable.”

Nor are the jobs going where they are most needed. Only 1 percent of Enterprise Fund spending, Baylor notes in a recent report, has gone to areas where the jobless rate is above 7 percent. And big urban and metropolitan areas feast on the Enterprise Fund—73 percent of its dollars have gone to counties with more than 1 million persons—while the state’s rural areas and small towns are left fighting for whatever scraps remain.

But helping rural and low-income Texans may not provide the instant political gratification that highly publicized ribbon cuttings and photo opportunities afford the governor and other politicians facing the electorate next year. Despite the blizzard of press releases emanating from the governor’s office—it claims that 22,846 jobs are resulting from its spending—a scant 275 jobs were actually created as of January 31, 2005, reports the state’s Legislative Budget Board.

And, amidst a national recovery, the state’s economic performance is not especially impressive. “We’re not growing as fast as the U.S. as a whole,” says Bernard “Bud” Weinstein, director of the Center for Economic Development and Research at the University of North Texas. “We came out of the recession later and we haven’t been generating jobs as fast as the rest of the country. Texas is still down maybe 100,000 jobs from its peak in 2000.”

Even when jobs are created, Texas lags behind other states in “getting the best bang for its buck,” in the words of the CPPP’s Baylor. Texas, he notes, tends to throw money at companies up front while states employing best practices, such as Oklahoma, dispense benefits only when certain employment milestones have been met. And because Texas’ financial woes are structural—there is no state income tax or corporate profits tax—it’s very difficult for the state treasury to benefit. The regressive sales and cigarette taxes, lottery tickets, property taxes, and assorted levies and user fees that constitute the chief sources of state revenue are a less efficient way to capture the benefits of employment and population growth.

“You don’t have a state income tax in Texas,” remarks Judy McKinney-Cherry, the director of the Delaware Economic Development Office. “Then how do you get your money back?” she asks rhetorically.

Delaware is much more circumspect in the operation of its job-development programs—even taking an equity stake in some of the companies it finances. It is also less secretive than Texas, where the governor’s office contends that legislative scrutiny would impair its flexibility in negotiating deals. “We calculate how many years companies have to stay until we get our money back,” says Delaware’s McKinney-Cherry, who is wary about “buying jobs.”

“We don’t have $295 million,” she adds. “I have a grand total of $10 million this year. So we try to do loans before grants. We make sure that if we do make a grant that it brings exceptional benefits. And it has to meet scrutiny. The local newspapers follow all this. And we have watchdog groups that attend our public meetings.” (Several telephone requests for interviews by the Observer to the Texas governor’s press office were not returned.)

What makes the Lone Star State’s comparative profligacy so unusual is that this is a state that reveres the workings of the free market as much as it cherishes such hallowed icons as the Alamo, cattle, oil, and Texas football. By law, the state even stipulates that every high school senior must take an academic semester of economics, “with emphasis on the free enterprise system,” says a spokeswoman for the Texas Education Agency.

Yet by opting for political expediency, Texas lawmakers are flunking their real-world test on the operations of the free market. As the CPPP’s Baylor notes: “When the Legislature continues to reject raising the minimum wage, you keep hearing the arguments that ‘we shouldn’t tell employers what to pay their employees’ and that ‘people earn what they deserve in the marketplace.’ But for some reason that logic falls down when it comes to subsidizing the movable company.”

Consider the case of Countrywide, which has contracted with Texas to add 7,500 jobs to its payroll in the Lone Star State in return for its $20 million plus tax subsidies. Gov. Perry frames the selection of Richardson, a town with a 4.1-percent unemployment rate in a state with a 5.8-percent rate at year-end 2004, as a proud Texas win over California, among other states.

Of the 7,500 jobs, Countrywide promises to bring 2,500 jobs to Richardson and spend $200 million on infrastructure and remodeling office space; it is not yet clear where in Texas the remaining jobs will go. Yet, Countrywide has been experiencing good times and its business is thriving. So much so that, a company spokesman says, it expects to increase its ranks to a total of 80,000 employees over the next five years, nearly doubling its headcount. When it announced expansion plans, Countrywide publicly declared that it was evaluating several states, touching off a bidding war. “Countrywide was going to have those [employment] numbers whether it located in Illinois or Florida or Texas,” says Professor Steve Cobb, chairman of the economics department at the University of North Texas in Denton.

There is strong evidence, though, that Texas always had a leg up in the race. For several years now, Countrywide’s CEO and chairman, Angelo Mozilo, has openly expressed the company’s dissatisfaction with business conditions in California. Although the company operates numerous loan-origination offices around the country and employs a small contingent of corporate employees in Arizona, there has been nothing outside of California to compare with the company’s growth here.

Since it first put down stakes in Texas 11 years ago, reports the Countrywide spokesman, its in-state workforce has ballooned to its current level of 7,000 employees. And its growth has been so robust that Countrywide is outgrowing its current digs in Fort Worth and Plano. Serendipitously, ample office space was available in nearby Richardson: Telecommunications giant Nortel Networks had lost its footing in an industry downdraft in 2000 and had abandoned its property.

When announcing that Texas triumphed, Countrywide officials heaped praise on Governor Perry for his yeoman service that, they assert, sealed the deal. Yet the fact that Texas’ $20 million cash offer defeated an even more generous package from the state of Illinois suggests that larger forces were already at work. “They play states off against each other,” says Cobb, “to see who’ll give them the best deal.”

Professor Cobb, who has tutored ex-Soviet officials on the workings of market economies, gave out a long sigh when asked whether the Countrywide deal was consonant with the tenets of free enterprise. “Being involved in business location or relocation is not something we would normally think of as one of the functions of government,” he says. “I know that this sounds extremely negative,” he adds, “but certainly this is an example of corporate welfare.”

Even if everyone does it, there is something unseemly about a well-heeled company with highly compensated executives brandishing a tin cup and looking for a handout. Countrywide’s Mozilo earned $22.6 million and cashed in $34.4 million on exercised stock options. That amounts to an annual haul of $57 million in annual compensation in 2003, the most recent figures compiled by Reuters news service.

Occasionally, a top corporate executive will candidly admit that business incentives are always welcome and that they appreciate the attentive solicitude of top politicians, but that such concerns take a back seat to more weighty determinants. Consider the case of Citgo, the oil company owned by the country of Venezuela. Last
ear Citgo collected $35 million from
he taxpayers of Texas, including $5 million from the Enterprise Fund and $30 million in subsidized, low-interest loans to move its headquarters to Houston from Tulsa. It also is upgrading its refinery operations in Corpus Christi, where it is adding 120 jobs.

Citgo actually made the first overture, calling on Gov. Perry, who did not exactly play hard to get with the state’s purse. “It’s not every day that a refiner and a marketer of petroleum products with annual revenues of $25 billion comes knocking at your door,” a gleeful Perry told Site Selection magazine.

Playing the role of host-in-chief, Perry squired top Citgo executives about at the 2004 Super Bowl in Houston. While the Texas governor was no doubt a charming companion and the company did not shun the state’s money, it appears that the mating ritual was largely unnecessary. Luis Marin, the former chief executive and president at Citgo, articulated the real reason behind the company’s transfer to Houston, telling the Associated Press last year that strategic and operational concerns outweighed the incentives from Texas officials in the decision to bring about 700 jobs there.

Among those myriad “operational concerns” were Houston’s critical mass of energy firms and expertise, Marin told Site Selection.

Relocating the company’s headquarters, [former CEO Marin said], will give Citgo stronger access to its Gulf Coast customers and its refineries in Corpus Christi and Lake Charles, La. In addition, a Houston base will provide Citgo with greater proximity to its parent firm, Caracas-based Petroleos de Venezuela.

The Citgo deal caught the eye of state Rep. Garnet Coleman, a Houston Democrat, who was outraged. “The chairman of Citgo said that the company would come to Houston—no matter what,” Coleman says. “I don’t think the leaders of Texas have the right to give millions of dollars to people who don’t need it. This is the rich getting richer off someone else’s money.”

Then there is the question of job quality. As the CPPP’s Baylor warns, the Enterprise Fund statute “lacks standards to promote high-quality jobs” that pay good wages and health care benefits. This is in sharp contrast with the best practices approach taken by most job recruiters around the country. In Delaware, for example, “We won’t consider incentive funds for anyone unless the job pays $40,000 a year” plus health insurance, says McKinney-Cherry.

At Citgo, headquarter positions manned by the top brass will average $72,000 while 120 more refinery jobs in Corpus Christi will pay a mean salary of $50,000, according to state contracts. Nonetheless, in many cases, the state’s taxpayers are underwriting jobs that are far less remunerative and, sometimes, downright nasty.

Tyson Foods is a case in point. It is not exactly clear just who will constitute the 1,600 persons to be employed by the $25 billion (in sales) global meat processor when its Sherman plant is up and running next year. No wage scale has yet been reported. But a 2005 report by Human Rights Watch finds that foreign workers usually do most of the dirty work.

The HRW report depicts poultry plants as filthy and dangerous, polluting and exhausting. And it finds that Tyson Foods has changed the complexion of the workforce in those regions of Arkansas where it has emerged as the No. 1 private employer. Over the past decade, HRW reports, “immigrant workers from Mexico and Central America have supplanted many rural white and African-American workers—a phenomenon characterizing the poultry industry nationwide.”

Tyson Foods is not the only project supported by the Enterprise Fund where job quality is questionable. Texas law places restrictions on communities offering incentives for retail jobs. Work in the retail sector is generally regarded by the economic development community as “downstream” employment and, because the retail sector is dependent on the overall prosperity of the region, less valuable when compared with primary jobs. Retail jobs are generally characterized by mediocre pay and frequently lacking in health benefits.

Yet the governor’s Enterprise Fund, which is not covered by the state’s legal restrictions, is handing over $600,000 in public money to Cabela’s, the world’s second-largest marketer of hunting, fishing, and outdoor equipment. Cabela’s is building giant, museum-like stores in Fort Worth and Buda, just south of Austin.

According to the contract with Cabela’s, which was obtained by the Observer, the outfitter is portrayed as not just any retailer but a must-see tourist attraction. Cabela’s claims 10 million visitors will annually venture to Cowtown and Buda from around the state and country—and even Mexico—to tour its cavernous interior and view stuffed birds and animals. Average pay per job is a modest $23,000. Since that likely includes management salaries, many jobs would appear to pay much less.

But rather than boosting tourism, the state taxpayers are most likely aiding Cabela’s efforts to fatten the bottom line. And as the state’s taxpayers side with Cabela’s as it sells fishing and hunting gear, they are tilting the playing field against the competition. Most likely to feel the pinch are such home-grown businesses as Katy (Tex.)-based Academy Sports & Outdoors and Austin-based Sportsman’s Finest. The company may cross-dress as a tourist attraction for the Texas governor’s office, but Cabela’s executives revealed their true garments in recent filings before the Securities and Exchange Commission. In those documents, they make clear that the company’s profits depend on what playwright Tennessee Williams so memorably labeled as “the kindness of strangers.”

In SEC filings, the company admits that it counts on government at both the state and municipal level for “free land,” “monetary grants,” and economic development bonds for the “recapture of incremental sales, property or other taxes.” So reliant is Cabela’s on generous government handouts and tax breaks that “the failure to obtain similar economic development packages … would have an adverse impact on our cash flows and on the return on investment in these stores.”

As the governor seeks replenishment of the Enterprise Fund, reform legislation is pending (House Bills 1938 and 3470) in the Texas Legislature. Lawmakers want to bring greater accountability and openness to the Enterprise Fund and vow to rein in the governor’s office from abetting corporate plunderers. Legislators are also calling for “clawback” provisions in the law—requirements that the state get its money back if companies renege on job development, make an early departure, or otherwise fall short on their promises.

That is a key feature of job-development arrangements in most states. In an era of corporate downsizing, restructuring, mergers, off-shoring, and outsized business bankruptcies, even the best of companies can be here today and gone tomorrow. A recent report in the San Antonio Express-News found that numerous corporate beneficiaries had helped themselves to millions in tax breaks only to shut their doors and leave the Alamo City over the last 15 years.

Several that have come and gone are companies with recognizable corporate logos. Among them were: Golden Aluminum/Alcoa, the metals company; discount retailer Solo Serve; sunglasses manufacturer Bausch & Lomb; Sony Microelectronics’ chip manufacturing plant; AMR Information Services’ call center for American Airlines; and Amnitek, a computer parts manufacturer.

Given such uncertainty, there are numerous actions that the state can take that would make much better—and more appropriate—use of the taxpayers’ dollars. Many public policy experts (whose ranks now include Microsoft founder Bill Gates who, in February, expressed his alarm at the decline of U.S. educational standards in a speech to the nation’s governors) note that states can make their largest contribution toward economic development by ensuring excellence in the workforce through supporting education and job training. Transportation infrastructure, a healthy environment, and quality-of-life concerns also act as magnets for business and provide fertile ground for entrepreneurs, notes Delaware’s McKinney-Cherry.

“If you have the right business environment and the right regulatory environment and a good quality of life and a workforce that is skilled for that particular company, they will come,” she says. “They’re also looking for museums, recreation, and parks. It makes more sense to use state money that way.”

And, as the business shutdowns in San Antonio demonstrate, many corporations remain “footloose.” In a global economy, multinationals can easily transfer call centers, manufacturing plants, software-development centers, and other job sites to Ireland, India, China, or just about anywhere on the globe. That fact of life is leading many states and communities to emphasize the growth of home-grown enterprises.

Mike Davis, a lecturer in finance at SMU’s Cox School of Business, believes that many millions of dollars now en route to big business could be better spent on fostering entrepreneurship, especially with loan guarantees. “Texas could finance thousands of small businesses,” Davis says. “But the political effect of that would be negligible.”

And in the hands of the current Texas governor, who is expected to face a tough re-election bid next year, that’s the bottom line. The Enterprise Fund has very little to do with economic development or job creation. Instead, it provides cover for the state’s political leadership, who claim credit for whatever economic progress is already underway while turning the serious work of governing into a public relations game. LeRoy of Good Jobs First labels this disingenuous practice “parade jumping,” meaning that politicians adroitly catch up to a parade that is already in progress and claim to lead it.

So give Gov. Perry another award: call him Grand Marshal of the parade jumpers.

Paul Sweeney, a freelance writer living in Austin, is a longtime Observer contributor. He has worked at Texas newspapers in Corpus Christi and El Paso and has written for The Boston Globe, The New York Times and Business Week.