Let Them Eat Cake

The Return of Tax Giveaways

It's back. Fresh from a two-year hiatus, that oft-disputed fiscal tool called tax abatement is once again part of Austin's economic development showcase. The latest participants in a growing national trend, the Austin City Council and the Travis County Commissioners Court, encouraged by the Chamber of Commerce, set policies three weeks ago allowing corporations as much as a 55% freebie on new property taxes for capital-intensive projects, primarily chip fabrication plants with a potential value in the billion-dollar range.

Detractors of the new policy say that tax abatements for behemoth companies mean that citizens and small businesses will end up paying an unfair portion of the costs for new roads, emergency services, and other infrastructure spurred by the new development. Furthermore, with the city's unemployment rate at 2.9% and the growth rate at a healthy 3%, critics argue that gimmicks aren't needed to lure companies to Austin's already booming economy, one that is becoming increasingly dependent on the highly mobile computer industry.

"Why do we need to give tax abatements when we're already going to create 52,000 new jobs in the next two years?" asks Councilmember Max Nofziger, who, along with Councilmember Eric Mitchell, were the only politicians who didn't vote for the policy. "It's better to have sustained growth over a longer period of time than to hype the economy as fast as it will go because there will be a bust to follow the boom, just like in the Eighties."

The policy allows as much as a 55% reduction on new property taxes, for up to 10 years, for companies whose capital investments exceed $250,000 per employee. So to qualify, a billion-dollar plant must employ at least 4,000 people; otherwise the city will have the right to terminate the agreement and collect "all taxes previously abated." Up to 15% of the abatement will be available only if a certain number of workers are hired from a proposed job training program.

The training program would be paid for with the plant's unabated taxes. Twenty percent would go toward the program, the remainder to the city and the county.

If a corporation receives the maximum abatement, that could translate into $62 million in uncollected taxes for a $1 billion plant, assuming the current city and county tax rates hold at their respective levels of 56 cents and 55 cents per every $100. That translates into $15,500 per worker over 10 years, if the company employs the minimum number of jobs. And since average county property values are rising in response to the stalwart economy (they jumped an average of 15% between 1994 and 1995), the abatements will be worth even more in the future. Moreover, council willing, the high-tech facilities could get additional millions in big-business incentives like development waivers and utility upgrades, like the $31 million package Sematech got from the city in 1987.

Those favoring the abatements, an odd coalition of Chamber officials, neighborhood activists, educators, and politicians, warn that without it, the companies will find a better deal in places like Portland, Oregon, where, unlike here, school district tax abatements are allowed under state law. Chamber officials, who played the lead role in the policy's development, and who are mediating between the city and five unnamed semiconductor companies, argue that without the plants, Austin will lose out on the jobs and lucrative tax base they offer. Besides, they add, the city can still collect at least 45% of a plant's new property taxes, meaning the city could get millions it would not have gotten otherwise.

What both sides do agree on is that Austin's economic about-face is partially due to the previous abatement policy, which was in effect from 1989 to 1993. The tax benefits convinced eight companies, including Celis Brewery, Golf-smith International, Motorola, and Applied Materials, to open new facilities in Austin between 1990 and 1994. The facilities received no less than an 80% abatement on property taxes for seven years. City staff estimate that the abatements granted total $24 million in lost tax revenue. Yet, at the same time, the companies employ 7,850 people, and pay the the city upwards of $11 million annually for electric, water, and wasterwater services. Proponents call this a fair tradeoff, but abatement critics say it's a short-lived boon. There's no guarantee, they say, that the companies will stick around once the deal runs out.

They point to the case of Conquest Airlines, which in 1989 moved its headquarters, including 78 employees and six airplanes, to Austin from Beaumont to nab the city's first-ever abatement - relief from new airplane property taxes that was worth an estimated $1.3 million over seven years.

The company quickly expanded its operations across the Southeastern United States. By 1993, it employed 300 workers and owned 16 airplanes, but the business jumped ship. With a year and a half still left on its abatement, Conquest and city officials acknowledge that the company's final days may be near. In a last-ditch effort for survival, management has liquidated 10 planes and approximately 100 employees.

City leaders, counting on the long-term revenue Austin would get for its short-term gratuity, promised taxpayers that 200 Austinites would gain employment at Conquest Airlines for 14 years, and that the company would establish a $47 million tax base to help stabilize property taxes when the abatement ended. Yet in 1994, the company's tax base was appraised at $4.7 million.

"We bet Conquest's taxes that they would be here for 14 years [and we may] lose that bet," says ex-councilmember Robert Barnstone, who voted against the Conquest abatement in 1989. "This deal was a relatively small one, but the major difficulty with all of these tax abatements is that they have all the elements of a poker game, and the council doesn't play poker very well. It offers grants and incentives when they're not needed and it winds up costing itself money."

Ex-councilmember George Humphrey, who voted for the city's abatement policy in 1989 in order to revive the ailing economy, says the huge giveaways create an unfair tax burden for small businesses and homeowners, particularly in the long run, since someone must pay for the infrastructure needed to maintain the growth. "It's clearly a bad economic decision to be giving multi-national corporations a tax abatement when the people of Austin are already having to pay higher and higher taxes. It's just beyond my imagination why we would give them relief while local business people are busting their tail, and have to shoulder [the corporation's] burdens."

Councilmember Ronney Rey- nolds, an accountant, disagrees, saying that the unfair burden argument has no factual basis and that big business already pays a disproportionate share of the city's taxes and utility revenues. He notes that even if a $1 billion plant gets a maximum abatement, the city and county will still be able to collect $50 million in property tax revenues. Reynolds adds that without a tax abatement, the city will get slaughtered in a nationwide bidding war for the new plants, saying that he'd "rather get 45% of something than 100% of nothing."

One of Austin's fiercest competitors is neighboring Round Rock, which nabbed Dell Computer Corp. from the city with a sweetheart deal two years ago, and is currently holding out a 50% property tax break for 10 years to a new fab plant from LSI Logic, which had sales of $902 million last year. The $3.1 billion semiconductor company, which is based in Milpitas, California, grew at a 48% clip in 1994. Needless to say, Austin leaders want the fab plant, too.

Adding fuel to the rivalry is LSI itself, which, like other expanding or relocating companies, keeps its plans quiet and plays cities against each other in order to get the best deal possible. According to an April 20 report in the Austin-American Statesman, the company is considering Austin, Portland, and Provo, Utah, for an $800 million, 400-employee chip manufacturing plant. But the Round Rock Leader reported four days later that LSI is considering Round Rock and Portland for a $3 billion facility, and made no mention of Austin. The Leader also reported that Round Rock had lost, presumably to Portland. Gary Bonham, public relations manager for LSI, would reveal only that a decision on a site will be announced by early June.

Another expanding company is Samsung Semiconductor, which is considering Austin among 20 other locations across the country for a $1.2 billion, 1,200-employee, customized chip factory. The Korea-based corporation, the world's seventh largest semiconductor company, had sales of
$4.9 billion last year, according to K.W. Kim, director of corporate development for Samsung.

One candidate for tax abatements under the new policy is Advanced Micro Devices (AMD), headquartered in Sunnyvale, California. AMD, which already has one plant in Austin, saw 27% growth last year and is worth $2.9 billion. The chip manufacturer lost a bid last fall for a $42 million city/county tax credit on its new $1.3 billion plant on Ben White, known as Fab 25. The plant is nearly half constructed and 250 of the anticipated 1,000 employees already work there, but it too is eligible for the abatement, as an amendment by Councilmember Brigid Shea to limit the abatement to only new projects failed.

"[The abatement] is obviously something we're very interested in. We haven't made any decison to move forward, we want to make sure we understand the job training program," says AMD spokesperson David Frink. "We'd like to work with the entities that put it together to ensure that the individuals who come out of the program are equipped to be productive employees."

The training program Frink refers to is being hailed by abatement supporters as the icing on the plan. It is expected to graduate 100 youths per year with associate degree-level skills in electronics. The program will likely function under the auspices of the Austin-Travis County Workforce Development Board, whose members will be appointed by the mayor and the county judge. Austin Community College (ACC) will provide the training with funds received from 20% of the plant's property taxes. According to preliminary estimates, it will cost up to $40,000 to bring a trainee from a fifth-grade to a 12th-grade level - the minimum required for a wafer-fab operator - within two years.

"There's a tremendous human investment in this project, and there's a tremendous return," says Hosni Nabi, chief academic officer at ACC. "As you know, anyone who comes out of a two-year program increases their marketability by 50% and their income increases dramatically."

Another part of the training plan calls for drawing targeted workers from the same neighborhood that hosts the plant, which Chamber officials say could likely be East Austin. But unlike the past policy, when the city and county offered higher tax abatements to companies that located in blighted areas, or enterprise zones, no such incentive exists in the most recent plan.

Nonetheless, abatement supporters cling to their hope-for-the-poor argument. "Sematech sold the American Dream to the poor community and nothing came of it. But we're trying to prevent that from happening again," says County Judge Bill Aleshire. "This [abatement policy] makes us give an honest promise to poor folk that they'll get help."

East Austin groups like People in Defense of the Earth and her Resources (PODER) and the East Austin Strategy Team (EAST), pray the judge is right. EAST chair Ron Davis supports the program, but says "it's going to really have to be monitored, and it's going to really take some good-faith efforts on the part of the company. We're really looking forward to working with some of the employers in the community, but there has to be a direct relationship for the partnership to work right."

On the other hand, there is doubt that a neighborhood will even want a plant nearby. Annually, such high-tech corporations emit thousands of pounds of nerve gases. Motorola and Advanced Micro Devices alone released a combined 275,000 pounds of toxic chemicals into the air last year, according to the Environmental Protection Agency (EPA).

While industry in Travis County cut toxic emissions by 39.2% in 1993, according to the EPA, it was only a year earlier that a study released by IBM found that pregnant assembly line workers who were exposed to glycol ethers, a chemical often used to manufacture computer chips, had a high miscarriage rate of 33%.

Nonetheless, the benefits of finding jobs for the underemployed may outweigh the costs of having a nearby fab plant, especially if precautions like a buffer around the plant and a top-notch emergency response plan is instituted, says Sylvia Ledesma of PODER. "Before, we were getting the toxins and not the jobs; at least now we might get the jobs, too."

Despite the fiscal and environmental implications involved in offering abatements to high-tech corporations, city staffers acknowledge that they were not involved in the policy's development. In fact, the only number-crunching came from Chamber officials, who say that Mayor Todd, two months before the vote, requested that they begin talking to high-tech corporations that were thinking of expanding into Austin.

Moreover, councilmembers say they knew little of the guidelines and the companies involved before they were asked to vote on the abatement policy. Only two weeks before the vote, Nofziger, at Todd's invitation, attented a meeting that included Chamber officials and a corporation that was eyeing Austin. Nofziger says he went "without knowing the terms of the agreement that had been worked out by the Chamber of Commerce. The plan had already been worked out at that point, but I hadn't been informed of the details."

Nonetheless, the city and county have embarked on a policy that could leave indelible impressions on the city's economy. Bob Wilson, a professor of urban policy at the University of Texas, asserts that, like Silicon Valley in the 1980s, Austin may be banking too much of its economy on one industry. Already, with help from companies like Motorola, Advanced Micro Devices, and Applied Materials, high-tech manufacturing in 1994 accounted for 9% (41,300 workers) of the employment in the Austin Metropolitan Statistical Area. Moreover, with new fab plants will come more semiconductor-related businesses to service their needs. For example, at least 95 companies, many of them new in the Austin area, supply both Motorola and Advanced Micro Devices, two of Austin's largest employers.

While Wilson says Austin's diverse high-tech portfolio will allow it to weather short-term fluctuations in the computer industry, the long-term scenario may be different. "Because we're growing so rapidly now, it's going to push prices up, land values up, salaries up, everything's going to go up and at some point Austin will no longer be a low-cost site. This is an industry that moves around. It was located in Silicon Valley for a while, and now it's moving out. Almost all of these industries in a 10 to 15 year period move into a decline, so in the long term the city will end up being less attractive because the costs have been driven up. If you want to look 20 years down the road, Silicon Valley is where we'll be."

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