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.”
This article appears in May 5 • 1995 and May 5 • 1995 (Cover).