Linda Burns

As my corporate site location consulting business now takes me throughout the United States and beyond, I have increased respect for Texas’ state and local incentive programs.

Texas is now the second-largest economy, passing New York and coming in second to California, per data released by the U.S. Department of Commerce Bureau of Economic Analysis, for a good reason. I credit the flexibility and versatility of Texas’ incentive programs for significantly contributing to this growth. No other state offers the variety of incentive options for projects of varying investment and employment levels I have experienced in Texas—but change is under way.

The changing incentive environment is truly the result of today’s “business not as usual” climate. With increased leasing and reliance on landlord tenant improvement budgets versus significant real property investment, many projects fall short of the qualifying thresholds outlined in outdated incentive policies. With most of the motivation for corporate real estate decisions still focused on cost reduction and consolidation, the justification for incentives to support business relocations and expansions is stronger than ever.

Although most policies for incentives do not apply to retention projects, the reality today is that many communities are using incentives to retain or expand businesses. Texas is one of the few states where there are local and state incentives that can be adapted for this purpose. These same flexible programs came under fire this year by some Texas legislators, however, the argument by proponents that incentives, whether for retention or new business, are needed to help Texas’ struggling economy prevailed.

Texas communities tend to work with performance-based incentives, where a project is evaluated based on job creation, capital investment, and/or sales tax generation. Performance-based incentives are becoming increasingly popular nationally, where the long-term trend has been to offer tax credits rather than grants.

Most of these newer performance-based incentive programs are limited and usually tied to recruitment, screening, and job training costs. Texas’ Economic Development Sales Tax, which allows local communities to use up to a half-cent of its sales tax for economic development efforts, serves as the backbone of local economic development efforts in more than 500 communities. These sales tax economic development corporations have become a model program by which communities can provide businesses with cash grants for relocation, tenant improvement costs, job training, and assistance with infrastructure costs.

The credit crunch, coupled with the continued pursuit for bottom-line revenue and cost reductions, has made locales with discretionary grant and financing-driven incentive programs increasingly attractive. There are new opportunities on the incentive front with states like Virginia, Louisiana, and Arizona, following the lead of Texas in modeling the state’s programs like discretionary cash grants, tax rebates, the Texas Enterprise Project sales and use tax rebate program, and the Texas Enterprise deal-closing fund.

Texas’ incentive programs will face scrutiny during the 2013 State of Texas Legislative session. This is a result of the review by the Legislature’s newly created Select Committee on Economic Development, whose role it will be to study and make recommendations on incentives. Communities in Texas could lose their competitive edge.

The western world has always considered ‘13’ unlucky. Hopefully, the “2013″ Legislative session will recognize the vital role its local and state incentive programs have played in the state’s economic recovery.

Linda Burns is a national site consultant based out of Dallas. She specializes in location incentives and economic development consulting. Contact her at linda@burnsdevelopmentgroup.com.