Denton businesses and developers are expected to receive more than $1 million next year in tax abatements and other incentives from the city, and those costs could rise in coming years as several new incentive agreements take effect.
But city officials say the benefits of the agreements - rising property values, higher sales and new jobs - should far outweigh the cost.
"It's not just an additional expense; it's additional [tax] revenue as well," said Bryan Langley, the city's chief financial officer. "Revenues will more than cover the additional expense that we have."
The City Council will hold a public hearing Tuesday night on the $585.4 million proposed budget for the fiscal year starting Oct. 1. Incentive agreements aren't affected by budget votes, but the agreements affect city budgets for years to come by tying up future tax revenue.
Denton has 13 tax incentive agreements that are either active or expected to kick in over the next two years, according to interviews and city records. The council approved them at various times over a decade, and they affect the budget in different ways.
In some cases, the city simply never collects the tax revenue. In others, the city writes the business a refund check.
In every case, the city asked for something in return, ranging from a new or expanded manufacturing plant, to road improvements, to a certain number of new jobs created.
City officials say every dollar given in tax incentives means many more are invested in the local economy. Most recently, the council approved a $9.5 million incentive agreement last month with two Dallas-based companies that planned to spend an estimated $60 million to redevelop Golden Triangle Mall.
Linda Ratliff, the city's economic development director, said tax incentives can be critical to attracting and keeping jobs in Denton. Incentives were seen as key in attracting several major businesses in recent years, including oil services company Schlumberger Ltd., which Gainesville was courting.
"I wish we lived in a world where we didn't have to give incentives, but we are in competition with other cities out there," Ratliff said. "If you're not out there involved in these projects, there's a good chance you're not going to get any of them."
'Zero-sum game'
Not everyone agrees.
"I'm convinced that tax incentives are not the decision-making factor when it comes to a business location or expansion," said Bernard Weinstein, a professor of business economics at Southern Methodist University's Cox School of Business who has studied the issue. "Mainly that's because savings from state and local tax breaks are fairly minimal if you look at overall operating expenses at most businesses."
Also, since companies can write off state and local taxes on federal tax returns, incentive agreements increase their federal taxable income, lessening their actual benefit, he said.
Weinstein said incentives have become a "zero-sum game" because most local governments offer the same basic package. Even if a company picks Denton over McKinney, he said, the economic benefit is the same to the North Texas region.
"My opinion is based on my own experience and scholarly research over 60 years that found they're not the game changer," Weinstein said. "They rank fairly low on the list of factors a business considers when looking for a place to build or expand."
Economic impact
The Rayzor Ranch, Unicorn Lake and Denton Crossing developments are expected to receive a combined $960,000 in the next year under performance-based sales tax incentive agreements, according to city budget estimates. Peterbilt Motors, Fastenal, Aldi Inc. and Sally Beauty are expected to receive more than $300,000 in partial property tax abatements on buildings, equipment or inventory.
A property tax incentive agreement with Schlumberger is expected to kick in next year, but a cost estimate was not immediately available.
The incentive agreement for Rayzor Ranch, a mixed-use project under development at Interstate 35 and U.S. Highway 380, is expected to take effect in the spring. The $62 million agreement, approved in 2007, was expected to kick in last year but didn't because the project failed to open enough business space.
Denton needs incentive agreements because, unlike many Texas cities, it hasn't set aside part of its sales tax rate for economic development, Ratliff said.
The state's sales tax rate is 6.25 percent, and cities can collect up to 2 percent for local needs, for a total cap of 8.25 percent.
Denton reached its sales tax cap after dedicating 0.5 percent to help form the Denton County Transportation Authority.
"Our competition is cities with a pot of dollars that they can be very flexible with in trying to get folks to locate to their city," Ratliff said. "If Denton had a half-cent sales tax, we would probably have a budget of $6 [million] or $7 million a year" to offer incentives.
A report by the city's economic development department in 2009, the most recent available, said the city received a 385 percent return on investment from tax incentives approved in the prior decade.
According to the report, the city awarded $3.16 million in incentives between 1999 and 2009 and saw an increase in property and sales tax revenues of $12.18 million.
However, the report assumed the companies would not have built or expanded in Denton without incentives.
The report also credits incentives with creating 2,445 new jobs but doesn't differentiate between low- or high-wage positions.
Ratliff said incentives are given mainly because Denton is actively competing with other cities.
"Is it the only factor? Maybe not, but that's the investment the city has to make to ensure that we have the businesses and the tax base and the quality jobs," Ratliff said. "These are agreements [with obligations]. We aren't just writing checks like some of the other cities are."
Denton has lost projects during negotiations when it wouldn't offer as much as developers wanted, Ratliff said. When agreements are reached, developers rarely get everything they asked for, she said.
Icing on the cake
John Baen, a real estate professor at the University of North Texas, said he believes Denton needs to offer incentive agreements to compete with other cities in the region, especially considering the city's reputation for having rigid building standards.
Still, Baen said, an incentive isn't the only factor in a company's decision to build or expand.
Tax abatements are the icing on the cake for developers, he said, not the cake.
LOWELL BROWN can be reached at 940-566-6882. His e-mail address is lmbrown@dentonrc.com.
