(Bloomberg) -- Landing Samsung Electronics Co.’s massive new chip plant didn’t come cheap for Taylor, Texas. The question now is whether the investment will pay off.
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State and local officials offered a raft of incentives to lure the plant to the town, which is in Austin’s northeastern suburban fringe. It all could amount to hundreds of millions of dollars for what’s expected to be one of the largest foreign investments in the U.S.
The approach underscores a debate that’s raged for years about heavily subsidized economic development projects. Research suggests they don’t always deliver, despite the eye-popping numbers in pitch decks and the politicians racing around to take credit for delivering jobs.
“The benefit of capital-intensive manufacturing is generally the tax revenues,” said Nathan Jensen, a professor at the University of Texas at Austin, who studies subsidy programs. “But these tax revenues are exactly what the state and local governments are giving back to companies.”
Few states are as finely tuned as Texas when it comes to landing big, new business investments. Its low taxes and light regulations have attracted companies for decades, including tech giants like Apple Inc., Tesla Inc. and Amazon.com Inc., which have all expanded in the state.
But Texas also knows how to close the deal with generous incentives. In total, the state has given out almost 6,300 awards that amount to more than $8 billion in subsidies, according to data from Good Jobs First, a Washington-based policy resource center. Texas ranks seventh in the nation for total dollars given. New York leads the nation with a total of $40.8 billion.
“Texas has a long history in the business-development game and has used tax incentives and subsidies, as well as its low-tax environment, to lure factories and other businesses from elsewhere in the U.S. since the 1980s,” said Margaret O’Mara, a history professor at the University of Washington, who studies the tech industry.
“This promotion, of course, comes at the expense of tax revenue and investment in other public infrastructure and services,” she added.
For an example of how tax breaks to lure business can backfire, consider Wisconsin’s $4.5 billion deal with Taiwan’s Foxconn to build a high-tech manufacturing hub that turned into a fiasco as the Apple supplier fell short of hiring goals.
The plant in Taylor will significantly augment Samsung’s already sizable presence around Austin, where it has a sprawling complex that houses more than 3,000 employees and fabricates some of the country’s most sophisticated chips. The South Korean tech giant plans to invest an additional $17 billion in the new factory, which is expected to create more than 2,000 jobs.
Local officials worked diligently to land the investment, as Samsung weighed incentives from communities in New York and Arizona, as well as nearby Travis County, home to Austin.
A key consideration was making sure the plant would have consistent electricity after power outages last winter knocked Samsung’s Austin facility offline for more than a month. Officials even helped broker a deal to make sure that water could be piped in from a nearby county, according to the Austin Business Journal.
The plan includes waiving 90% of property taxes for a decade, and 85% for the following 10 years. An incentive program that reduces the taxes Samsung would pay for schools is estimated to cost $314 million.
In addition to those abatements, the state is giving Samsung a $27 million grant from its Texas Enterprise Fund, which is aimed at luring projects that create jobs. The company could also get help with the construction and operation of the facility, such as exempting sales tax on materials used for building.
“It’s safe to say this is one of many subsidies they are going to enjoy,” said Kasia Tarczynska, a research analyst with Good Jobs First.
Of course, finding so many workers in the middle of a labor shortage presents a host of challenges. And then there are the risks communities face in adding thousands of new residents, including traffic snarls, escalating home prices and other burdens on the region’s infrastructure.
Taylor is planning to issue revenue bonds supported by Samsung’s utility payments to cover the cost of infrastructure, the city’s spokesperson Stacey Osborne wrote in an email. It’s expecting to issue an estimated $17 million to $18 million in debt in the first quarter of next year, but she added that the city could pursue a negotiated private placement, and the overall amount could change depending on adjustments in construction costs. Taylor has close to $51 million of outstanding debt.
In a statement announcing the deal Tuesday, Governor Greg Abbott said the plant will bring “countless opportunities” for Texans and “play a major role in our state’s continued exceptionalism in the semiconductor industry.” Taylor Mayor Brandt Rydell called it “the single most significant and consequential development for the local economy since the International & Great Northern Railroad laid tracks here in the 1870s.”
Samsung is “laying the groundwork for another important chapter in our future,” said Kinam Kim, vice chairman and head of the company’s Electronics Device Solutions division. “We are also proud to be bringing more jobs and supporting the training and talent development for local communities.”
The investment stands to put Taylor -- and Texas -- at the vanguard of an industry of increasing geopolitical importance. Chip shortages this year have had sweeping economic consequences, leading the Biden administration and Congress to push for new domestic production.
Taylor sits in a region that’s experiencing booming growth, and its tight labor market suggests workers will have to be brought in from elsewhere. Even so, the addition of a major new factory will almost certainly give an extra jolt to a small town known for its barbecue.
The investment may also come in handy for Abbott as he ramps up his bid for reelection next year.
“It will help Abbott build a narrative that the state is open for business and drawing in corporate investment,” said Cal Jillson, a professor of political science at Southern Methodist University in Dallas.
The governor has presided over some of the fastest economic growth in the country as financial services firms and tech giants expand in the state. But he’s also embraced a conservative social agenda that has generated pushback from corporations concerned that it could make it harder to operate in Texas and attract the best talent.
“This is a very visible way for the governor to show that he is creating jobs,” said University of Texas’s Jensen. “Governors get a considerable increase in support from voters -- in particular more moderate voters -- from these kinds of wins.”
Subsidy programs are hardly a Texas phenomenon -- or one that’s exclusive to Republican politicians, said Brett Theodos, a senior fellow at the Urban Institute. He pointed to the lucrative film tax credits commonplace in Georgia and the nearly $900 million Tennessee lawmakers greenlit earlier this year for a Ford Motor Co. plant near Memphis.
“This is something that Republicans and Democrats have done -- it’s not confined to one party,” he said. “It’s not fully resistible when multinational corporations can play cities and states off each other.”
(Added details on Taylor’s municipal financing in the 17th paragraph)
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