Elections

Everything is Bigger in Texas: Governor Perry and The Texas Enterprise Fund

Nov 21 '11

We are delighted to welcome the following guest post from Nathan Jensen (Washington University) and Edmund Malesky (UCSD). The post looks, among others, at whether governor Perry was more likely to award grants to businesses that offered campaign contributions.

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We have been working on a series of projects on the political benefits of using tax incentives to attract business. Our work is cross-national, but we have collected some U.S. data on state tax incentives. Given the attention that Rick Perry’s influence on the Texas Economy has received, we thought a quick summary of some preliminary research findings might be of interest to Monkey Cage readers.

U.S. states have become very active in attracting investment for the purpose of job creation. Most states have either government agencies dedicated to investment promotion or have public-private sector partnerships that help facilitate new investment. This includes long lists of tax credits available, including the much maligned Film Tax credits that have attempted to lure Hollywood productions to every corner of the US and Canada. Now, it is not just Angelinos who can run into stars at the super market.

Among the policy levers available to Governors are discretionary  “deal closing” funds.  These funds can be used to supplement existing tax credits to cinch an investment deal when executives appear to be wavering. According to Kansas Inc., 30 states have these deal closing funds with the median program in the $7-10 million range.   The biggest of these funds by quite a margin is the mammoth $250 million Texas Enterprise Fund (TEF) which came to life under Governor Perry in 2003.  The TEF is three times the size of the second largest fund (Alabama).

What makes this fund interesting to political scientists is the amount of discretion the incumbent Governor has over tapping into this tremendous cookie jar.  Created by the Texas Legislature at the request of Governor Perry, the TEF provides grants to new investment.   Recently, a number of news stories, commentators, and Republican opponents have attacked Perry’s use of this fund, claiming that the resources have been allocated for political gain rather than distributed with the best interests of Texans at heart.

To its credit, TEF is transparent about the funds allocated, listing all of these on their website.  While picking out individual companies and their grants makes for interesting news stories, there is an obvious research design problem in only highlighting the funded projects (there is even a greater problem in only highlighting the projects that fit the angle of the story).  To really understand the selection process, we also need to know which projects did not get funded.  It may be that Perry’s selection process included the investments that would have the greatest impact on employment and economic prospects in Texas.   The fact that a few of these projects included those with political connections to Perry is irrelevant if their projects would have been selected anyway.  The only way to know if politics played a role is to see if political factors outweighed the economic benefits of the projects, so bad projects were selected while good investments were left at the altar.

Using public information requests to the Governor Perry’s office we obtained data on the unfunded projects.  Thus we can compare the 99 funded projects (plus others that have been accepted but the funds have yet to be disbursed) with the rejected projects.  We also have data on projects that were offered funding, but decided to not invest in Texas (16 projects) and firms that pulled their application prior to a final decision (6 projects).

One striking descriptive statistic is that only a total 18 projects were unfunded.  This fits some of our own work where we argue that Governors use these tax incentives to claim credit for investment coming to the state and deflect blame for failed bids to attract capital.

We are still in the process of collecting more background information on the funded and unfunded projects, but one interesting comparison is total campaign contributions to Rick Perry by firms and employees of these firms (Hat Tip to Adam Bonica for pointing us to this data).  For the funded projects, the average total campaign contribution (corporate contributions and individual directly to Rick Perry’s campaign in 2002, 2006, and 2010) is $5,070.  The rejected applications average $508.

While this descriptive statistic may stink of nepotism, these averages mask the high variance in both contributions and the size of grants received.  (the standard deviation of contributions for the funded projects is $17,885, unfunded $1,897).  For the firms that had their applications rejected, only 3/18 provided any direct contributions.  The biggest donor which did not receive a grant was Seimens, providing over $8,000 in contributions.  But a similar pattern holds for the funded projects, 71 firms, a clear majority also provided no direct contributions.  Of the firms that did provide contributions, these contributions tend to be relatively large (on average $16,000).  Looking at the data from a different angle, the average rejection rate for companies that provided contributions was 8.5% while the rejection rate for non-contributors was 17%.

As noted, these rejection rates are quite low and a better test is to focus on the size of grants awarded.  Below is a simple scatter plot presenting the relationship between contributions to the Governor Perry’s campaign and size of the grant received.  The 18 firms that had their application rejected are coded as a grant of $0.

While this data doesn’t provide a smoking gun on how politics affects the allocation of these discretionary grants it is suggestive that this program may have been used to reward political benefactors.  Preliminary evidence suggests that Perry donors are both half as likely to have their applications rejected and received grants that were three times larger than non-contributors (average grant size of $7.8 million for contributors and $2.6 million for non-contributors).

Yet the problem with this analysis is that the firms that provide contributions may different from those that do not.  For example, the average size of the parent firm is much larger for contributors (68,000 employees) than non-contributors (8,100 employees).

To directly examine the treatment of contributors and non-contributors we examined how the size of employment directly generated by the company affected the size of grant provided.  The following figure illustrates this with a simple scatter plot.

This figure doesn’t tell a simple story on the relationship between contributions and grants.  In a series of multivariate regressions, the strongest predictor of grant size was the amount of jobs created – a fact that certainly fits with the narrative that Perry has portrayed in his campaign stump speech.  But, on the margins contributions seem to matter.   As a final test, we compared the ratio of jobs per dollar awarded.  Using a simple T-test we found a statistically significant difference between non-contributor (mean grant per job of $4,891, S.D. $360) and contributors ($6,308, S.D. $711)

Overall we find some limited evidence of political favoritism.  While contributors and non-contributors are both quite likely to receive TEF grants, the probability of rejection is twice as high for non-contributors (although not statistically significant) and the size of these grants does vary.  The dollar amount allocated is largely a function of the jobs created by the investment.  But contributions also have a sizable impact on the amount of dollars per job created.  Contributors receive an extra $1417 per job created, or an extra 29% in incentives per job.  Only time will tell whether these jobs are worth the cost of the layout of taxpayer money, but the economics literature certainly leaves room to be suspicious that are not.

This is work in progress and we welcome comments, criticisms and suggestions.  Two issues that concerns us beyond the standard questions of statistical identification on the relationship between contributions and political favoritism.  First, a number of media outlets have reported the Texas Enterprise Fund has provided inflated job numbers for political contributors.  Thus our data may be biased towards finding no relationship between contributions and grants.  Second, an alternative mechanism for providing campaign contributions to the Perry campaign is through the Republican Governors Association.