Georgetown and Midland City Council approval of tax incentive deals worth at least $11 million to woo the area's fist Costco Wholesale warehouse may jeopardize local businesses, reduce public services and negatively impact taxpayers, an expert has argued.

"My general take on incentives are that they are, with only rare exceptions, very bad public policy," said Nathan Jensen, a professor in the Department of Government at the University of Texas-Austin, to Texas Business Coalition. "The simple concern is that most incentives are found to be going to companies that would have invested anyway. Thus it is spending public resources on development that would have occurred anyway. This means it is either leading to higher taxes for residents or other businesses or a lowering of services."

The 158,000-square-foot store will be located on the northwest corner of I-35 and Georgetown’s Lakeway Drive. The new Costco is projected to create 235 new jobs while the city’s return on investment is looking to exceed its cost incentives within three years of operation. Jensen contends that while the project may open new jobs, it will impact existing local businesses and thereby negate any positive affects.

"Certain types of businesses only displace existing businesses," said Jensen. "This was from some older literature on Walmart and how it leads to closures of small businesses. This is the creative destruction of capitalism and in some ways can be good for innovation and competition. But if the government is subsidizing a new business that leads to other existing businesses to close, that is a major concern. Most cities have fully moved away from subsidizing retail. This is some of the worst economic development investment."

Cities rarely need to court big retail stores because those business are probably already looking to expand in the general area, Jensen said. However, in a statement provided to Texas Business Coalition, the City of Georgetown argued that the project expects to increase the town’s overall retail spending despite the loss of several local businesses.

“The Costco store in Georgetown is expected to increase the proportion of purchases by residents inside the city and reduce the city’s retail leakage to nearby cities,” City of Georgetown Communications Manager Keith Hutchinson said in the statement. “In addition, the Costco location is anticipated to attract shoppers from northern communities outside of the Austin metro region since there is currently no other Costco store between Georgetown and the Dallas metro area.”

The statement includes a 2016 local study that concluded Georgetown households spend only 32 percent of their total annual spending at local businesses. Jensen rebukes those claims of economic prosperity.

"There is very little economic development impact," he said. "They create few new jobs and don’t tend to pay high wages. I don’t think cities should block these developments. But it is a horrible use of public resources. As far as I know, these agreements don’t have any wage standards. So at the very least, the government could use these incentives to really push up wages at higher rates than would be paid without incentives. This looks to be a very bad incentive deal that is targeting the wrong type of investment and isn’t pushing for higher wages. These are exactly the kinds of deals cities have moved away from."

Georgetown officials approved the decision during a council meeting on Dec. 10, along with five additional items related to the project. Georgetown Transportation Enhancement Corporation (GTEC) will donate up to $2 million in funding for public roads in addition to the new Costco site receiving a minimum of $20 million in capital costs for the facility and public improvements. 

Also approved was a sales tax-reimbursement agreement where the city will reimburse half of sales taxes paid to Costco each year up to either $2 million total or 10 annual payments. In addition, two items will pay for the $1.2 million cost of a new gas line to provide natural gas, which will partially be funded by GTEC and Atmos Energy. 

Jensen notes that the public will feel the impact of these incentives. 

"First, incentives often lead to a reduction in public services," he said. "In many communities, school districts feel the biggest impact, although this varies on the types of incentives offered. Other services can be curtailed due to incentives. The other is that governments have to find additional ways to raise revenue. Many Texas municipalities raise sales taxes to pay for economic development. Other communities have to keep property taxes or other fees high."

While proponents claim there are no costs, Jensen argued that it is a false narrative and that taxpayers will ultimately pay the price.