Lawmakers focus on incentives to draw employers
SANTA FE – The list of tax breaks and economic development incentives handed to businesses over the past several years reads like a chapter book.
New Mexico has spent money on job training and recruitment. It has helped businesses with necessary public infrastructure and worked to level the playing field with neighboring states by cutting corporate taxes on profits, purchases, payrolls and sales.
But with the state unemployment rate now the highest in the United States and job growth stalled, lawmakers and Gov. Susana Martinez are again grappling with a path forward for more diversified job growth and economic development.
With layoffs in the energy sector rippling through the state economy, it may be impossible to know whether the state is a victim of bad luck or bad policy.
"There's always more you can do," said state Sen. Clemente Sanchez, a Grants Democrat who works in small-business development. "Everyone wants instant gratification. People are impatient, that's understandable. Our kids, our grandkids, they leave the state, and that's frustrating. Business needs certainty. These things don't happen overnight. It all makes a difference, but it might take five years."
Economics professor Jim Peach of New Mexico State University is not so sure. "A lot of people talk about the business climate, and what they really mean is reducing taxes and regulations. But the No. 1 thing businesses look for is an educated and well-skilled work force. I think New Mexico has a failed strategy of economic development."
State Sen. Peter Wirth, D-Santa Fe, said there has been bipartisan support for many of the efforts, but the state needs to step up and do more, especially with comprehensive tax reform.
"Lower rates and writing massive checks to lure in companies is a real long shot, and that's the track we're on," he said. "We have to build this from the ground up and help our small businesses."
Gov. Susana Martinez emphasized job training and worker readiness in her State of the State speech last week, saying "recruitment deals require a significant number of highly specialized, trained workers." She continued to push her education reforms as the way to a stronger economy. "We need to graduate more of our kids from high school, ready for the work force or college," she said.
A critique of economic development efforts by the Legislative Finance Committee emphasized that no one program will cure the state's systemic problems.
"A continuing issue with New Mexico's economic development efforts is the search for a silver bullet — a single program or incentive that will cure the state's economic ills," according to the LFC analysis. "This ignores the multitude of long-term structural challenges New Mexico faces, including high-school drop out rates, lack of infrastructure and available buildings, regulatory concerns and a skilled workforce."
For three years, the governor and lawmakers have essentially tried it all, tinkering with the tax code, reducing some of the corporate rates and offering incentives to firms that hire workers. They've boosted tourism marketing, added money to job-training programs and invigorated partnerships with local communities for downtown redevelopment efforts. More money for business recruitment has gone to the New Mexico Partnership program, the public-private group that coordinates private-sector relocation efforts.
The tax code changes especially have put the state in the spotlight.
"The state stormed back into the limelight with bold reforms to its corporate tax structure and incentive programs," writes the business newsletter SiteSelection, which is geared toward business recruiters and economic development officials. "Star quality shone through with innovations like a single sales factor, which allows companies to be taxed only on sales to customers in New Mexico, effectively eliminating corporate income taxes for most manufacturers. ... Companies are taking notice," states the piece, published in November.
Martinez echoed that in her speech, citing the photonics firm Skorpios, which recently announced it would expand in Albuquerque and add some 300 jobs that average $60,000 a year.
"Our recruitment pipeline is filling up as these reforms begin to take hold," she said. "New Mexico makes the final cut for larger and more projects than ever before."
The role of LEDA
One of the biggest tools to bring firms to the state and boost expansions of homegrown businesses has been the Local Economic Development Act, or LEDA. The money is often called a "closing fund" because it gives the state grant money to help finalize an agreement with a company that needs costly public improvements, such as water and sewer lines, electrical upgrades, storage or even a wider airport taxiway — as was the case for a business in Roswell.
Boosting the fund has been a bipartisan priority for both the administration and the Legislature and was backed by an interim committee of lawmakers serving on the Jobs Council, which has evaluated job-creation efforts for the past three years.
Some two dozen companies received the pledge of assistance in 2015, and it is the largest economic development program that the state has to offer businesses, both large and small. From a toy-products manufacturer in Los Lunas to a brewery in Santa Fe, from an aviation company in Otero County to a cheese factory in Tucumcari, all received some LEDA money for needed projects.
The $7 million pledged by the state Economic Development Department is supposed boost employment by 2,379 statewide — eventually.
But in an analysis of the program, the Legislative Finance Committee wondered where all those jobs are.
"The state's job growth remains relatively low, and the Economic Development Department assisted in the creation of fewer jobs in 2015 than 2014 despite the enhanced tax climate and spending twice as much in LEDA funds," the document states. "This raises concerns the department might have given funding to companies that would have located in the state regardless of the incentive, or that increased funding led to larger awards for smaller projects."
State Economic Development Director Jon Barela recently told lawmakers that every LEDA dollar comes with a commitment for private investment — $116 million last year. His office is ensuring that businesses that sign a LEDA agreement maintain their commitment to those job goals.
"We will not spend the money for the sake of spending it," he said.
Barela's department also made sure that a recent firm that was sold to Google and left the state refunded a portion of the grant money — and that $1 million can now be used for other projects. Google paid back the money in November.
He added that helping locally grown firms with capital so they can expand without overreaching is a good use of LEDA, even if those firms have no plans to leave New Mexico.
The Santa Fe Brewing Co. received $250,000 in LEDA assistance, even though it had long planned an expansion at its location south of Santa Fe. Would it have left the state without the aid? Probably not, Barela said. But do small companies run up against funding limitations as they grow?
"A small company needed that assistance to launch those jobs and expansion," Barela said of Santa Fe Brewing.
Barela emphasized that having a robust LEDA fund, as well as the tax incentives, has given New Mexico a competitive edge against Texas and Arizona.
"Skorpios is an incredible game-changing company," he said. "It could be 1,000 to 2,000 employees 10 years from now. We had to fight to keep them here. New York, California, Texas were really fighting to get them."
Another firm he is in negotiations with has run up against a shortage of warehouse space south of Las Cruces as business activity along the Mexico border has boomed. While Texas can offer lots of available space, "LEDA can offset that natural advantage that El Paso has," Barela said.
The other challenge New Mexico still faces is marketing — and lawmakers want to beef up spending with the New Mexico Partnership, the economic development organization that works with the state to better promote the recent tax incentives.
"A lot of companies just haven't heard of New Mexico when it comes to business relocation," said Steve Vierck, chief executive and director of the partnership. "They have for tourism, Taos skiing, Santa Fe. There is an awareness when it comes to tourism. But but when it comes to business facilities that can employ people, we're a relative unknown — especially when it comes to Texas and Arizona."
His job is to travel and try to get an hour in front of corporate executives to make the case for New Mexico. The week before the Legislature opened, he was in northern Virginia at a trade show and meeting privately with corporate executives.
"Sales missions have produced the most prospects in companies that have located here," he said. "You kiss a lot of frogs, some of them don't work out. I just left a big company with some operation in the state, and they are looking to do more."
Likewise, Barela said queue of parties interested in New Mexico has never been stronger. "We have some very large projects in the pipeline. If some of those projects were to come through, we would be drawing down that [LEDA] tank pretty quickly," he told lawmakers.
Barela also said there are more efforts underway to frame the "New Mexico True" tourism campaign for better business recruitment.
"We need to be smarter in how we market the state," he said.
Jason A. Espinoza, president of the Association of Commerce and Industry, said the state is on the right path and needs to be continued with more marketing for the New Mexico Partnership and tourism promotion.
More can be done to keep startup companies that expand in the state, and the group is backing a capital gains reinvestment tax credit so entrepreneurs who sell one company and want to start another would do that in New Mexico. He also said work needs to continue on workers' compensation reform and regulatory consistency.
Peach said the state has relied too heavily on recruiting businesses from out of state.
It takes recognition, he said, that a new way forward could mean economic growth comes from making the state a better place to live for everyone, not necessarily the best place for a business to relocate.
And that requires more leadership and coordination from all agencies — especially in higher education.
He added that the successful regions where growth has remained strong through the recession are anchored with higher education, research, manufacturing and a diversified workforce that is drawn to public amenities.
"We need to make New Mexico an attractive place for firms and individuals to come. We need good roads, and we need good parks, and we need broadband," he said.
One of those who agrees is Daniel Burrell, a Santa Fe businessman whose family has funded a private osteopathic medical school in Las Cruces.
The project is only possible with participation from New Mexico State University, which has signed an agreement with the school so the medical students can be part of campus life. There also are shared faculty agreements between the schools. The public-private partnership is seen as one model for a way forward with other efforts.
Burrell said New Mexico sits with Colorado, Texas and Arizona in a competitive part of the country, but that competition is about more than taxes. Many of the economic incentives are quite good, he said, but other factor often outweigh those, including access to capital.
The state needs to invest more in all of them in order to be taken seriously by business — and that includes broadband, roads, bridges, water systems, rail access and airports.
He added that high rates of poverty and crime are not going to attract investment.
"You have to look at long-term planning around some of these issues and make big capital investments," he said.