San Diego City Council To Consider $1.5M Tax Rebate For Illumina
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July 21, 2014 1:07 p.m.
San Diego City Council To Vote Today On Tax Rebates For Biotech Company Illumina
Almis Udrys, director of government affairs for city of San Diego and Mayor Kevin Faulconer's pointman on the Illumina deal.
Alan Gin, economics professor at the University of San Diego, author of USD's Index of Leading Economic Indicators.
MAUREEN CAVANAUGH: Our top story on Midday Edition involves a vote today at the San Diego City Council that is expected to seal the deal on tax rebates for the biotech company Illumina. The company manufactures medical devices, employs up to 1000 people in San Diego, and apparently was considered moving out of the city. The deal would give the company $1.5 million in tax rebates in return for Illumina state in San Diego for the next ten years. It is the largest of three tax rebate deals struck with San Diego businesses this year, which is something of a new trend in San Diego. Earlier today I spoke with Almis Udrys, director of government affairs for the city of San Diego. Here's that interview:
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MAUREEN CAVANAUGH: If the city council approved said, how does the deal work? Is it a lump sum tax rebate?
ALMIS UDRYS: That is absolutely right, the tax rebate is going to take at once Illumina could demonstrate they have generated tax revenue above and beyond what we have received over the last few years.
MAUREEN CAVANAUGH: That is up to $1.5 million, is that right?
ALMIS UDRYS: That is correct, $1.5 million with interest as well, over the time while they are claiming the rebate, interest would be accrued as well. In the end it would be over $1.5 million
MAUREEN CAVANAUGH: This is a ten year deal with Illumina. Does the company receive a yearly incentive from the city?
ALMIS UDRYS: They do not. The incentive really is focused on Illumina retaining jobs in San Diego. The sooner they generate the additional revenue above the most recent year, the sooner they get to claim the rebates. To that degree, if they bring more people on board or generate more sales revenue, that will help them get the rebate sooner.
MAUREEN CAVANAUGH: Illumina was apparently thinking of relocating outside of San Diego. Where and why?
ALMIS UDRYS: We were told early in the Mayor's administration, this goes back to early March, that Illumina had been scoping out other locations to expand manufacturing operations. A couple of the cities that we heard of through our partners was Poway, Memphis, and locations and other cities. One of the driving factors particularly outside of California is the relative cost of doing business and the tax regulations that you may be subjected to tend to be a little bit less intense than other states.
MAUREEN CAVANAUGH: And the cost of living perhaps?
ALMIS UDRYS: That also can play a factor. I do not know all of the factors that Illumina was considering, but certainly the cost of living can play a role in where a company may choose to locate or expand.
MAUREEN CAVANAUGH: Why is it important to the city for Illumina to stay in San Diego?
ALMIS UDRYS: Illumina is our twelfth largest sales and use tax generator in the city. They provide the most recent tax share, they provided the city with $1.3 million in revenue, this is the revenue that you hear Mayor Faulconer talk about, our sales and use tax revenue provides funds to enable us to do neighborhood services like street repair, sidewalks, library hours, streetlights, that revenue from all of the companies in our city, all of the businesses in our city, is what drives our ability to deliver services. Keeping one of our top sales and use tax distributors was of utmost importance to Mayor Faulconer, and it is just an added bonus that they are in one of our base sectors, our innovation economy, the biotechnology sphere. They produce some very incredible machines that will lead us into the next iteration of medical advances.
MAUREEN CAVANAUGH: Theoretically what you're saying X a lot of sense, keeping this company here with jobs will be a financial benefit to the city. But will any city agency actually keep track of data to make sure that the city is actually profiting from making this tax rebate deal?
ALMIS UDRYS: That is an excellent question, and one of the requirements within the economic development incentive agreement, is that Illumina report to us on their job status, both manufacturing and sales jobs, so that annually we can verify that the commitment that they made to us in this agreement is being met, and the condition for the rebate is being that, because those manufacturing jobs and the retention of those jobs is integral to this deal to our ability to retain revenue and keep some very good paying jobs in the city of San Diego.
MAUREEN CAVANAUGH: The formal name for this deal is the economic incentive agreement. The city has certain criteria for offering this kind of tax incentive. What is the criteria that the city uses?
ALMIS UDRYS: That is an interesting question, the reason I say that is because over the last several years, almost a decade, we have not entered into very many of these larger scale economic development agreements. This will be one of the larger ones over the last decade, and when we determine the criteria for these deals, one of the first questions we ask is say your company is interested in the agreement, make your case. What is it we benefit from you being here, and what are you interested in our help in? We look at the most recent ones, this year with Mayor Faulconer, this will be our third one. Two of them were craft breweries, Ale Smith and Ballast Point earlier in the year, and this one with Illumina, all of them share a common thread with manufacturing jobs, good paying jobs that have been difficult to retain in the city of San Diego and the state of California. Manufacturing being one of our ace sector economies, Illumina happens to have before do one job multiplier, meeting for every job that they generate, there are three ancillary jobs created. Really when we talk about them retaining jobs, there are three additional jobs for every manufacturing jobs that Illumina retains that also benefits the city tax base. They also tend to be one of our top tax contributors. They're looking to grow, and they also were noted as the smartest company in the world by MIT recently. All of those factors played a role in Illumina's situation, and we are looking forward to looking at more of these tax agreement in all parts of the city.
MAUREEN CAVANAUGH: We just heard last Friday that the transportation management firm Omnitracs is moving from San Diego to Texas. Did the city offer a tax incentive program to Omnitracs?
ALMIS UDRYS: My understanding is I do not believe that we did, but I will have to look into that in more detail to find out. I am quite certain that we did not.
MAUREEN CAVANAUGH: One of the things that I think pops up in people's minds is that now that the city of San Diego is starting to offer these tax incentives to businesses to get them to stay, what is to prevent other companies all of the sudden trying to get the same deal?
ALMIS UDRYS: That is a very important question, and one that Mayor Faulconer and the council are very focused on. In fact, when we began working on this deal, Mayor Faulconer asked us to take some time and think about how these will apply to future companies. Absolutely, we want San Diego to be open for business. We want companies to stay here, we want to attract companies here, and we want companies to grow, particularly in our base sector economies like biotech. We are one of the leaders in the country in the life sciences industries. Clearly, the decision of how to decide who gets the agreement is an important one. It isn't simply that the company is looking at some other cities to expand, as indicated in your early questions. Being a company in the base sector, manufacturing is a huge component. Generating jobs beyond jobs that you retain, the jobs multiplier I was talking about, and also looking to grow and expand in the city, those are all criteria we will be looking at. Not all of the criteria needs to be met, but certainly any number of those will be to be met, and we will be looking for businesses that are interested in those types of deals to come present their case. Everyone of these agreements is tailored through both circumstances and negotiations to the needs of both the city and a particular business.
MAUREEN CAVANAUGH: Thank you for speaking with us, I appreciate it.
ALMIS UDRYS: Thank you very much for having me today.
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MAUREEN CAVANAUGH: Joining me now is professor Alan Gin, Professor of Economics at University of San Diego, and Author of USD's Index of Leading Economic Indicators. Alan, welcome back and thank you for coming in. San Diego is not known for handing out many tax incentive packages to businesses. There have been three this year, and we just mentioned them, Illumina, Ballast Point and Ale Smith. Why do you think that the city is now handing out these incentives?
ALAN GIN: I think what we have seen is that there is a lot of competition now between cities for businesses. We have lost three companies now to Texas, so I think there is a sense that San Diego needs to get into the game of trying to give incentives for companies to remain here and expand here.
MAUREEN CAVANAUGH: Three companies that you are talking about, have they all been owned by the same holding company?
ALAN GIN: That's right, Vista Equity Partners bought out three San Diego companies and moved them to Texas with big incentive payments.
MAUREEN CAVANAUGH: Is there any reason for the city to think that any company not owned by the same venture capital company are really thinking of heading out of town en mass?
ALAN GIN: That is a good question. I think the survey was done recently that said a lot of firms were considering moving out of the region, but whether they actually pick up and do so is another question. There is concern that is businesses might use this as a way to play cities against each other to get these incentive packages.
MAUREEN CAVANAUGH: Financially speaking, does this deal with Illumina seem like a good move for San Diego?
ALAN GIN: It seems reasonable when you look at the numbers. $1.5 million to retain about 300 manufacturing jobs, that translates into about $5000 per job retained. Just to give you a comparison, when Active Networks went to Texas, they said they would add 1000 jobs there, but they got $8.6 million, about $8600 per job. I think it is a reasonable number.
MAUREEN CAVANAUGH: What does San Diego potentially lose by allowing these tax rebates? Do we potentially lose revenue that would be used for better services or infrastructure repair?
ALAN GIN: That is the thing. This means reduced revenue to local government. That will then impact the level of services that can be provided, spent on infrastructure, and other things. The hope is that this will boost the economy, generate additional jobs, and people will spend money that will generate other sales tax revenues in the economy.
MAUREEN CAVANAUGH: You used a very good phrase "the hope is," there was a New York Times report in 2012 that said that many cities are losing a considerable amount of revenue by offering business tax rebates, but no one seems to be keeping track if the cities are really financially from the deal. Is there a way to keep track of that?
ALAN GIN: It is difficult, that is a good question. Not a lot of analysis has been done as far as the impact of incentives, and whether it is a net positive. Sometimes it may be a little difficult to estimate the secondary benefits.
MAUREEN CAVANAUGH: It makes a lot of theoretical sense, you do not know when you go back whether or not it is actually working in dealing with the dollars and cents.
ALAN GIN: That is correct, a lot of times what happens, it is just a matter of cities competing against each other and the benefits going to companies involved.
MAUREEN CAVANAUGH: Now that San Diego seems to have started down this road of offering some select companies select tax rebates in order to stay in the city and expand and create more jobs in the city of San Diego. Do you think that San Diego is going to have to continue offering tax incentives to get companies to stay?
ALAN GIN: I think it is a little bit of a concern. The precedent has been set and other companies may take this as an opportunity to ask for incentives of their own. Fortunately right now, we're in a situation where the local economy is doing well. The latest jobs report from last Friday shows that we are up almost 35,000 jobs compared to where we were last year. That is helpful in the sense that the local economy seems to be picking up. We could maybe afford to lose a few companies, but you would like to keep them if possible.
MAUREEN CAVANAUGH: Entering this sort of rebate era, is it just part and parcel of doing business for cities?
ALAN GIN: It is actually a phenomenon that occurred about two decades ago. In 1993 the state of Alabama offered Mercedes-Benz over $250 million to get a facility to locate there. That translated into about $200,000 per job. I don't think they ever got that back. There is more competition, particularly from Texas. They have the Texas Enterprise Fund offering incentives for these companies. Petco moved some operations to Texas as a result of some of these things.
MAUREEN CAVANAUGH: Thank you for speaking with us.