LegalZoom or LegalDoom?

The City Council is trying to decide whether or not to provide relocation incentives to LegalZoom, an online legal form provider.

Here are the deal details.  The City pays out $20,000 for ten years for a nominal total of $200,000.  The state’s recruitment- and talent poaching-focused Texas Enterprise Fund would provide an additional $1,000,000.  Austin’s population is only about 3% of the state’s population, though it’s likely that we produce more revenue per capita to state coffers than the average community, so let’s say 7% of the state’s money comes from Austinites.  That’s a total of $270,000 nominal going to the folks at LegalZoom.

In exchange for Austin’s $270k, LegalZoom agrees to provide jobs, make real estate improvements to its space, and use minority and women sub-contractors in the improvements.  At the onset, LegalZoom agrees to bring in 50 jobs, augmenting the number to a total of 600 jobs by 2016.  To put these numbers in context, Austin’s proposed budget for FY 2010 is $2.75 billion.  Austin has about half a million working age adults (over 18 under 65).  So, either way, this deal is neither a substantial public expense nor a significant contributor to employment.  The City’s analysts estimate a net benefit to the City’s revenues of $563,000, and LegalZoom indicates that about 540 of the 600 jobs will be local new hires.

Is this a good deal?

In the chart below, I calculate the expected nominal dollar benefits to City revenues under different flight probabilities by LegalZoom if no incentive package is offered.  While the media coverage seems to convey a sense of 100% flight probability if the incentives are nixed, that is unlikely to be the case.

The return on revenues for the City are decent in the event that LegalZoom is likely to skip Austin without incentives, but if that is not the case than this investment looks less compelling as a revenue generator.  This is especially the case if there is a good chance of LegalZoom relocating regardless of incentives, and particularly so because Austin has many ways of generating revenue through enforcement of fines, efficiency initiatives, or just plain old increases of fees and taxes.  From this analysis it does not appear that the revenue generation is a compelling factor in this deal.

The job creation however, does seem much more compelling.  While LegalZoom indicated their net total job creation in the public hearing process, I could not find an estimate of the expected duration of those jobs in years.  This is needed to calculate the subsidy cost per job year.  Let’s assume that each job will last an average of 5 years.  Thus, even if there is only a 5% chance of flight, the expected jobs created by the deal would be 27 for a total of 135 job years.  Even under that conservative scenario, Austin public monies would be buying  a job year for $2,000.  Simply put, even if LegalZoom was very likely to show up without the incentives, buying the certainty of the jobs is pretty cheap and the most compelling piece of the deal.

As a one shot deal the LegalZoom job creation commitment makes the incentives pretty compelling for an Austin taxpayer, but as a long-term strategy, there are some potentially troubling issues that should be addressed.

For starters, it’s unclear why exactly LegalZoom is seeking these incentives or why the Austin policymakers think this might be a sector worth subsidizing.  As Wells Dunbar implies, LegalZoom’s proposal might be opportunistic wrangling, as opposed to a make-or-break incentive mix.  With the Hanger Orthopedic incentives, it was clearly an investment in creating a cluster around one of our desired growth areas (medical) where Austin is not yet a dominant leader.  Dunbar goes on to hypothesize that we are probably offering incentives because some other town is also in the mix, invoking a collective-action dilemma.  Further, the focus on funding relocation probably seems random and unfair to existing Austin companies that might believe they could transform local subsidies into additional job years more efficiently than relocating firms.

To remedy these issues the Council could look into creating an even more structured incentives process that focuses exclusively on key strategic areas like medical technology and life sciences and that uses a market-based bidding mechanism to reward efficient job year creation regardless of the geographic origins of the company.

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