By Paul Phair, VP-Development (South Bend, IN)

The old adage of ”˜Death and Taxes’ has been replaced.  Do you know how long the US Tax Code was in 2011 – 72,536 pages!!  You can take an average accountant, hit him with a dose of industrial grade pepper spray, and he will still find the right loophole to get you around just about any tax the government throws at you.

“Oh, you sold your Apple stock for a huge gain, but bought a shelter pet with the proceeds, great, no capital gains tax for you!”

No, no, taxes are not a sure thing any longer.  However, the new substitution is its mirror reflection, so please allow me to introduce, Mr. Tax Abatement.  That’s right, besides death the only thing you can guarantee is that a company looking to build a new or expand an existing facility is going to be seeking a tax abatement on their new real property investment.  They have to.

Tax abatements are a sensitive issue in almost every community across the country.  There are both proponents and opponents with many reasons/opinions on both sides, some of the more popular:

For

• Business attraction to the community
• Job creation
• Creation of new property taxes and private investment
• A pro-active approach to economic development

Against

• Corporate welfare
• Home grown small businesses cannot compete
• A zero-sum game by reshuffling vs. creating new
• Filter public dollars to private business and away from other programs

So who is right?  Simply put, both. Like it or not, tax abatements are a competitive tool, and most communities must have them available if they want to attract/retain industrial and large office users to/in their area.  It may not make the difference between locating in South Bend vs. Mobile, AL, but it might well make the difference when choosing between South Bend and Fort Wayne.

Tax abatements are a sub-national phenomenon, meaning that they are mainly used as a competitive economic development tool by competing municipalities or states, not nations.  Have they degraded the property tax base of the overall nation; probably.  Have they done so on a local level?  This is a more complicated question because, with any competition, there are winners and losers; but when the first recorded commercial property tax abatement was granted in the 1640’s, in modern-day Connecticut⁽¹⁾, it was the official start of the economic development arms race.  Therefore, a community that does not offer tax abatement often times has a glaring omission in their toolbox that companies will notice when they come calling.

Beyond the straight forward economic implications, municipalities will often use their tax abatement policy to INCENTIVIZE local companies to be good corporate citizens.  Companies will receive longer abatements if they create a large number of jobs, use local or union labor in construction, design environmentally friendly facilities, or support a local charitable organization; these are just a few examples.  Certainly these are not bad things, but many times companies find these items to be cumbersome and, even worse, if they do not meet their future projections, a municipality will include ”˜Claw Back’ provisions.  This is a messy process where the municipality will retroactively collect taxes that they deem should not have been abated due to missed goals.  We would all like to be able to predict the future, but it is difficult to know exactly when the economy is going to slump and a company will not hit its hiring goals.  These provisions send the wrong signal to companies that are looking to invest in your community.

So, what can we do set things right?  You could get all communities and States to retract their abatement policies and set the same assessment and tax rate policies to put everyone on a level playing field, but that is about as likely as the Cubs winning the Series next year.  So, it looks like a rehabilitation of tax abatement policy, to make it fair and equal for as many groups as possible, is the only choice left.  Funny that’s the case, because I do have a suggestion that, in theory, would make many (definitely not all) parties happy.

My Tax Abatement Policy Theory:

The municipality pegs an applicant’s tax abatement to their actual private investment in a construction project that expands or creates a building.  An example, if you build a new 150,000 square foot industrial building and your hard (bricks and mortar) construction costs are $4.5 million then you would receive a tax abatement of $585,000 (4,500,000 x $0.13) to be credited toward your real property taxes as you choose within the next 10 years.  Similarly, if a small metal fabricator expands their existing warehouse by 5,000 square feet and it costs them $150,000 they would receive $19,500 in tax abatement credit ($150,000 x $0.13).

It is a very simple policy which:

1. Eliminates the complexity and confusion of the tax abatement process
2. Eliminates ”˜Claw Backs’ as this policy is based on performance instead of projections
3. Eliminates inequity for corporate behemoths vs. smaller, home-grown companies
4. Eliminates issue of incentives for traditionally more expensive construction techniques because every additional dollar spent earns additional tax abatement (not a perfect solution, but better than many existing policies)
5. Promotes a pro-growth environment that is friendly to private investment
6. Allows municipalities a much easier budgeting task to plan for any ”˜re-allocation’ of public funds away from other programs (also much easier for companies to budget)

Some remaining problems:

1. By far the largest, does not eliminate inequity between states and municipalities.  As soon as your community offers $0.13, the community next door will offer $0.14.
2. Does not specifically address job creation or support of ”˜community organizations.’  This is on purpose; in my opinion these items only muddy the waters.  New private investment creates construction/design jobs and a new tax base which creates municipal jobs and provides the opportunity for a City to improve services and, therefore, quality of life for its residents.
3. Still requires an ongoing reporting and administrative function.  However, the simplicity should keep the required ”˜red tape’ to a minimum.

It is not (by any stretch of the imagination) a perfect policy, but I do think that it would address a lot of the complaints that both sides often use in their arguments.  At the very least, it’s a conversation starter on an issue that needs to be addressed, because, like death, it’s a serious problem that is not going away.

(1)  (Wassmer, Robert W., The Increasing Use of Property Tax Abatement as a Means of Promoting Sub-National Economic Activity in the United States, December 12, 2007)