The Monroe County Council held its annual tax abatement compliance hearings at its regular June 10, 2014 meeting and after some good discussion about the value of tax abatements, found all tax abatement recipients in compliance with the terms of their abatements. This post will give a little more background about the process.
What is a Tax Abatement?
A tax abatement is a phase-in granted to a company on the new property taxes owed on the increased assessed value generated by the company’s investment in either real property (buildings) or personal property (equipment). Tax abatements typically have a duration of 10 years (although abatements of any duration up to 10 years are allowed by law, and a new law provides for abatements for personal property of up to 20 years in 2015), and typically start at 100% for the first year of the abatement, and step down gradually, so that by the 10th and final year of the abatement, only 10% of the taxes on the new assessed value are abated. Tax abatements are only granted on new investment, and so will never result in a decrease in property taxes owed by a company.
What is the Purpose of a Tax Abatement?
The intention of a tax abatement is to incentivize a company to invest in real property and equipment in a way that creates or preserves jobs and increases wages and benefits. Generally, a company’s investment in real property and equipment should have two separate benefits.
The first is that the tax base increases. The primary benefit of an increased tax base is that the tax rate goes down (slightly) for all taxpayers in the district, and subsequently that the circuit breakers (tax caps) have a slightly lower impact on units of local government (see my previous posts on the circuit breakers here and here for more background). Additional assessed value also does result in a small amount of additional revenue for local government — but only for so-called rate-controlled funds like cumulative capital development funds.
Traditionally, increased assessed value was the primary motivating factor for economic development tools like tax abatements; however, contrary to popular understanding, Indiana’s system of property taxation means that additional assessed value doesn’t actually generate a lot of additional revenue for government. I wrote a posting a few weeks ago that dealt with this issue explicitly (Does New Development Generate New Property Taxes for Local Government?).
The second, and more important goal is to use that investment to create additional jobs and and wages to the community. This goal isn’t as simple as it might seem, and there is a lot of contested terrain here.
First of all, many local economies, such as that of Bloomington/Monroe County, are regional in nature. Our businesses and public-sector institutions like IU and Ivy Tech provide jobs for residents of surrounding counties as well as Monroe County (there is also some outbound commuting as well, for example, to Crane). However, because of the way that income taxes in Indiana work, local governments in Monroe County only receive income taxes from Monroe County residents, regardless of where they are employed.
Second, when communities have relatively low unemployment (Monroe County’s unemployment rate for May 2014 was 5.2%, one of the lower rates — but definitely not the lowest — in the state), it is questionable as to whether additional jobs actually go to existing residents or simply encourage people to either move here or encourage people to commute from surrounding jurisdictions, neither of which necessarily benefit existing residents.
Third, some believe that government incentives should only be used to create higher-paying jobs — for example, those that raise the overall median wage for the area. However, a counter-argument, is that it is important to have jobs at many wage levels, to provide entry-level opportunities for residents, especially those at the lower skill levels. For example, jobs in the life sciences and technology industries tend to provide higher wages, but also require much higher skill-levels. These jobs might raise the median wage for the area, but might also be inaccessible to large numbers of residents.
Many local governments in Indiana have been increasingly dependent on income taxes for revenue for basic services (and there are a number of reasons why they have been forced to do so, including many laws that restrict the increase in property taxes, regardless of the increase in costs of services). So the creation and sustainment of both jobs and payroll have become essential to the funding of local government.
Do Tax Abatements Work?
The academic literature on the effectiveness of tax abatements is mixed; most studies show that tax abatements have little effect on whether or not a company selects a particular region to locate (workforce and quality of life factors are more dominant)– but may have an effect on which jurisdiction a company locates within a region. Many local officials also feel that they need to make abatements available because other jurisdictions do. Tax abatements do also have some effect on expansion investments made by companies already in a particular location. I’m giving a little of short-shrift to this important topic, because I think that it deserves a posting on its own.
What is the Process for Assessing Compliance?
Tax abatement compliance hearings is a statutorily-mandated annual process for all companies with tax abatements granted by the county (the City of Bloomington uses the same process for their abatements that compares the proposals made by companies at the time of application for a tax abatement (the “statement of benefits”) with the actual investment made, jobs created or retained, and payroll of those jobs. In other words, did the company do what they said they were going to do at the time that they applied for the abatement?
The compliance process begins with submission of data from the abatement recipients (on investments made, jobs created, and the salaries of those jobs created). The data is submitted both on a state-mandated form (the CF-1), which is generally considered very difficult to follow, and a Monroe County-specific form meant to make the data easier to interpret. The following are the Monroe County data sheets submitted by all Monroe County tax abatement recipients. These data sheets document the basic parameters of the abatement — when it began and when it ends, the number of jobs and payroll at the beginning of the abatement, and the number of jobs created (or lost) and the payroll at the present.
- Author Solutions
- Baxter Pharmaceuticals
- Full o Pep
- Karst Holdings LLC (Eco Logic)
- Mirwec Film
- Tasus PP Abatement 2002-19
- Tasus PP Abatement 2010-45B
- Tasus PP Abatement 2011-56
- Tasus RE Abatement 2002-19
This data is then reviewed by the County’s Economic Development Commission (EDC), a three-person citizen panel, who then makes recommendations to the County Council on whether to find the companies in compliance with their proposals that they submitted when they applied for their abatements. These proposals specify the investment the company will make, the estimated number of jobs the investment in create or retain, and the payroll represented by those jobs. The roles and responsibilities of the Economic Development Commission are specified in IC 36-7-12.
If the company has actually achieved all of their commitments (i.e, created all of the jobs and wages that they had proposed in their application), then no additional review is required by the EDC — the company is in full technical compliance. However, even if the abatement recipient has not actually been successful at achieving all of their commitments, the EDC can find the company in substantial compliance, if the reasons that they are not technically in compliance are out of the company’s control, or if technical compliance no longer makes sense.
For example, because of the economic downturn and changes in their customers’ orders, Baxter Pharmaceuticals was unable to create the number of jobs that they had originally proposed. On the other hand, the payroll of the jobs they did create and sustain are substantially higher than proposed. Another example was BioConvergence, in which their initial business plan did not materialize because Cook essentially opened a directly-competing business right next door to them. Representatives from BioConvergence and Baxter have attended past Council abatement hearings and EDC meetings in person to explain their respective situations and answer questions.
The Monroe County Economic Development Commission (EDC) consists of Greg Travis, Regina Moore, and Kirk White. For 2014, the EDC recommended that all abatement recipients be found in compliance with their statement of benefits, although several of the compliance findings were contingent on the provision of additional clarifying information. The findings of the EDC are here:
These recommendations are then presented to the Council, and the Council votes whether or not to find the recipients in compliance. The Council conducted the hearings at the meeting on June 10th. The hearings are an opportunity for the council to discuss and vote on the recommendations of the EDC, and also for members of the public to be heard. We did not hear from any members of the public at the meeting on June 10th, although we have definitely heard from members of the public at past tax abatement compliance hearings.
Memorandum of Understanding
One of the common concerns about tax abatements is that it is difficult for a unit of government to seek recourse from companies who do not comply with the terms of their abatement. First of all, the company can’t be held accountable for circumstances beyond its control — and that can include a lot of gray area. Second, the only statutory remedy the government has is to rescind the abatement — and rescission will almost certainly result in litigation, which most units of government try to avoid like the plague!
In order to address these concerns, and also to generally provide more accountability between both parties, in recent years, the Council has begun making use of Memorandums of Understanding (MOUs). MOUs are binding contracts between the abatement recipient and the county spelling out mutual expectations much more specifically than are found in the state statute governing tax abatements. For example, each MOU the Council has drafted specifically defines what “substantial compliance” is, addresses when jobs are supposed to be created by, addresses the liquidated damages for non-compliance (commonly called clawback provisions) and specifies that any litigation be conducted within the Monroe County Circuit Court jurisdiction.
Signed CF-1 Forms
After the council voted (unanimously) to find all of our abatement recipients in compliance, I signed on behalf of the Council all of the compliance forms (called CF-1 forms) that are then filed and serve as documentation of compliance with the terms of the abatements. The following are the signed CF-1s for 2014 for all Monroe County tax abatement recipients. Note that there can be more than one form for each company, for several reasons. First, a company can receive multiple abatements. An abatement is for a specific investment, and a company can make multiple investments, all of which are eligible to receive an abatement (of course, they cannot double-count the jobs or wages created by the investment!). Second, companies apply separately for abatements of real property and personal property (equipment), so a given investment might have two separate compliance forms if it involves both real and personal property.
- Author Solutions PP
- Baxter Pharma PP 03-51B
- Baxter PP Baxter RE
- Bioconvergence PP
- CLF RE Cook – PP
- Cook excl Bldg D RE
- Cook RE
- EcoLogic-Karst Holdings RE
- Full O Pep PP 2004-03
- Full O Pep PP
- Great Oak RE
- Grocery Supply PP
- Grocery Supply RE
- Hammond RE
- Heitink Plywood PP
- MIRWEC Film 1 pp 2003-29
- MIRWEC Film 1 PP 2006-18
- MIRWEC Film 1 PP
- MIRWEC Film RE 2003-29 – 1
- MIRWEC Film RE
- Printpack PP
- Printpack RE
- Tasus – PP 2011-56
- Tasus – PP
- Tasus PP 2010-45B
I hope this posting gives a little bit of context to the whole concept of tax abatements as an economic development tool, and also provides the public with easy access to the actual documentation that abatement recipients provide the county during the annual compliance process. I know I’ve only scratched the surface, and will attempt in future postings to address some of the criticisms that are often levied against tax abatements (some of them highly legitimate and others not much).
- The Herald Times published an article after the hearings: Tax abatement program brings positive results, compliance reports show [subscription required]