Tax increment finance (TIF) districts are the subject of a lot of public misunderstanding. In order to increase transparency about TIF districts, redevelopment commissions in Indiana were recently given some requirements for increased public reporting on the impacts of tax increment finance (TIF) districts on other units of local government. In the short 2018 special session, the Indiana General Assembly passed House Enrolled Act 1242, which, among other things, required that:
Each redevelopment commission shall annually present information for the governing bodies of all taxing units that have territory within an allocation area of the redevelopment commission. The presentation shall be made at a meeting of the redevelopment commission and must include the following:
(1) The commission’s budget with respect to allocated property tax proceeds. (2) The long term plans for the allocation area. (3) The impact on each of the taxing units.
HEA 1242 of Special Session 1 of 2018
Remember that TIF districts “capture” any growth in the assessed value of real property within the district and use it to support infrastructure in the district, rather than being used to lower the tax rates of the underlying taxing units that serve the district. These taxing units refer to other units of government, such as cities and towns, county, township, public library, etc., that have territory that overlaps a TIF district, and may have to provide services to the development within the district.
Monroe County currently has 4 TIF districts: Westside, Fullerton Pike, State Road 46 (also sometimes referred to as North Park), and Curry-Profile (which consists of two parcels of the former GE plant purchased by Cook and moved out of the Westside district into a newly created TIF).
This past Wednesday, the Monroe County Redevelopment Commission hosted the first annual public presentation of this information, in fulfillment of the statute. All taxing units were invited to attend. I’m including a link to the presentation that was given (by Financial Solutions Group) here, because it provides a good overview of the status of current and future projects, debt, and overall cash flow of each of Monroe County’s TIF districts, as well as their impact on other taxing units. The presenter acknowledged that this was the first report for Monroe County of this kind, and that the data will be improved and presented in more detail in future years.
In brief, the presentation outlined the following types of (positive) impacts that the underlying units of government see from the TIF districts (in greatly varying degrees):
Personal Property: TIF districts typically capture only the grown of assessed value of real property (buildings and structures), not personal property (equipment used in producing income). However, factories and other businesses typically employ a lot of personal property as well (machines, IT equipment, etc.). So the assessed value of the personal property does accrue to the other taxing units, and thereby goes to reduce their tax rates
Circuit Breaker: Due to the aforementioned growth in personal property typically associated with growth in TIF districts, the tax rates are slightly lower than they would have been, and therefore the circuit breakers (constitutional tax caps) are slightly lower, leading to a bit more revenue for the other taxing units. Note that this effect, while positive, is generally quite small.
Income Tax: With employment associated with growth in TIF districts comes local income tax (LIT), which benefits all taxing districts. Note that this income tax only goes to Monroe County taxing units if the employee earning the wages lives in Monroe County.
The presentation to the Redevelopment Commission is also available on CATS.
I want to mention a big caveat, though. There is a big omission in this type of analysis, and that is the additional costs to the other units of government caused by development in the TIF districts. To understand the impact of these costs would require a case-by-case assessment. For example, the impact on the Monroe County Public Library by the industrial development in the Westside TIF is negligible/zero. On the other hand, the same development puts significant additional responsibilities on the Ellettsville Fire Department (which serves Richland Township, by contract). A more comprehensive understanding of the impact of TIF on other governmental units needs to take these additional costs into account.
Note: in the presentation above, the Curry-Profile Allocation Area is referred to as the Cook Allocation Area. While Cook is the sole property owner in the TIF district, the official name is Curry-Profile.
The discussion in the media about “dark box” assessments (the use of vacant stores as comparables for the assessments for property tax purposes of big box stores) has made me want to look more broadly about who pays taxes and who doesn’t in Indiana’s system of taxation. There is a feeling expressed by many residents that businesses are treated more favorably than individual taxpayers. This view is almost inevitably expressed any time a business is given an economic development tax abatement. On the other hand, politicians (particularly Republican politicians, unsurprisingly) often claim that Indiana needs to lower taxes on businesses in order to continue to attract jobs (see recent debates on the corporate income tax and business personal property tax).
As you might imagine, though, Indiana’s system of taxation is complex, and it can be difficult to disentangle the various threads, to determine whether or not the system is fair, both overall and across the various classes of taxpayers (businesses, homeowners, renters, farmers, etc.). I’m hoping to explore these issues of taxation — who pays and who doesn’t pay — over the next series of blog posts.
Today’s post explores the issue of tax exemptions: that is, when do property owners (individuals and organizations) pay taxes on less than the full assessed value of their property.
To do this, I’ll be looking at the real estate data for Monroe County for 2015 (for property taxes to be paid in 2016), which the Monroe County Auditor’s Office kindly provided for me. Note that there is an important caveat to this data: it does not include property owned by other units of government, which includes state (including Indiana University and Ivy Tech), federal, city, county, and school corporation. None of these governmental entities pay real estate property taxes at all (which makes some sense when you consider them as units that are providing governmental services. The data set also does not include personal property, which applies almost exclusively to business.
Tax Exemptions in Monroe County
Indiana has a number of purposes for which it exempts property from full taxation. The most familiar include the homestead deduction (which exempts some property value from homeowners who occupy their homes), the exemption given to non-profit organizations and churches, and tax abatements given to businesses as incentives for investment in job-creating development. But there are actually several dozen different types of real estate property tax exemptions given to property owners for a variety of purposes.
First, how much property value is exempted from taxation overall in Monroe County? In 2015, it is approximately $3.2 billion (yes, billion), out of a total of $9.8 billion in gross assessed real estate value.
So whose taxes are exempted? I’ve taken the 2015 real estate data and collapsed the dozens of exemption types) into 11 categories, which I think are more illustrative. For example, I collapsed the homestead deduction, supplemental homestead deduction, and mortgage deduction into the category “Homestead”. I collapsed the two types of economic development incentives — tax abatements and enterprise zone abatements — into the category “Economic Development”. Etc.
As you can see from this table, the vast majority of property tax exemptions are given to homeowners — over $2.6B, or 82% of the total $3.2B in exemptions granted. This may — but probably shouldn’t — come as much of a surprise: the property tax system we have is a political artifact, and residents, not businesses, vote. Further, homeowners vote at a higher rate than renters, and homeowners with greater wealth (often meaning higher-end homes) vote at a greater rate still. So it really isn’t surprise that our tax exemption system provides enormous tax benefits to homeowners — abatements that dwarf all of the rest of the types of tax exemptions combined.
The next largest beneficiary of favored property-tax status — still a distant second to homeowner exemptions — religious institutions! Churches and other religious institutions enjoy $158M in exemption from property taxes. Coming in third is economic development incentives, including both tax abatements and enterprise zone abatements, which are similar, but are only allowed in one of a fixed set of so-called “enterprise zones” throughout the state. I will do a separate blog post and provide more detail on these economic development exemptions.
There are several exemption categories that might broadly be thought of as the non-profit sector. This includes:
educational exemptions — which does NOT include public schools or IU or Ivy Tech — think private educational organizations as well as IU fraternities and sororities
hospital — in particular IU Health Bloomington Hospital (I will do a separate post on this one at some point)
charitable — what most people think of as the nonprofit sector, including Middleway House, Community Kitchen, Stone Belt, etc.
membership organizations — including the YMCA, Boys and Girls Club, Sycamore Land Trust, and other charitable organizations — and oddly the Indiana Railroad company
There are several other categories of exemptions, including what I call socioeconomic exemptions. These include exemptions available for blind or disabled property owners, seniors, and veterans. Energy efficiency exemptions include exemptions for solar and geothermal installations. Finally, there are exemptions for low-income housing, as well as a couple of very small exemptions that I have lumped together under miscellaneous (cemeteries, rehabilitation of historic properties, and model homes).
Hopefully this has been illuminating, and perhaps you have been surprised by which classes of taxpayer have been most favored in Indiana’s property tax system. I plan to explore many related topics in future blog posts, and will be drilling down on several categories of tax exemption, including those given to non-profits, hospitals, and for economic development.
Today, the City of Bloomington Economic Development Commission (EDC) will be meeting at noon (2015-01-23 at 12:00PM) in the Hooker Conference Room in City Hall. There are 3 substantive issues that will be covered in the meeting — issues that might be characterized as the good and the ugly in economic development. Unfortunately I don’t have a lot of time to write about this in much detail before the meeting, but will update the public afterwards.
1. Big-O properties (principal Mary Friedman, Bloomington) is requesting a 3-year tax abatement for a mixed-use project at 338 S Walnut Street. I have written about this project extensively before here (City Tax Abatement Request for Mixed Use Building 338 S Walnut St). They are coming back before the EDC because they are requesting to change the plan a bit — to reduce the amount of retail square footage on the ground floor from 2500sf to 1663sf to make room for bicycle storage (in order to make the bedroom to bicycle storage ratio 1:1). This abatement request will need to be approved by the City Council.
2. Cook Pharmica is requesting a 10-year personal property tax abatement for a significant expansion to their vial and syringe-filling business unit. They are proposing to invest $25M in new equipment, which will result in the creation of 70 new jobs, with $3.2M in new payroll. All wages would (and would be required to) be compliant with the City’s Living Wage Ordinance. The jobs would be created between 2015 and 2020. Cook Pharmica is also investing several million in the building to accommodate this expansion; however, they are only requesting the tax abatement on the personal property improvements (the equipment), not the real estate improvements.
The abatement is requested as a 70% abatement over 10 years. The 70% figure was chosen because Cook Pharmica could alternatively take advantage of an automatic 10-year Urban Enterprise Zone tax abatement, which also results in a net 70% savings on the personal property taxes resulting from their new investment, but distributes the remaining 30% to the Bloomington Urban Enterprise Association, the City’s Redevelopment Commission, and the Indiana Economic Development Corporation. Structuring their request as a 70% abatement on personal property tax instead keeps the 30% as being distributed to the taxing units serving the property (i.e., City of Bloomington, Monroe County, MCCSC, Monroe County Public Library, etc.). This abatement would need to be approved by the City Council.
3. Between 1986 and 2012, the City issued business loans through the Bloomington Investment and Incentive Fund (BIIF). There are 5 outstanding BIIF loans, of which 4 are current. The remaining loan was made to XfiniGen — a company that proposed to build the “next generation lithium batteries for large scale energy storage applications”, and proposed bringing 107 jobs to Bloomington. The company folded, and has left $37,464.07 in principal outstanding. Their last payment was in November 2013. The City is proposing that this remaining debt be written off, as there is little to no chance of collection. The memo in the packet about this situation provides some more detail about the company and the City’s attempts to collect the debt.
I was recently appointed to the City of Bloomington’s Economic Development Commission (EDC), as a County Council nominee, and just received word that we will be considering a tax abatement request for a mixed-use development at 338 S Walnut St downtown. One of the primary roles of the EDC is to evaluate and make recommendations on requests for tax abatements. The EDC is purely advisory; the City Council has the ultimate authority to approve tax abatements in the City of Bloomington.
Monroe County also has an Economic Development Commission, which makes recommendations on tax abatements in the unincorporated part of the county. This will be my first time considering a tax abatement on a project with a residential component; County projects have all been for employment-generating facilities (manufacturing and logistical facilities), at least during the time I’ve served on the Council.
The photo below shows the currently vacant lot currently on 338 S Walnut, along with a bit of the two adjoining properties — 340 S Walnut to the south (owned by the same owners as 338 S Walnut) and the old Costume Delights to the north.
Interestingly, 338 S Walnut St used to be the home of Monroe County Health Department’s Futures Family Planning Clinic; the clinic has since moved into the basement of the Monroe County Health Building. The building has already been demolished, and the lot is currently vacant.
The following is an architectural rendering for the planned project provided as part of the tax abatement application. The building is expected to be mixed-use, residential and commercial, and provide a total of 14,400 square feet. It will also include some on-street landscaping.
The owners anticipate investing around $2M in the property, and are asking for a 3-year phase-in of the property taxes associated with the new assessed value. This means that the new assessed value would be 100% abated the first year, 66% the second year, 33% the third year, and subsequent years would be taxed at the full value.
The property currently generates around $4000/year of property tax. At full value, the new project will generated around $40K/year of property tax, so even after the first year of the abatement, the new project will be generating 3 times as much property tax as it is currently.
The following abatement schedule (from the EDC packet) shows the estimated taxes with and without the abatement:
The EDC meeting to evaluate this application is on November 21, 2014 at noon. I’m not yet sure when this application will appear on the City Council agenda.
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.
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.
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).
In several other posts (such as this one), I have mentioned that there many who are skeptical of tax increment financing (TIF) as an economic development tool. In general, I would summarize the various criticisms as follows:
TIF activities can cause a loss of revenue to other taxing units (cities and towns, counties, townships, school districts, etc.) through circuit breaker (“tax cap”) losses.
Extensive development in a TIF district causes the tax rates in the taxing district containing the TIF district to be higher than they would otherwise (because the assessed value in the TIF district is captured by the TIF, not the surrounding taxing district).
TIF districts encourage “green field” development, rather than redevelopment of blighted areas. This development can reduce greenspace, eliminate farmland, and encourage urban sprawl.
Development in TIF districts may cause increases in costs for the units of government that serve the TIF districts (i.e., schools, libraries, fire and police protection, etc.) without providing these units of government with any additional revenue to provide that service.
Areas that are already poised to develop may be hurriedly placed into a TIF district, which would increase the return on investment to the private investors in the TIF district, to the detriment of taxpayers and other local units of government.
Assessed value is moved from the base of the TIF district (i.e. the pre-TIF assessed value) to the TIF, in order to ensure that bond payments can be made. This reduces the assessed value available to other units of government, and thereby increases tax rates for other taxpayers (and with the circuit breaker tax caps, could even reduce the revenue to other units of government).
Development encouraged by TIF districts benefit may primarily the private investors in the properties in the TIF district, and do not benefit the existing residents of the town, city, or county.
Decision-making about TIF districts and expenditures are made by appointed, rather than elected, officials, and generally are made with significantly less public scrutiny or transparency than other local government budgetary decisions.
These are the general criticisms I see about TIF districts. Of course, with any individual TIF district, there is always the question of sustainability — will the district generate the necessary tax increment to pay the bond for the infrastructure. And of course, while most of these criticisms are valid, there are also legitimate responses to each of them. If you think that I have missed a major criticism of tax increment finance in general, though, please let me know!
Here are a couple of recent news stories or blogs with criticism about TIF in Indiana:
The Indy Star on 2012-09-01 published this: “Behind Closed Doors: Top Democrats are mum on this tiff“, about a controversy in Indianapolis about whether to proceed on a couple of planned TIF district proposals immediately vs. waiting for a more systematic and structural change to the TIF decision-making processes.
A blogger, Pat Andrews, who goes by the name Had Enough Indy? is a frequent critic of TIF districts in Indianapolis, and lately has been calling attention to the drop in the TIF base (the amount of assessed value in the district that is allocated to other units of government, rather than the TIF district itself) in several Indy TIF districts. Although I don’t agree with all of the conclusions here, Andrews raises some important questions and puts out a number of original documents to support the claims.
Both companies, Dormir (AKA Sleep LLC) and Pharmakon Long Term Care Pharmacy, Inc. were given personal property tax abatements by the City of Carmel in 2008 for moving their facilities to Carmel. The tax abatements were on the value of information technology (IT) equipment installed at the facilities for use in manufacturing and distribution activities.
When a company applies for a tax abatement in Indiana, it is required to file a Statement of Benefits stating the amount of the investment the company is requesting a tax abatement on, as well as the number of jobs and salaries that it estimates will be created by the investment. The company is then required to file annually, for the length of the abatement, a Form CF-1 Compliance with Statement of Benefits – Real Property (for tax abatements on improvements to real property), or a Form CF-1 Compliance with Statement of Benefits – Personal Property (for tax abatements on personal property, i.e., manufacturing and logistical equipment). This form requires the company to report the actual salaries and jobs created as a result of the investment. These forms are then reviewed annually by the body that granted the tax abatement (in this case, the Carmel City Council) for compliance with the terms of the tax abatement.
According to the draft resolutions in the Carmel City Council meeting packet for 2012-09-04, neither company submitted their CF-1 forms this year for review (the form was due on May 15). Also according to the resolutions, Dormir submitted a letter of explanation on August 8. This letter is referred to as Exhibit A in the draft resolution, but unfortunately has not been included in the meeting packet.
Note: in the time I have been on the Monroe County Council, although we have occasionally had to chase down the information or follow up for more details, we have not had a company with a tax abatement decline to provide a CF-1 compliance form.