Sunday, April 3, 2011

What If You Were Mayor?

What if you were Mayor of Indianapolis? What would you promote as the City's abatement policy?

There is an opening in the public dialog to discuss this economic development tool, thanks to a curious abatement situation recently reported on by IBJ reporter, Francesca Jarosz. In a new article entitled "Tax breaks for Rolls-Royce hinge on investment, not jobs" (sorry, the article is open only to online subscribers), Jarosz reports that the Ballard administration has agreed to two property tax abatements for Rolls-Royce. One would be a $1.2 million, 10-year abatement for the company to remodel the downtown Faris building, recently vacated by Eli Lilly. The second would be a $21 million, 10-year abatement for the company's $190 million update of two plants between Tibbs and Kentucky Avenue.

I was interviewed by Jarosz for this article and she passed on that Rolls-Royce has not actually applied for either abatement as yet. So, the approval process is in very early stages.

Over at Advance Indiana, Gary Welsh has made a couple of excellent points; that this is more of the pay-to-play relationship businesses have with the Ballard administration, and that once the Mayor decides his position on an abatement, the rest of the process is just rubber stamping by the Metropolitan Development Commission and the City-County Council. I can't really argue against those positions. If pay-to-play rumors are even 10% true, the Marion County Prosecutor or the FBI should investigate, prosecute, and jail those who are involved. As for a mutant public process, I am all for a more transparent, more responsive, and more accountable system than the one we currently 'enjoy'.

For my purposes here, I'd just like to get a little community dialog going about abatements, using the proposed Rolls-Royce abatements simply as a complicated, real life example.

So, you be the Mayor. Where do you stand on abatements?

Abatements are allowed by state law for any project that will bring an investment in buildings and/or secure new jobs. The company who is awarded an abatement, pays only about half of all new property taxes that result from their investment. An abatement is granted anywhere from 3 to 10 years. The practice in Indianapolis has been to enter into a contract whereby the company agrees to invest an agreed upon amount of money in new facilities, or upgrades of current facilities, and produce an agreed upon number of new jobs, in return for the abated taxes. This is called the "clawback clause". If the company fails to invest the money or produce the new jobs, the City can ask for the company to repay the taxes as a penalty.

As Jarosz points out in this article, 69 of the 80 abatements granted over the last 3 years have included increased job numbers as part of the agreement. Still, that means that nearly 14% have not included additional jobs.

So, if you were the Mayor of Indianapolis, what would you do? Would you allow any abatements?

Surrounding counties have been particularly aggressive with providing abatements to companies considering locating there. So, there is a regional competition for jobs and future taxes from companies choosing what central Indiana city to call home. Then there are the really big companies who can locate anywhere in the US or overseas. Would abatements be part of your approach to attracting new businesses to Indy?

If you, as Mayor, are open to abatements, then under what conditions would you support one?

Is it a certain type of business? In the past, just for examples, abatements have been granted to retailers like Kroger, hotels (with the condos atop the Conrad also being granted abatements), some housing stock, and industrial businesses.

How do you, as Mayor, balance the need of a company like Rolls-Royce, to make significant improvements in their plants in order to modernize them - but not to produce more jobs. If a major employer, like Rolls-Royce, is looking at two aged plants and has $190 million to spend, they have options to move to a new location and build new, or remain and update the existing plants. Should your City grant an abatement, even though no extra jobs will be created? I think the two proposed abatements for Rolls-Royce actually represent the spectrum of upgrades. In the smaller Faris deal, there is remodeling of an office building, presumably for layout and not modernization. Should your City grant an abatement for a company, even a major employer, to simply remodel a building? Should your City grant abatements for any company to locate downtown? Should your City grant an abatement for a major updating of an aging plant, in order to keep the major employer in your City?

There is no doubt that companies view abatements as routine anymore. If they can save millions of dollars in taxes, they are surely going to do so. So, one cannot be sure of the accuracy of any threat to relocate a business should an application for an abatement not be granted.

Would you as Mayor create a public list of what sorts of investments or job creation numbers will automatically result in an abatement?

Tax abatements are a fact of life, for sure. That does not make every one wise, nor every one foolhardy.

If you were Mayor, what role would property tax abatements play in your efforts to increase economic development and job creation?

15 comments: said...

I'm confused by what you mean by "pay to play" who is paying how much to whom for what?

Had Enough Indy? said...

The phrase referrs to a requirement that in order to do business with the City, or get tax benefits from the City, a business must either contribute to certain campaigns or hire certain legal representatives.

Anonymous said...

It seems forgotten in this whole process the the mayor and others involved are not just abating the municipalities piece of the pie. They are affecting schools, police, fire, libraries, etc. budgets. The process should include considerations of all those units of government that will be affected by this process.
Not just the movers and shakers and their law firms.

Had Enough Indy? said...

Excellent point. I'd like to see all clawback taxes be distributed to the taxing units that should have gotten the money in the first place, and not be spent by the Mayor any way they like.

Blog Admin said...

My bigggest problem with abatements or any of these special deals that the city and/or state enter into, it almost always goes to large businesses, chains, and so on. Rarely, if ever, are small businesses, owned and run by people who live right here in the county, eligible for these same types of benefits.

So if abatements are what we do to encourage big businesses to move and expand here, what are we also doing to encourage locally owned businesses?

Anonymous said...

I have NO doubts that without these abatements companies would leave to locales that would offer them thus leaving the existing work-force high and dry. Monarch Beverage is an excellent example, Monarch moved to Decatur for what 8 or 9 years then the're gone to a new land of abatements. I could see offer a "near zero" tax rate in lieu of total abatements but, the Mayor needs to keep the better paying factory jobs here.

Anonymous said...

"Jobs" generally follow large capital investments but ought not be required as part of what is, actually, only a risk sharing arrangement. Abatements partially compensate for risk taking by lowering the cost of capital which is important especially in the early years of the risky investment. However, I've never seen a capital budgeting report that factored in abatements as anything important but taxes, especially high and unreasonable taxes eliminate your community from even being considered.

Had Enough Indy? said...

Indy Student - I can see where, since improving property that you own is key to an abatement, that smaller businesses would not be eligible. But, I really do not know the size spectrum of those that are eligible. You bring up an excellent point.

Had Enough Indy? said...

anon 5:32 - I do hear, from time to time, of some particular companies following abatements. You would think that these could be tracked and avoided in the future, if that is what a municipality wanted to do.

Had Enough Indy? said...

anon 5:51 - yes, tax rate differences across County lines is a perennial problem for those of us who live in Franklin and Decatur Townships, in particular -- since we haven't had our first round of full development yet.

Anonymous said...

Tax abatements should generally not go toward retail development since these businesses follow, not lead, economic growth.

Surely the "community" redevelopment folks will be up in arms, but they have grants and other programs for that.

Remember Cheryl Morphews big push to get a "Cabela's" to locate south of Indy so they could become the next tourist mecca for red neck hunters?

Hint; Cabela's never built the store even after they gave them millions in incentives, yet a couple locals built a low end hotel at the highway intersection. Hint. hint; Walmart, Kroger, & Chucky Cheese will not build a store because of tax abatements.

Anonymous said...

If I was Mayor....I'd put an end to school boards. Look at what's happening in Decatur Township and the Perry Township boards. School boards are nothing more than out of control egomaniacs. Fiscal responsibility should begin at the top; ie the Mayor.

Unigov said...

Abatements are not a fact of life, they are formalized corruption. Where in Article 10, Section 1 does it say anything about property tax reductions for new business or added employees ?

The law that permits abatements is contrary to the state constitution, as well as contrary to any rational person's sense of fairness. Abatements result in distorted markets. They are most likely based on bribery. And the info about the supposed job creation is kept secret, example being Lilly, which has managed to swipe hundreds of millions in abatements that were based on employment levels, while laying off thousands.

So, no abatements.

Anonymous said...

"Abatements are not a fact of life, they are formalized corruption.


Anonymous said...

Unigov, you are correct. Abatements are just another in long line of scams. The more laws that are created, the greater opportunity for corruption. Excessive lawmaking creates excessive corruption, as there is no need to bribe unless there are favors (exceptions) to laws to be granted by those in power - so, in the end, government always picks winners and losers, no matter how noble the idea.

Abatements, TIFs and other so-called incentives are part of the Site Selection Consultants game of They win; We lose. They do everything in secret, preventing any transparency, so that there is not way to ascertain the truth of whether or not a company would stay or relocate because of incentives or not. Generally, studies have always shown that movement occurs for other reasons. But, when governments are willing to hand out money, many businesses will get in line, especially when they know that clawbacks won't be enforced if they have significant enough clout.
States and localities, in fact, should be prohibited in competing for business locations by offering incentives (Commerce clause - hopefully, one day). A city's duty should be to provide and environment for people, business and community to prosper. Anything else, is nothing more than bribing companies to relocate or stay, which, is inherently unfair for everyone else. And if a business will stay or relocate somewhere just because of incentives, it is not much of a business anyway - which is why any quality business does not locate only because of incentives. They are just the icing on the cake. The incentives are not the cake!