Tax Abatement Considered at Tonight’s County Council Meeting

22 Dec
2015 Monroe County Council

2015 Monroe County Council

The Monroe County Council will be considering an application for a tax abatement at its work session tonight, 2015-12-22, the only item on the agenda. The packet is available here: Council_Work_Session_Packet_20151222

Tax Abatement Application Facts

Here are the basic facts about the tax abatement application:

  • The applicant is RSSJ Rentals, AKA Robert (Bobby) Scank, local restaurateur (Bobby’s Colorado Steakhouse), who plans to build a 3600 sf building. The application that the building will cost approximately $300,000 — however, Mr. Scank told the Economic Development Commission (EDC) that the cost will be closer to $425,000 (since the tax abatement is tied to the investment, the value of the abatement would scale accordingly).
  • The tenant will be Shoshone Trucking, based in Peru, IN. Shoshone will use the property for truck storage, vehicle maintenance, materials storage, and an office. The company currently has 12 employees, and plans to expand to 20 when they are able to move into the building
  • The jobs to be added are truck drivers, with a starting wage of $21.10/hour plus benefits.
  • The property is 5260 W Vernal Pike.  A map is included below. This property is within the county’s Westside Economic Development Area (TIF District). This means that the costs of and benefits of this take abatement will both accrue to the TIF district, not to the other units of government that service this parcel. This also has implications as to the process (which I’ll discuss below).
5260 W Vernal Pike Map

Parcel Boundary, at West Vernal Pike and Angelina Way

  • The property is zoned Light Industrial, with no zoning changes required for this usage.
  • Mr. Scank reported that he had a 5-year lease with Shoshone Trucking, with 2 2-year options. For this reason, he is applying for a 5-year tax abatement (this is shorter than the more typical 10 years). As with all tax abatements, the percentage of new assessed value as a result of the investment that is abated declines throughout the life of the abatement.
    • For example, for a 5-year abatement, the first year 100% of the new assessed value is abated, in the second year 80%, down to only 20% in the fifth year. After the term of the abatement, 100% of the new assessed value is taxed.

This abatement application is unusually small in scale compared to our typical tax abatement applications. Most of our abatements come in the form of much bigger investments (i.e., bigger buildings); this project is similar in scale  and scope to the abatement that  the Council granted for Eco Logic in 2014.

Process

All tax abatement applications in the unincorporated county (which this is go to the Monroe County Economic Development Commission (EDC) for review, analysis, and recommendation to the County Council. The EDC met last Thursday, 2015-12-17, and voted 3-0 to recommend in favor of the 10-year abatement (the abatement request has subsequently been reduced to 5 years).

All tax abatement applications require two votes by the County Council: what is called a “declaratory resolution” and a “confirmatory resolution”. Tonight will be the declaratory resolution. If the vote is in favor of the abatement tonight, then the Council will schedule the confirmatory review and vote at their 2016-01-12 regular meeting.

In addition, however, because this abatement request is in a TIF district, the Monroe County Redevelopment Commission and the Board of Commissioners (as the legislative body that created the Redevelopment Commission) also are required to approve the abatement request. The RDC’s review of the tax abatement application is restricted to consideration of whether the granting of the tax abatement would jeopardize the Westside TIF’s ability to meet its bond obligations. Since the investment that is associated with this tax abatement will increase the revenue to the TIF district and the overall value of the investment is very small in proportion to the overall value of the TIF district, it would be very difficult for the RDC to find that the abatement would jeopardize the ability to make bond payments. In any case, the RDC met on 2015-12-17 and found that the abatement would not jeopardize the Westside TIF’s ability to meet its bond obligations.

The County Commissioners’ review will be scheduled for their  regular meeting on Friday, 2016-01-08 (assuming the Council approves  the declaratory resolution tonight).

Finally, as a matter of practice, the County Council always requires a memorandum of understanding (MOU) with the recipient of the abatement. This MOU constitutes a binding contract between Monroe County and the recipient of a tax abatement, and specifies in detail the terms of the abatement, including the timeline for the creation of any proposed jobs, criteria for substantial compliance with the terms of the abatement, and any remedies (“clawbacks”) for noncompliance. This MOU would be considered at the same time as the confirmatory resolution.

In summary, here are the relevant dates:

  • Review by Economic Development Commission: 2015-12-17 (Completed)
  • Review by Redevelopment Commission: 2015-12-17 (Completed)
  • First Review by County Council: 2015-12-22
  • Review by County Commissioners: 2016-01-08 (tentative, if  first review by the County Council is successful)
  • Second Review by County Council: 2016-01-12 (tentative, if  first review by the County Council is successful)

Analysis

The property is currently assessed at $62,300 and pays approximately $1080 in property tax per year. The following table summarizes the value of the investment and the 5-year abatement, over a 10 year period. I used estimated tax rates provided by the Assessor’s Office — and made the assumption that neither the property value nor the tax rates would change during the 10-year period.

Screenshot 2015-12-22 07.27.20

There are two numbers that matter most in the analysis of the abatement. The first is the total of the column “Estimated Revenue Not Received”, $21,412. This is essentially the value of the abatement to the property owner over a 10-year period, and is also the revenue forgone as a result of the abatement, assuming the investment went on as planned, without the abatement.

The second number is the total of the Additional Taxes Paid from Investment column, $49,962, which is the estimate of the additional amount of taxes over the status quo that would be brought in as a result of the investment.

These two numbers really can be seen as reflecting the  two different sides of the abatement: the tax revenue forgone (assuming the investment goes ahead) and the additional tax revenue generated by the investment.

In addition, it is useful to look at the two columns labeled Cumulative Without Improvements and Cumulative With Improvements. In particular, these numbers show that even WITH the abatement, the property will be generating more revenue by the second year of the abatement than it would have without the investment.

Tax Abatement within a TIF District Critique

So besides the usual criticisms of tax abatements in general (in my opinion the most salient being that the literature shows that tax abatements have a minimal impact on a business’s decision to make an investment), this abatement is subject to another critique — that it is a tax abatement within a TIF district. Indiana is one of the few (not the only — at least Iowa and Missouri also permit them) state that permits tax abatements within TIF districts, so overall this is a relatively rare and not-well-studied situation.

I’ve heard  this critique take 2 different forms, which can actually be seen as diametrically opposed:

  • A tax abatement in a TIF district is “double-dipping”, as it combines two economic development incentives
  • A tax abatement in a TIF creates two economic development incentives working against each other, because the purpose of the TIF district is to capture revenue from development in the district, and a tax abatement diminishes the amount of revenue for capture

I  reject double-dipping argument, at least  in the general case. Tax abatements and TIF districts are often lumped  together in public discourse as similar economic development incentives. However, they are really very different. While a tax abatement is clearly an economic development incentive that works to the benefit of an individual business/investor by reducing the amount of new taxes paid by the business, the TIF district  serves to provide infrastructure that makes particular parcels of land broadly develop-able. Any business that is going to expand or site at a particular location will generally only do so if there  is existing infrastructure.

So the benefit to an individual business owner  of being in a TIF district is simply having access to land with infrastructure. But this is not a particular benefit beyond any other land that has infrastructure that is outside a TIF  district. The benefit of a TIF district accrues more directly to the unit of government that created the TIF  district — the ability to raise revenue to put in infrastructure to support employment.

Incidentally, I’m not saying that double-dipping couldn’t occur in a specific case.  A redevelopment commission could choose to invest in or provide some other sort of direct assistance to a particular property (other than providing publicly-available infrastructure) and then also allow a tax abatement on the same property. However, this is not the case here, and in general.

The second argument — that a tax abatement in a TIF creates two economic development incentives working against each other, because the purpose of the TIF district is to capture revenue from development in the district, and a tax abatement diminishes the amount of revenue for capture — does have some merit — but this merit has to be evaluated on a case by case basis. First, we have to start  from the premise that the goal of the TIF district is not to accumulate as much revenue as possible, but to provide overall benefits to the community. These benefits can include redevelopment of blighted/brownfield land, amenities that improve the quality of life of residents of the community, and employment available to local residents (in urbanized areas, providing housing is an additional potential benefit of a TIF district).

The revenue captured by a TIF district is simply a means to the above purpose(s), in that the revenue allows for the investment in the infrastructure (in particular, pays the bond that created the infrastructure). So in the case of a tax abatement within a TIF, the abatement would only work at cross-purposes with the goals of the TIF district  if it impaired the ability of the TIF  district to invest in the infrastructure necessary to meet its goals. This could mean impairing its ability to make  debt service payments, but could also mean impairing its  abilities to make other infrastructural improvements that aren’t funded through debt.

So as long as the abatement does not impair the ability of the TIF district to make the necessary investments to meet its goals, it does not work at cross-purposes to the TIF district. Again, making this determination requires looking at the specific case. Is the abatement relatively large compared to the overall cash flow of the TIF district, such that it could materially affect that cash flow?  Is the TIF district putting in special infrastructure or other incentives specifically to serve this property? Does the project necessitate special services or greatly increased demands on government? If the answer to any of these questions is in the affirmative, then the abatement could be seen as working at cross-purposes with the TIF district; if not, though, the abatement can be seen as working in concert with the TIF district. If the abatement plays a role in incentivizing the investment (again, it is not a given that this happens), then the abatement can increase, not decrease, the revenue available to make investments in the TIF.

And finally, even if you take an entirely negative view of tax abatements  — in effect, see them as harming all of the other taxpayers — the taxpayers that are harmed  in the case of a tax abatement within a TIF district — are only the other property owners (businesses) in the TIF district. So even if  you take a categorical stance against tax abatements, having the tax abatement in a TIF district actually mitigates the harm done to the other taxpayers AND units of government.

Council Meeting Tonight

The Council will take the first  vote on this tax abatement application tonight. As always, the meeting is open to the public, and will be held this evening (December 22, 2015) at 5:30 in the Nat U Hill room of the Monroe County Courthouse, and it will be broadcast on CATS. Public comment will be taken on this tax abatement application. Hope to see you there!

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