TERRE HAUTE —
Politicians routinely promise to create jobs. And one of the tools they use in job creation is the property tax abatement, which usually cuts by about half the amount of property taxes due on new business investment over a 10-year period.
Abatements are fairly common. Between 2000 and 2010, the Terre Haute City Council granted 89 tax abatements. Just this year, the Council has approved a total of more than $5 million in abatements to Sony DADC, AP&S Clinic III, LLC and LIN Television for a new WTHI-TV building.
Supporters of tax abatements say they are a way local governments can “incentivize” businesses to make investments and create or retain jobs. That investment can then have a ripple effect, creating new, complementary investment activity.
But property tax abatements have their critics.
Some say abatements needlessly reduce the tax burden on companies that would have made their investments even without the abatements.
What’s more, those critics say abated taxes are made up by other taxpayers.
Abatements simply “shift” the tax burden from companies to other taxpayers, they contend.
A tax shift
So what’s the truth? Do tax abatements granted by Vigo County and Terre Haute officials really cost you money?
In one way, the answer is clearly “yes.” That’s because local units of government are allowed to collect a certain amount of money each year. That amount — sort of like an allowance given to a kid — is called a “levy.”
Imagine a teenager gets an allowance of $10 per week and each parent pays half, or $5 each. If one parent receives an “abatement” and doesn’t have to contribute to the allowance, then the other parent will pay more because the allowance remains $10.
In a way, abatements work in similarly. When one person has some of his or her contribution forgiven (”abated”), then everyone else has to pick up the slack.
Larry DeBoer, an expert on local government finance at Purdue University, explains it this way: If the amount of assessed value in a community is lower because some property has been abated, then the tax rate on the rest of the assessed value must be higher. In his words: “You’re abating the property and then distributing the property taxes that would have been paid by that property to all the other property tax payers.”
So, in that way, it seems clear that abatements do cost other taxpayers money. But there is often more to the story.
Not a shift
Most companies seeking property tax abatements tell local officials that their investment might not — or will not — take place if an abatement is not granted. If they are telling the truth, then things get a little more complicated.
Imagine a third relative joins the household with the teenager who receives a $10 weekly allowance. Now the $10 allowance can be split three ways — about $3.33 per adult. But, imagine the third relative will join the household only if his share of the allowance is abated. If that’s true, then the abatement will have no effect. If the relative is not granted the abatement and refuses to move in, mom and dad still pay $5 each. If the abatement is granted and the third relative moves in, mom and dad still pay $5 each.
There is no change.
“So the crux of the argument,” DeBoer said, “is: Do you need that abatement in order to make the firm locate in your community?”
If you grant an abatement to someone who would have located in your area anyway he said, you are costing other taxpayers money. And if you grant an abatement to someone who really would not have made the investment without it, then you are not costing other taxpayers.
Half a loaf
A further complication to the argument is that abatements don’t last forever. Typically, abatements are granted for 10 years and allow companies to ease into paying their full tax burden. In most cases, 100 percent of the tax is forgiven (or “abated”) in the first year, 90 percent in the second year, 80 percent in the third year, and so forth until none of the tax is abated in the 11th year.
This complicates our “impact of abatements” story because, while an abatement may mean higher taxes for others, over time, it could, in theory, mean lower taxes for others as the new property joins the taxable property rolls.
Again, using the allowance example, if an abatement is needed to bring a new relative into your home, as we’ve already seen, in the first year, that relative will pay nothing toward the teenager’s allowance. However, in the second year, the new relative will start kicking in, meaning mom and dad will be paying a little less than they otherwise would toward the $10 per week allowance.
So, in the long run, abatements can add someone new to share the allowance burden. That’s why supporters of granting abatements often use the expression, “Half a loaf is better than no loaf.” In other words, while the family is not getting full support from the third person in covering the $10 allowance, in time, that third person will begin to help out.
No real benefit
There are still more complications.
For one thing, while in theory property taxes could fall as abatements expire, because local government levies tend to increase every year, that really never happens. Once again using our teenager’s allowance as an example, it’s as if the teenager’s allowance increases each year from $10 per week to $11, then $12 and so forth.
Another complication is that many abatements are granted on “personal property,” which is basically equipment. This year, Sony DADC was granted a $72 million abatement on new equipment for its Terre Haute plant.
Personal property complicates the “half-a-loaf” argument because personal property typically drops rapidly in value.
DeBoer explained it this way:
“There is a standard depreciation schedule on the assessed value of equipment, so by the time you actually get to tax it, most of the value isn’t there any more,” DeBoer said. “So you never really get to tax the equipment at its full value once you put the abatement on there.”
Ryan Cummins, a former Terre Haute City Council member and a local businessman, makes this same point. In his eight years on the City Council, 2000-2007, about 75 percent of the dollar value of abatements granted were for personal property. That means most of those abatements never contributed their “half-a-loaf,” he said.
“If lower taxes spur targeted ‘economic development’ for the abated entity,” Cummins asks, “why wouldn’t lower taxes for all taxpayers spur economic development all over the place for everyone?”
Tax cap complication
Yet another complication in the abatement story involves Indiana’s new property tax caps. Before the caps, lost revenue to local governments from abatements would be made up by other taxpayers. Now, thanks to the caps, some people are already paying at their limit in property taxes. As a result, the new burden of abatements is being carried — at least in part — by local government entities in the form of lost revenue.
It works this way. Imagine mom and dad are paying $5 each for the teenager’s allowance of $10. No problem. But what if the teenager now wants $11 and mom and dad have their allowance contribution capped at $5 each? That means that granting an “abatement” to the third relative joining the household will not simply mean mom and dad pay a little more to meet the new $11 allowance. They can’t. So the abatement means the allowance cannot increase. That costs our teenager.
“It not just that your taxpayers will have to pay a little bit more,” DeBoer said. Because of the tax caps, you now have to say to schools, parks, libraries and local governments, “you are actually going to get less revenue as a result.”
Some people, such as Cummins, believe this is a good thing. It forces local governments granting abatements to actually receive less revenue. Others see the caps as a reason to oppose granting abatements.
“I’m not sure the development community has entirely thought this through,” DeBoer said. “I’m not sure anybody has entirely thought this through. It’s a huge new wrinkle in just about everything we do in local government.”
New complications
All arguments aside, local government officials likely will continue to grant tax abatements. In fact, in the 2011 session of the Indiana General Assembly, lawmakers passed HR 1007, which gives local government more flexibility to grant even more generous abatements, especially in depressed areas.
Another reason that local officials will continue to grant abatements is that they worry that not doing so would send a negative signal about their community’s willingness to work with business. And, abatements provide a concrete way for local officials to claim they helped “create jobs.”
Abatements provide something for local governments to offer businesses to encourage investment, said Cliff Lambert, executive director of the Terre Haute Department of Redevelopment. Local governments are in competition with each other for new business investment, and local officials “have to be sure they have something of value in their tool boxes” to attract new business and jobs, he said.
What’s more, Lambert said, while an abatement forgives property taxes, new investment activity means local businesses and their employees will contribute to other revenue streams, such as the CAGIT and EDIT taxes.
Here to stay
At the end of the day, it’s impossible to know whether abatements were necessary to convince a company to make a certain investment in a particular community. Even the companies, themselves, are not always sure how an abatement will affect their investment decisions, DeBoer noted. Either way, it is almost certain that companies and local officials will continue to seek and grant abatements.
“It’s absolutely in the interest of [businesses] to say ‘We need this abatement in order to come here,’” DeBoer said. “It is absolutely in the interest of the government officials who give those abatements to say, ‘Without these abatements, they wouldn’t have come, so give us the credit for attracting this business to our community.’”
Arthur Foulkes can be reached at (812) 231-4232 or arthur.foulkes@tribstar.com
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