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Archive for Sunday, August 30, 1992

ANALYSIS EASES TAX ABATEMENT CONTROVERSIES

August 30, 1992

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In the year since the city of Lawrence adopted a new policy on tax breaks and then a process for screening businesses that seek incentives, abatement requests haven't incited the public controversy they once did.

In fact, no applicant who's asked for it has failed to receive a 50 percent, 10-year abatement of property taxes involved in a relocation or expansion since the policy was formally adopted in September 1991.

City and economic development officials concede that the Lawrence City Commission's failure to indulge in the once-customary and spirited debate on the merits of tax abatement requests they've received this year may be misinterpreted as rubber stamping.

Not so, says Tony Redwood director of Kansas University's Institute for Public Policy and Business Research. IPPBR researchers created the cost-benefit model used to gauge the measurable benefits and costs of a tax abatement proposal.

Rather, the model combined with the policy, which sets out standards for businesses the city would like to attract or retain, "imposes a discipline into the decision-making process of the commissioners," Redwood said.

ABATEMENT requests aren't being turned down, he said, because companies that don't fit the bill are bailing out of the process before it gets to the city commission.

"When we run the model on projects that look marginal, it discourages those companies from requesting abatements," said Redwood, whose institute has evaluated five abatement-requesting businesses during the past year. "It saves lengthy, heated debate over marginal proposals."

City Manager Mike Wildgen agreed. "I think the ones what come to us now are pretty strong," he said, but he added that there's no way to know how many businesses the policy and cost-benefit model have chased away.

"We certainly hand out the policy to people and then never hear from them again," he said. "But they could be making their decision based on a number of factors.

"You need to remember that the cost-benefit model is only one factor in this issue."

OTHER FACTORS the city's tax abatement policy brings to bear on applications for incentives include zoning for a business' location, its environmental impact and the level of pay and types of jobs a business offers. Some, but not all, of those issues are measured in the cost-benefit analysis, Wildgen said.

In addition, he said, businesses now must pass muster with the city's administrative review committee, which examines abatement requests and makes recommendations to the city commission.

"In fact, that's broadened out the scrutiny," Wildgen said, noting that the six-member committee includes representatives of the city, Douglas County, Lawrence public schools and the city's Economic Development Council.

BILL MARTIN, the Lawrence Chamber of Commerce's economic development director, said that although the cost-benefit model had been a useful tool in predicting the success of an abatement application, it also had discouraged some businesses from seeking abatements in Lawrence.

He added that not all of those businesses who declined to locate in Lawrence or expand here would have flunked the cost-benefit analysis, either.

"I think it's a combination not only of the model but the community scrutiny," he said, noting that even closely held businesses are asked to divulge information about their financial operations that they normally would consider private. "You might have a company that looked pretty good in the model but didn't want to go through the in-depth review by the city."

THE CITY also requires that companies be reviewed annually to ensure that they've fulfilled the promises for job creation and pay they made in their abatement applications.

"Late this year we'll be asking for reports, updates on where they're at," Wildgen said. Companies must file the reports by March of each year, and their abatements can be withdrawn if they fall short of projections.

However, Martin said it was unlikely that any firms would lose their abatements once they were granted because companies, acting on his advice, generally make modest projections for their performance.

THE FIVE firms that have qualified for tax abatements this year and the amount of investment they proposed making are:

Packer Plastics, $4 million for new equipment.

Golf Course Superintendents Association of America, $3 million for construction and $500,000 for equipment connected with a 32,000-square-foot addition to the organization's headquarters at 1421 Research Park Dr.

Kantronics Inc., $500,000 addition to its manufacturing facility at 1202 E. 23rd and $50,000 in new equipment.

Pitman-Moore Inc., $1.25 million for new eqipment installed at its warehouse and distribution facility in East Hills Business Park. Douglas County Development Inc., the economic development organization that is leasing the building to Pitman-Moore last year received an abatement on the building itself, which it valued at $1.9 million.

Oread Laboratories, $6.625 million for renovation and expansion of their facility at 1501 Research Park Dr. However, the company has decided not to take advantage of the indistrial revenue bonds or tax abatements it was granted.

ALTHOUGH all five projects proposed to add or retain jobs, one critic of the city's abatement policy said the cost-benefit model overlooks one important cost that of the abatements obtained by businesses that would have located or expanded in Lawrence without such incentives.

"The critical question the one we keep glossing over is how much you really have to give to begin with," said Allen Ford, a KU business professor.

Ford, who describes himself as pro-business but philosophically opposed to abatements, defines abatements as taxpayer subsidies and says there really is no way to measure the real cost of tax breaks for businesses.

He points to existing businesses that seek abatements and speculates that they're applying for them simply because they're available. It's his contention that they'd expand in Lawrence without incentives.

"PEOPLE don't do these kind of deals with it being contingent on property tax abatements. If it's that tight a deal, they won't do it," he said.

At the chamber, Martin agrees that some companies will expand or locate in Lawrence even without incentives. However, he says a conservative abatement policy will create costs of a different type.

Martin thinks the competition among communities seeking business investment is becoming so heated and inducements offered by other cities so tempting that Lawrence can't compete.

"I think in the future we're going to see local companies expand in other communities because there are better incentives available," he said.

Already, Lawrence can't recruit some new businesses when other communties are offering such enticements as millions of dollars in cash, free land, reduced costs on construction or leasing, unsecured lines of credit and free housing for employees.

"That's above and beyond a 100 percent tax abatement for the maximum term allowed by law," Martin said.

FORD ISN'T flapped by such reports.

"When you look at the cost of this in total," he said of the abatements granted in Lawrence, "we're really not losers. You might see fewer jobs created but you'll have all your taxes paid."

Martin, of course, disagrees. As an example he points to Famous Brands Liquor, a company whose abatement application provided the impetus for creation of the current policy.

City commissioners were bitterly divided over the company's worthiness for tax breaks on a warehouse and distribution center the firm wanted to build in Lawrence. Local economic development proponents, who say the scrutiny humiliated the company, are still bitter.

When the commission ultimately offered an abatement for 25 percent and five years, the company saw it as adding insult to injury and built its new warehouse in Topeka.

"HOW MUCH revenue have we gotten from them? I think that's a perfect example of the importance of abatements," Martin said.

Over in city hall, Wildgen said there are two sides to the cost-benefit issue. He noted that Ford sees the cost issue in terms of tax revenue lost while economic development advocates like Martin believe the reduced revenue gained is better than no new revenue at all.

"Some of it's how you're looking at it. It's a glass half full or half empty kind of thing," he said.

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