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Archive for Tuesday, January 14, 1992

TAX ABATEMENT MODEL EXAMINED

January 14, 1992

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Lawrence city commissioners examined for the first time Monday the nuts and bolts of a statistical model used for weighing the consequences of giving businesses property tax breaks.

The model is the only element of the city's "tax abatement" policy the commissioners haven't accepted officially.

"This is the only thing we don't know much about," said Commissioner Bob Schumm, who requested Monday's study session to clear up questions on the model. "This is the only missing link in the policy."

The model is used to figure the potential benefits and drawbacks of granting 50 percent tax abatements over a 10-year period to businesses that are considering expansion in Lawrence.

Commissioners support the policy in hopes that it will encourage economic growth in Lawrence.

The model was designed by Kansas University's Institute for Public Policy and Business Research.

Helga Upmeier, a research associate for IPPBR, guided commissioners through a test run of the model, using a fictitious business called "Jayhawk Company."

MORE THAN 200 pieces of data are plugged into the model, including the number of jobs created, families moving to Lawrence and using local schools, the range of salaries and the business' estimated utility bills.

The end result is a benefit-cost ratio, which is used like a rating. The model's creators suggested that a ratio of 1.25 to 1 or higher could justify giving a business a tax break.

Meier said a 1.25 to 1 ratio can be interpreted as meaning that for every $1 in cost to the city over 15 years, which is the period of the abatement, the community would reap $1.25 in benefits.

The commissioners and local business leaders who attended the study session played "devil's advocate," trying to shoot holes in the model by firing "what if" scenarios back and forth.

Gary Toebben, president of the Lawrence Chamber of Commerce, frequently jabbed at the model's conservative approach to measuring benefits, claiming no business would show a positive benefit after 10 years under the model.

MAYOR BOB Walters countered that the eleventh year, the first year after the tax abatement ends, is usually the "recovery" year.

Commissioners sifted out three considerations that the model didn't address: intangible benefits and drawbacks, the chances of a business expanding in Lawrence without the abatement, and changing the approval ratio in the event of economic hard times.

Schumm suggested that the commissioners consider the three elements separately for each tax abatement request.

"I think we'll always need to use the intuitive side to complement the hard data we get," Commissioner Shirley Martin-Smith said today. "You need to handle this data with care and understanding of the community."

In the end, the commissioners seemed shell-shocked by the model's statistical intricacies but generally pleased with its accuracy.

THEY AGREED to consider accepting the model as part of the official tax abatement policy at an upcoming commission meeting.

Approving the model would cap several months of debate over the best method for considering abatements.

Commissioners have approved tax abatements in the past without the model, but it was an inexact science, said Commissioner Bob Schulte.

"If we approve the model, I think it should go a long way to making people feel more comfortable about the standards for approving an abatement," Schulte said.

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