Archive for Monday, December 22, 2003

Tax abatements not effective

December 22, 2003


The editorial "No Guarantees" (Journal-World, Dec. 14) argues against returning to the use of "but for" analysis as part of the city's tax abatement policy.

There are multiple meanings to the concept of "but for" analysis.

First, "but for" can mean that a project is infeasible but for provision of the abatement. These cases are very rare, usually firms already in town that are confronting failure. A tax abatement is the city's contribution to keeping these firms solvent and avoiding the unemployment that would result if the firm fails. The city should enter into a partnership with a failing firm only after the most careful review of the alternatives.

Second, "but for" can mean that the firm will not choose Lawrence but for provision of the abatement. This is a very different test. The presumption is that the firm is not at the break point of financial infeasibility. At issue is how well does the community compete with other communities in terms of attracting the firm? It is conceivable that when the costs of labor, land, utilities, and financing are added up, offering a property tax break may just prove to be the one component of operating expenses that makes our community preferable to other locations. Again this is a very rare situation, and Lawrence's current tax abatement policy does nothing to examine this issue.

Firms create competition between cities, forcing cities to bid for the firm with financial inducements. However, each competing city can know where it stands relative to the others in terms of the costs of labor, utilities and other expenses. If one city already has an advantage due to low labor costs, then it makes little sense for that city to compete further, offering unnecessary tax breaks. Lawrence has been in this situation on multiple occasions recently. Lawrence did not need to grant tax breaks in order to win the competition, but it granted unnecessary abatements because its own economic development practices do not include examination of these issues.

Third, "but for" can mean that but for the abatement, all other forms of public subsidy are too costly. This would rarely be the case because property tax abatements are very inefficient. Property tax payments are deductions for income tax purposes. By lowering available deductions, tax abatements raise federal and state income tax liability, lowering the after-tax benefits of an abatement relative to the foregone tax dollars by the city. This efficiency loss suggests that cities should seek other subsidy mechanisms that will generate more value relative to the foregone tax dollars.

In practical terms, this means cities realize greater benefits by investing in infrastructure and industrial park development. For each tax dollar spent on these items, the city gets one dollar of value that stays in the city if the firm moves out. Our experience in this area is instructive; Lawrence has granted abatements to firms that have not survived their abatement benefit period. Thus, the firms have left town, the abated dollars are lost, and the jobs are gone.

The editorial suggests that, if the city returns to a policy employing a "but for" analysis, a business would be forced to take an oath. No oath is part of the process, but firms should be contractually obligated to create the jobs, to pay the wages, and make the investments promised. Currently, compliance by the abated firms is the exception rather than the rule. All but one firm of the 15 firms granted tax abatements are out of compliance in one or more of these areas, a dismal record of performance.

Research in local economic development shows unequivocally that property tax abatements do not factor into a firm's location decision. Cities are prone to giving away such tax breaks when they are not necessary. We should learn from the large body of research that exists on effective economic development planning and from our own experience. The tax abatement policy has failed the taxpayers of Lawrence. Lawrence needs to raise the bar both for granting abatements and for performance by firms that receive abatements. Reinstating a "but for" provision to the policy is a necessary first step to fixing the policy.

Kirk McClure, is an associate professor of urban planning at Kansas University and a member of the city's Public Incentives Review Committee.

Commenting has been disabled for this item.