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Archive for Thursday, September 29, 2005

Firms must earn tax incentives

September 29, 2005

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Economic development involves partnerships between the city and various businesses. These partnerships exchange tax breaks, bond financing and other public contributions for new jobs paying wages at or above community standards and for new investment in real property.

Over the last few years, Lawrence has entered into partnerships with 17 firms. Thirteen of these partnerships have failed to produce at least 90 percent of the promised jobs, pay at least 75 percent of employees wages that are at least 90 percent of community average wages, or make at least 90 percent of the promised investment. Even with these generous standards for compliance, to have 13 out of 17 partnerships fail indicates that the city has received poor guidance in its economic development activities. It is compelling evidence that the city needs to seek new leadership in its economic development planning.

The Lawrence City Commission has previously articulated that it grants tax breaks in order to gain good jobs paying wages at or above community standards and to leverage new investment. The Public Incentives Review Commission (PIRC) annual reports address several issues beyond simply the jobs created, but there is no doubt that the new jobs and wages are the reason the city gives tax breaks to these firms. Minus the jobs and wages, other benefits, such as community involvement, simply do not justify the costs of the tax breaks.

Abuse of the tax abatement program is widespread and ongoing. Some firms promised that they would create permanent full-time jobs but instead hired workers through temporary employment agencies paying low wages with few or no benefits. Some firms have failed to report their job counts and wages levels. Some firms have paid wages below community standards while unabated firms are paying at or above these standards.

There can be no question that if a firm fails to fulfill its part of the bargain, then the city is being denied the benefits it expects in return for the tax break. The PIRC exists to check on the performance of the abated firms. Efforts to divert the work of the PIRC may be viewed as good advocacy for business, but it is harmful to the city of Lawrence and its taxpayers. This level of non-compliance leaves the city with a weak reputation, rendering it unable to negotiate effectively with new or existing firms. Word is out: Lawrence does not enforce the terms of its economic development agreements. A firm can promise much and deliver little, with impunity.

With a program of this scale, it would be expected that two or maybe three firms would be out of compliance. However, to have 13 out of 17 partnerships fail to deliver the promised jobs, wages and investment is truly remarkable. The non-compliance found in Lawrence's tax abatement program has little to do with economic cycles. One non-compliant firm came to the PIRC explaining its low level of employment as a function of the economic downturn, and the PIRC agreed that the firm was non-compliant for reasons out of its control. However, economic cycles cannot justify a firm hiring temporary employees while unabated firms offer permanent positions. Economic cycles do not justify low wages to abated firms while unabated firms pay at or above community standards.

The most disconcerting fact is that Lawrence would probably have gained nearly all of the jobs generated by these firms without giving away wasteful tax breaks. Firms choose a location for many reasons, and property tax breaks rarely enter into a firm's decision process. Wage levels paid in a community, the availability of land and labor, access to transportation and the cost of utilities all are much more important to the location decision than are property tax rates. Lawrence has comparative advantages in these areas.

In addition, unabated tax rates in Lawrence are often lower than abated taxes in competing locations, suggesting that the city is foolish to give away something that it does not need to give away to compete for firms. Abated firms have admitted after the fact that the tax abatement did not factor into their location decision. They simply told the city that abatements were necessary, even though they would have located in Lawrence anyway.

The failure rate of abated firms in Lawrence is too high to justify. The economic development planners who have guided the city into this position should be replaced. Lawrence needs and deserves effective economic development planning carried out by skilled professionals reporting to the City Commission.

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

Comments

Ceallach 9 years, 2 months ago

Professor McClure, being a member of the City's Public Incentives Review Committee, has a better perspective than many of us. However, I am not surprised about the City bungling tax incentives with businesses. Our city consistently displays a desire to play "big shot" with business men who probably laugh all the way to the bank. But the city power people seem to feel good about their management of our money no matter how miserably they fail.

It is totally unfair for Lawrence businesses to be forced to compete with "fly-by-nighters" for personnel. The telemarketers are a good example of the parasites this city has attracted. The majority of their employees never reach permanent status, therefore they never have to pay health care or other benefits associated with full time work. When too many people have worked their way close to permanent status or have earned additional wages due to performance, the company pulls some shady lay-off/firing, citing bogus reasons for doing so. At that point it seems out city's guardian angels pat them on the back for trying so hard to do the right thing (that's the businesses -- not the workers).

lunacydetector 9 years, 2 months ago

i find it almost suspect mr. mcclure failed to mention affordable housing in his reasons why companies choose communities. companies need single family housing that is affordable for their workers - and i'm not talking apartments or townhouses. this is one area lawrence fails miserably.

with the over building and vacant new apartments and office buildings, perhaps lawrence should concentrate in bringing new retail. what would you say about that idea mr. mcclure?

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