LJWorld.com weblogs Town Talk
Predicting the future on tax abatements
Imagine this. A major manufacturer has chosen Lawrence as the site for a new $50 million plant that would employ 500 people and pay average salaries of $44,000 per year. City commissioners would march down Massachusetts Street singing a chorus of Hallelujah! Struggling real estate agents and merchants would join arms and dance a jig of jubilation on sidewalks across the city. The Kaw would once again flow with milk and honey. Not so fast. Come to find out, that company wouldn't be eligible for the 80 percent tax abatement that it expects. At least not under a new method that staff members are developing to measure the cost and benefits of tax abatements. In fact, the project wouldn't even come close to qualifying. The city's current tax abatement policy requires that any company requesting a tax abatement show that it would produce at least $1.25 cents in general benefits to the economy for every $1 in property tax that it has abated. In the past, a project with 500 new jobs and average wages of $44,000 normally would have no problem meeting that standard. But under the new measuring method being developed at City Hall, the hypothetical project only scored a 1.10 benefit-to-cost ratio, well short of the required 1.25 score. So, what's up? Well, the new tax abatement scoring model - which commissioners will consider in December - is significantly different from the current model that is maintained by economists at Kansas University. Here are a few ways it differs:¢ The proposed model assumes the company actually would come to Lawrence even if the tax abatement was not offered. The current model assumes the exact opposite. The assumption makes a big difference because under the proposed model all tax abatements are counted as a cost. For example, in this hypothetical example, the company would get a $12 million tax break over 10 years. With the proposed model, that $12 million gets counted as a cost to the city and the county. That makes it more difficult for the benefits to outweigh the costs. ¢ The proposed model assumes that quite a few new people would be living in the city as a result of the new company. At first glance, that would seem to be good. But when it comes to models, that isn't always the case. The proposed model assumes that there will be 411 new households in the city and county as a result of the new company. Some of the households will be people who are working at the new plant. Others, though, will be people who are in service jobs supporting the new plant and the new people who live here. Those folks may be making significantly less in wages than the plant workers. If a person makes a lot less, it may be that they'll add more costs to government than they'll generate in revenue. The bottom line is, the proposed model counts more of those type of people than the current model does. Again, that makes it harder for the benefits to outweigh the costs. ¢ The proposed model, in this case, assumes all the costs associated with the new project should be entirely accounted for by the new business. For example, if the new manufacturer required an upgrade in the roads around the plant site, all those public costs should be attributed to the project, even though other non-plant related traffic would benefit from the upgrades as well. That's different from how the current model accounts for costs. But the biggest factor in all this may be the specific site where the company is locating. The model assumes that it is the 87-acre farm field just east of the East Hills Business Park. The site currently is the only industrially zoned property in the city more than 50 acres in size. (A 155-acre tract along the Farmers Turnpike was recently zoned industrial, but it is now tied up in a lawsuit filed by upset neighbors.) The 87-acre site, though, may be an expensive one to develop. Economic development leaders have asked the city and county to spend about $2 million to add seven feet of fill dirt to the site. Without raising the elevation of the site, it likely is not marketable, eco devo leaders have said. In addition, city staff members assumed that there would be another $2.5 million to $7 million in off-site infrastructure costs related to the project. Although the city could require the developer to pay for those costs, this model assumed that wouldn't be a likely scenario. It counted those costs as a cost for city and county government to pick up. What all these numbers add up to, likely, is a lot of food for thought for city commissioners. Is it worth investing money into the 87-acre site? Would this new way of measuring tax abatements make it too difficult for companies to qualify? Does the current tax abatement model too often leave the city and county holding the bag? Answers should be forthcoming. In the meantime, the sidewalks will be jig-free zones.