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Tax Abatements: Boon or Bust? It Depends

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May 4, 2010 by   Leave a Comment

Editor’s Note: On paper, the numbers add up to one thing: hope. Millions of dollars in new investment and thousands of new jobs were supposed to come in northern Indiana by the end of 2009 — many powered by Hoosier tax dollars. But, in mid-2010, many are nowhere to be found. WSBT-TV, the CBS affiliate in South Bend, Ind., took a closer look to find out why. Here are excerpts from the station’s in-depth report:

Hope was in the air as the ribbon was cut on 19 new northern Indiana companies in 2009. According to annual reports from Indiana’s Economic Development Corp., in the eight Indiana counties that comprise WSBT’s viewing area alone, those announcements represented more than $234 million in new investment from “competitive projects.”

An even bigger payoff?

The projects are listed as creating a total of 3,827 new jobs.

18 other companies across Northern Indiana are listed as investing $29 million in expansion, retention or training projects in 2009, creating an additional 1,312 new jobs and retaining 1,939 jobs.

It’s all part of $21.3 billion in new investment across Indiana listed by the state’s EDC since 2005 — including more than 100,000 new jobs statewide. From electric vehicles to food and furniture, the promises of new investment and new jobs they represented became a light at the end of a dark economic tunnel.

But, after weeks of research, WSBT discovered some of those jobs are nowhere to be found. We also found most of the companies in question have something else in common, too.

A Common Thread

Dorinda Heiden-Guss

Dorinda Heiden-Guss

It’s a term you’ve likely heard before, but it’s one that’s often misunderstood. Tax abatements are used extensively around the globe and right here at home. In 2009 alone, more than 20 local companies–from RV makers to steel mills, musical instrument manufacturers and electric vehicle developers — were offered millions of dollars in tax breaks in exchange for new investment and jobs.

Economic Development officials say, quite simply, it works.

“We call it, in Elkhart County, tax phase-in. It’s a tool that is used for existing as well as prospective new companies coming to the area for job creation,” said Economic Development Corp. of Elkhart County President Dorinda Heiden-Guss.

“A tax phase-in, or abatement, can be anywhere from one to ten years in term, and that may sound like a long time. But, if we aren’t doing it, someone else will. It’s highly competitive in economic development,” Guss continued.

There are plenty of local examples of how the process has worked to spur new investment.

In Elkhart County alone, EDC lists $189 million in new investment in 2009, and 4,235 new jobs — a higher number than in the previous seven years combined.

But, economic development officials admit — sometimes it can be tricky to turn those numbers from “commitment” to “reality.”

For example, Plymouth-based Electric Motors Corp. was promised about $250,000 from the state for worker re-training grants in exchange for new investment in Elkhart County, including the creation of 1,600 new jobs by 2012; 450 of those jobs were due to be created by end of 2010.

In January, then Interim CEO Ralph King said the company still intended to hire “several hundred people” to manufacture the vehicles beginning in May or June. But, as of early May, the company had instead vacated its former Wakarusa headquarters and downsized to a smaller location in Marshall County. (There was no new word, either, on its planned partnership with Nappanee-based Gulf Stream Coach Inc.)ElectricMotorsCorpGulfStrea

Following the layoffs of four employees in November — about one-third of the company’s workforce at the time — only a small handful of employees remain.

It’s not a typical situation, Heiden-Guss said, but it does happen.

“There’s a certain amount of risk, I would say, with that. You’re going to believe somebody. You want to believe. But, you’re also going to do your due diligence as an Economic Development Corporation. You cannot control the enterprise system. It’s just not possible. But, each project is a case by case,” she said.

But, WSBT’s research shows those cases appear to be growing.

Additional Subtraction

Keystone Rv Co. logoAccording to a search of archive records, Goshen, Ind., based Keystone RV Co. accepted $400,000 in state and local tax breaks for a new facility and new jobs in LaGrange in 2006. As sales surged the following year, the abatements promised appeared to be paying immediate dividends.

But, by early 2009, as the entire RV industry struggled to stay afloat, the company had laid off 265 workers at several facilities.

In New Carlisle, steel maker I/N Tek I/N Kote announced a major expansion in 2008, bringing 100 new jobs by 2010. United Auto Workers union representatives hailed the expansion as a major step toward a more stable future for local workers, and town leaders quickly approved tax breaks for the company.

But, in early 2010, company officials announced all construction on the addition was placed on an “indefinite” hold, as steel prices soared and profits dropped.

In Elkhart, Accubilt promised 33 new jobs and a $1.8 million dollar expansion when it accepted state and local tax breaks in 2006. At the time, city council members touted the announcement as “another positive sign” that Elkhart was a “city on the move.”

But, three years later, Accubilt laid off 73 workers. In late March, the company itself was on the move, closing the doors of its Elkhart facility for the last time.

And, these aren’t isolated examples. In fact, according to WSBT’s research, in many cases, tax abatement and job commitment haven’t exactly gone hand-in-hand. It’s one reason county leaders say they try to get as much information as possible before rolling out the red carpet for companies.

“You tend to question the large numbers,” said Heiden-Guss. “You’d love to see the 1,300 jobs and all the excitement and what-not. But, you don’t want to give false promises either.”

Heiden-Guss called it an “economic roll of the dice,” but one that’s “controlled”–particularly for taxpayers.

“Those companies that don’t meet those objectives or that haven’t completed their process will not receive benefits. The part where the taxpayer loses out is that those jobs that were promised don’t come to fruition. But, if the company did not meet those objectives, they are denied–do not receive–the incentive,” she said.

“I believe in accountability, and I think you’re going to find the elected leadership does too. They know firsthand that they need to be held accountable,” Heiden-Guss continued.

It’s a sentiment echoed by Elkhart County Commissioner Mike Yoder.

“Our county initiated [tax phase-ins] as a way to attract advanced technology companies–companies that would do something to diversify our economy. It’s a very important tool, because we have to come up with some sort of incentive locally to trigger the other incentives that the state kicks in. And, if we’re not offering those incentives, we’re not going to be competitive with other communities,” said Yoder, (R-Middlebury).

Elkhart County, Yoder added, has faced intense competition to land new investment.

“We’ve gone up against San Antonio, Texas, for example, that was literally just giving buildings away,” he said.

It’s one reason why Yoder says the county has felt it important to “roll the dice” on tax phase-ins. And, he says, in every case, taxpayers have virtually no risk.

“We want to see companies fulfill their commitments. But, if they don’t, we’re really not out anything, because, they wouldn’t have been here anyway. These are taxes we wouldn’t have had if the company had gone somewhere else,” Yoder said.

Controlled Risks

“There are some risks involved, no doubt,” said Indiana University-South Bend Economics Professor Dr. Grant Black. “Perhaps you do some infrastructure increases. Perhaps you give some tax breaks. And, just the way the markets work, the businesses might not pan out like they had intended.”

“Those are things that are really, usually out of anyone’s control. So, perhaps you don’t reap as strong of a benefit as you had predicted. And, there is a chance that, when you weigh your costs and benefits in the end, sometimes you may come up hurt a little bit,” Black continued.

Still, Black says there are many levels of mitigation aimed at controlling that risk, and protecting taxpayer money in the process.

“A lot of abatements have very strict guidelines that include requirements for companies to comply with. It’s not just a guaranteed reduction or elimination of taxes during that time period. If you don’t comply with the specified terms, you would then owe back taxes, for example,” Black said.

It’s why Black says it’s important for taxpayers not to count on investment until it actually happens.

“The time it takes these things to go into play is often a lot longer than people probably imagine. A lot of times we hear the big hoopla on the news and the big announcements. But, when you hear these announcements about creating lots of jobs, you really need to be aware that’s likely going to take some time, and is contingent on a lot of other economic factors,” Black said.

That could be one major reason for the increasing amount of promised jobs and investment that haven’t come to fruition.

“Some of that slowdown is likely due to the sluggish economy,” Black said. “And, even if that changes, ramping up operations could take some time. I don’t think you’re going to see that change overnight.”

Future Planning

In response to a recent investigation by an Indianapolis television station, Indiana’s Economic Development Corp. updated its 2009 annual report, listing for the first time the number of announced projects that never came to fruition at 13 percent statewide last year.

It’s also important to point out that many announcement projects do succeed even beyond expectations.

But, there are protections in place for those that don’t.

St. Joseph County recently passed a “tax abatement ordinance,” outlining which companies can receive tax breaks, and for how long. Elkhart County, and many other local counties, also have a review process in place to determine if companies are holding up their end of the bargain when it comes to investment and job creation.

If that doesn’t turn out to be the case, many counties have “claw-back provisions” aimed at guaranteeing at least a portion of money given for tax breaks is returned if a company doesn’t fulfill its commitments.

The goal now, Yoder says, is to increase the number that do live up to expectations.

“We want to see success,” he said. “And, it may take 5 or 6 — maybe 10 years to realize. But, we’re starting to see the change we want to see. We just need to be patient.”

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