Tax Abatements and Economic Development Incentives and Local Government and State Government and Tax Credits and Job Creation and Government & Economic Development and Government and Economic Development

Cities weigh new law allowing bigger tax breaks

July 13, 2011

Communities across the state are trying to decide how they will use a new law that provides them more flexibility to employ economic development incentives but could increase pressure to give companies more tax breaks.

The law allows cities and counties to waive all taxes on new business investment, such as equipment and buildings, for up to 10 years. It also lets localities funnel back to the company, rather than to government units, up to 100 percent of the local option income taxes paid by the new employees a company hires.

Proponents of the law say the leeway it provides will help make Indiana municipalities more competitive in attracting jobs. But some economic development and government officials worry that it could give businesses more leverage in negotiations by pitting communities that can’t afford to utilize the incentives against those that can.

“It’s a race to the bottom almost,” said David Bottorff, executive director of the Association of Indiana Counties. “This tool is out there now, so the pressure can be applied to get locals to use it.”

Leaders from Develop Indy, the economic development arm for Indianapolis, and city officials say they’re still in the process of analyzing the law and evaluating whether—and to what extent—the city will use it. Any policy changes would have to be approved by the Metropolitan Development Commission.

Previous state law prescribed a formula that local governments had to follow in giving abatements on real and personal property. Under the law, city officials would calculate how much a business would pay in new taxes and reduce that by a certain percentage every year.

For example, a 10-year abatement on real property would reduce taxes by 100 percent in the first year but only 5 percent by the 10th year.

Any deductions only applied to the company’s new investment in the property, not the existing assessed value—a point that remains in the new law.

But the new law allows communities to alter the abatement schedule as they see fit, based on factors such as the company’s amount of investment and how many jobs the business says it will create.

It also allows communities to offer income-tax credits as a hiring incentive, but excludes from that benefit companies moving from one site in Indiana to another.

Indiana Rep. Mark Messmer, the Jasper Republican who authored the law, said cities with sophisticated economic development operations already could have found ways to maximize tax abatements under the old law. But “this would allow it to be a lot more cookbook,” Messmer said, particularly for cities such as Jasper, which hasn’t used tax abatements in the past.

In fact, early discussions of the law change surfaced after a task force in Jasper identified expanded abatement power as one way to make that community more competitive for jobs.

The Jasper City Council is beginning to work on an ordinance that would outline its abatement policy. But city officials such as Mayor Bill Schmitt, who finishes his final term at the end of this year, are urging caution that when the city moves forward with incentives, it doesn’t give away too much of its tax base.

That concern is shared by groups such as Washington, D.C.-based Good Jobs First, which advocates making communities more accountable for economic development incentives.

Thomas Cafcas, a researcher with the group, said 24 states allow for some sort of property-tax abatement. He said that allowing full abatements for up to 10 years isn’t unprecedented but is a potentially dangerous policy.

“If you’re eating away at the property tax and you’re eating away at the income tax—if you’re eroding these stable forms of taxes, then what’s left?” Cafcas said.

Messmer said those fears shouldn’t overshadow the residual benefit a community receives, such as new residents moving in and new jobs created. And, he points out, communities eventually receive the full value of the new investment once the abatement expires.

“It’s increasing jobs and development to your local economy,” Messmer said. “You’re just delaying the increased revenue to one, three, five, seven years down the road.”

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