$31M in tax abatements debated

The Springfield News-Sun knows jobs are important to you, so we’ve made it our business to find out what’s happening in economic development. Business reporter Everdeen Mason spent two months investigating Clark County Auditor’s Office and city and county Tax Incentive Review Council records from more than a decade ago to determine whether companies with tax breaks are actually creating jobs and higher tax revenue.

Clark County and Springfield have given at least $31 million in real estate tax abatements over 10 years to 25 companies, generating nearly 3,000 jobs.

But local officials say they dislike using tax breaks to lure business.

“This is debated greatly across the country right now as well as economic development circles about the role incentives play in site selection decisions,” said Tom Franzen, Springfield’s assistant city manager and economic development administrator. “There’s not an easy answer.”

Business growth and property tax revenue are cited by supporters of incentives. Wittenberg University economics professor Jeff Ankrom and others, however, say job figures are inflated and incentives allow businesses to pit communities against each other.

In a two-month investigation, the Springfield News-Sun examined annual reviews of every property tax break in Clark County in the last 10 years as well as yearly reports from the companies themselves. The Clark County Auditor’s Office did not have the abatement amounts for some companies.

Of 11 local tax abatements that ended in the last decade, 64 percent failed to meet job creation promises and 27 percent didn’t meet investment promises. And of the nearly 3,000 jobs created, not all of them remain.

Interviews with local officials and experts showed that tax abatements are designed to achieve three main things:

In Springfield and Clark County, abatements are mostly for property taxes. The News-Sun focused on enterprise zone agreements, although the city has five commercial community reinvestment acts that link tax breaks to a location rather than a company.

The area used to give tax abatements for personal property – or equipment and furnishings in a building, but a state law did away with that by 2009.

Here’s how it works. As a company searches for a place for a building project, or a way to fund an expansion or investment, the city or county may offer a tax abatement, depending on whether the project is a good fit for the community and what the proposed outcome is. Some larger agreements need approval from the school district.

Once the agreement is approved at local and state levels, participating companies must submit a yearly report of progress, and a Tax Incentive Review Council, or TIRC, discusses all projects on an annual basis to determine which are working or need modifications.

Franzen said Springfield and TIRC look at each deal differently, including factors such as what utilities a business might need, if the community has the right work force, possible challenges the business may face, and if there’s other financing available.

Growing business

Tax abatements lessen the initial costs for a business.

“You have this tremendous amount of money spent on capital as far as building the building, property taxes, start-up costs,” Franzen said. “They haven’t had a chance to ramp up and start producing revenue very quickly, so this helps offset some of those start up costs.”

McGregor Metalworking Companies, a local manufacturer, has received abatements from the city for two of its five subsidiaries: Ohio Stamping and Machine, and Rose City Manufacturing. OSMI received a five-year abatement in exchange for investing $1.3 million and creating six jobs. Rose City received a five year abatement for a $1 million investment and ten jobs.

“What it all does for the success of the organization is it makes us more profitable in the end,” said Dane Belden, president of McGregor Metalworking. “It allows us to reinvest.”

Belden said the business must constantly upgrade equipment and hire more people to work that equipment — both of which are costly investments.

Without tax abatements “we would not have been able to grow, not in the same time frame. We made investments that don’t initially makes a return.” he said.

McGregor Metalworking exceeded the investment values in both cases, investing $1.5 million in OSMI and $1.1 million in Rose City, but neither company met the job requirement.

“The current economic environment has had a negative impact on most all businesses, and Ohio Stamping has been no exception,” said Seth Powers of McGregor Metalworking in a letter to the city in 2009. “We continue to reduce costs and re-size the business to meet the current customer demands.”

OSMI and Rose City’s agreements ended in 2009 and 2005, respectively.

OSMI had 72 employees when the abatement ended in 2009, and now has 54 employees as of year-end 2012. Rose City dropped from 84 employees at the abatement’s end in 2005 to 81 employees.

“There’s been a willingness on behalf of communities to work with employers during these tough economic times,” Franzen said. “We’re not taking too harsh of a stance if the employment fell below their targets.”

Most agreements in the last 10 years have some job component attached to them — either a certain number of jobs retained, created or both. Some companies don’t meet them, often a result of economic factors.

Wittenberg’s Ankrom said he believes employment numbers from tax incentives are exaggerated.

Ankrom is an expert on public finance and monetary theory and policy economics and also Wittenberg’s associate provost for Faculty Affairs and Institutional Research.

He cited research done by the W.E. Upjohn Institute for Employment Research, which suggests that 80 percent of jobs created go to local residents or workers from other communities who would have been employed in another local economy.

“So employment effects are probably exaggerated by proponents of these measures,” Ankrom said in an e-mail.

Ankrom also said that 60 percent of tax revenue collected from these projects must be spent to provide the infrastructure needed to sustain the activity.

Grow property values for schools

By encouraging investment in properties, it gives the values on the land an opportunity to grow. But by abating the property taxes, school districts get less money than they would have.

“We’re happy with our ongoing working relationship with city government and city commission,” said Ed Leventhal, Springfield City School District board president. “Whether we’re happy giving up funding during tough economic conditions is another question.”

Leventhal and Springfield City Schools Treasurer Dale Miller said the school took a hit when House Bill 66 ended tangible property tax, or personal property tax, in 2006, which cost the school $2.6 million.

Schools used to receive more money from tax abatement funded projects when personal property and inventories were also taxed, Miller said.

Based on auditor’s records, the county forgave at least $31 million in property taxes for companies with tax deals. However, property values increased as much as 9,500 percent in some cases.

“You’re going to receive something that you might have not. You’re not going to receive 100 percent of it, but 50 percent of something is better than nothing,” Miller said. “And also, it’s to try and help the city improve economically.”

Clark-Shawnee Local Schools is home to two industrial parks — NextEdge Applied Research Park and Prime Ohio. Prime Ohio is currently filled to capacity, while NextEdge has struggled to gain tenants.

“Prime Ohio and NextEdge came on in a very difficult economic climate. A lot of businesses suffered throughout that time,” said Tom Faulkner, Clark-Shawnee treasurer.

“We’re hopeful it will be good to the schools in the long run,” added Gregg Morris, Clark-Shawnee superintendent.

On opposite ends of the spectrum are Gordon Food Service and Teikuro Corporation, both of which are in Prime Ohio.

In 1995, Springfield offered GFS a tax abatement that would decrease from 75 percent off in 1995 to 50 percent by 2007. The business was looking at a property in Prime Ohio Industrial Park worth $10 million and proposed an $80 million building project. GFS also promised to create 250 jobs.

GFS ended up spending more than $94 million, although according to county records the property value remains the same.

Additionally, GFS had 400 employees by the time the abatement expired, creating nearly $18 million in annual payroll.

The company now has more than 440 employees here.

“Tax abatements are an important factor for consideration when selecting a location for a new building site,” said Deb Abraham, spokeswoman for GFS. “The central location in the state of Ohio, proximity to major markets we serve, and easy access to I-70 were also important when evaluating the Springfield location.”

Abraham said she could not elaborate on the company’s growth plans locally.

Teikuro Corporation, meanwhile, received a 60 percent property tax discount for 10 years, approved in 2008 in exchange for a $2.8 million investment in their facility to create 25 jobs and retain 92 others.

By 2011, Teikuro — which creates hard surface treatments for the auto industry — had invested $2.3 million and created no jobs. The company has also lost jobs rather than retained them, reporting an employment number of 36 in a 2012 report.

Darron Routzahn, plant manager for Teikuro, refused to comment on the abatement. But in minutes from last year’s Tax Incentive Review Council meeting, the council acknowledged the company has done poorly because of ties to the auto industry.

In the minutes, Franzen said Teikuro said it had increased sales but had had no documentation.

The city will continue the abatement, “but will monitor the situation with a possible modification.”

Although Teikuro has not fully met its obligations, the property values on the land have risen.

According to data from the county auditor’s office, the land was worth more than $3.6 million before the abatement and is now worth $5.2 million.

Sometimes a property on bare land receives very little tax revenues, but after development, schools get higher tax revenues even with the abatement, Faulkner said.

For example, Assurant Group started work on a property worth $230,600 in 1993. By the time the abatement was complete in 2003, the property was worth $22,182,500.

The schools only vote on a tax abatement if its higher than 60 percent, which happens rarely, according to both Clark-Shawnee and Springfield City officials. Leventhal said when the board does vote, it does not affect the decision, only delays it.

Both districts have representatives on the city and county tax incentive review councils.

Competition

Opponents question whether tax abatements are truly needed. Communities seem to rely on them as a means of staying in the competition for businesses.

“It’s not our number one selling tool for projects in the community,” Franzen said. “It’s a matter of remaining competitive across the regions and within like states we’re compared to in the region.”

Wittenberg’s Ankrom said the threat of businesses leaving is what leads local governments to dole out incentives.

“It is like pro sport franchises – as long as there are places welcoming new entrants with open arms, the mere threat of leaving is sufficient to accomplish the goal of retaining the breaks, or extending or sweetening them,” Ankrom said. “If they bail, it is a sign that other factors like labor availability or energy costs have risen to the top of the decision list.”

In addition to normal business factors such as location, suppliers and customers, companies compare what incentives are offered by local communities, Franzen said.

“… You can be excluded by not saying what you have available,” he said.

City and county leaders said they prefer to woo companies with other amenities, making the incentives an extra perk. Franzen said he tries to convince companies Springfield is the right place because of the low cost of living, location, superior infrastructure and access to utilities.

“Those are real assets and those have real value to prospects,” Franzen said.

Franzen said some companies will emphasize the incentives too much and not be a great fit for what the community has.

“We’ve respectfully declined to go after them,” he said. “We’ll say ‘this isn’t a good fit for us.’ ”

Tax incentives encourage businesses to bounce around looking for the best deal rather than the best fit, Ankrom said.

“But the net effect when all jurisdictions put the same effort into attracting businesses with incentives is that business just gets shuffled around,” Ankrom said. “There is very little new net activity created by these incentives.”

An example would be Keystone Foods, now Martin-Brower, which received a tax deal from Fairfield City Council to move there. As a result that city gained hundreds of jobs. But to do so, the company moved its Springfield distribution operations at M&M Restaurant Supply to a new facility in Fairfield and laid off or transferred nearly 200 local workers.

Organizations such as the Heritage Foundation believe tax incentives are a reflection of a bad business climate in a community.

“Usually when states and localities go for target tax incentives, they’re doing so to cover for a lousy business tax climate,” said Curtis Dubay, senior policy analyst at the conservative think tank. “They have lousy taxes, so they’re trying to lure them back.”