Value of business tax incentives debated

Value of business tax incentives debated

July 9th, 2010 in News

The total value of the tax breaks granted to help recruit or encourage local investments will soon nearly triple with the completion of the biggest local projects granted tax breaks--the $1 billion Volkswagen assembly plant, the $300 million expansion of Alstom Power and part of the corporate campus for BlueCross BlueShield of Tennessee.

The total value of the tax breaks granted...

The property tax bills for most Chattanooga homeowners and businesses will jump 19 percent this year under the city budget adopted this week, but more than 30 local companies will continue to get a break on their tax bills.

According to county tax records, Chattanooga businesses shared in more than $3 million of property tax exemptions this year through agreements with city and county industrial development boards. The annual value of the tax breaks will nearly triple in the next couple of years with the completion of the biggest beneficiaries: the $1 billion Volkswagen assembly plant, the $300 million expansion of Alstom Power and part of the $300 million corporate campus for BlueCross BlueShield of Tennessee.

The city and county have agreed to exempt more than $200 million of property tax payments for manufacturers and developers over the next 30 years to entice the businesses to locate or expand in Chattanooga.

Local officials contend such incentives are necessary to recruit new and expanding businesses. Without them, the officials say, there would be even less tax money available from plant investments and employed workers.

Chattanooga Mayor Ron Littlefield insists such tax breaks "are the price of doing business in industrial recruitment" and have helped propel a manufacturing renaissance in Chattanooga.

Mr. Littlefield and Hamilton County Mayor Claude Ramsey both said they would support a nationwide moratorium on such tax breaks, either through legislation or court action, if every community acted the same.

"My preference would be that no one offered these type of tax breaks, but so long as it is an option and other communities are offering such incentives, then I think we have to compete," Mr. Ramsey said.

"I remember when we had a policy against giving tax breaks and we watched all kinds of industry march through here, take a quick look and then go on to some other place."

But critics complain that many incentives are actually subsidies.

"It's just not fair to small business owners like me who pay their taxes and don't get these breaks," said Tim Price, owner of JAT Systems in Soddy-Daisy and a long-time anti-tax activist. "They are picking winners and losers with these incentives and that's not right."

Good Jobs First, a nonprofit group in Washington, D.C., that opposes many business tax breaks, contends that many incentives are a giveaway to businesses that would locate or expand in a community even without the tax breaks. Typically, the expense of paying all state and local taxes, after federal deductions, amounts to only 0.5 percent of a business's total expenses, Executive Director Greg LeRoy said.

"There are far more important factors than these incentives in determining where businesses locate," said Mr. LeRoy, who has written two books on business incentives. "But these tax breaks can either force other taxpayers to pay more or starve local governments of needed money to pay for new growth."

Communities compete

Mr. Price believes most of the businesses getting tax breaks in Chattanooga over the past decade already have operations here and would have probably made the investments without the incentives.

But local manufacturers looking to expand may be wooed by other communities offering rich incentives to relocate.

The Chattanooga City Council on Tuesday granted steel processor LJT of Tennessee its fourth tax break since it opened in 2002. The tax cut, valued at about $500,000 over a decade, will aid a planned $11 million expansion that will add 84 jobs, LJT Vice President and General Manager Michael Donnelly said.

The day the tax break was approved, Mr. Donnelly said he got a call from recruiters from other states.

"I regularly get calls from other states and we have other steel processing facilities across the country that we have to compete with internally for business," Mr. Donnelly said. "Everyone is aggressively competing for jobs and anytime you are looking at an expansion there is somebody trying to steal those jobs for their community."

But City Councilwoman Deborah Scott, one of three council votes against the LJT tax break, questioned the wisdom of granting tax breaks to existing companies every time they expand. She also opposed a tax break for the renovation of the downtown DoubleTree Hotel.

"I'm not opposed to these incentives when they are needed to bring new manufacturing jobs to our city, but I think we need to be more judicious in how we give out these breaks," she said.

Looking for tax breaks

A 2009 survey of corporate relocation specialists by Site Selection magazine indicated that three of the top 10 location criteria involve local taxes and incentives for their clients.

Site Selection Managing Editor Adam Bruns said state and local governments are taking a harder look at such breaks in the current economy.

"There have long been "clawbacks" clauses (requiring businesses to pay back incentives if investments or jobs don't pan out), but they are getting a closer look today than they may have in the past," he said.

Nonetheless, Mr. Bruns said most major business investments do involve some government assistance, tax breaks or direct investments from state or local governments.

Mr. LeRoy said such incentives seem to be getting bigger and more frequent regardless of the economy.

Economic recruiters in Chattanooga created a matrix in 2003 to structure incentive packages based upon the number of jobs added, the amount of business investment, the quality of jobs and wages paid.

J. Ed. Marston, vice president of marketing for the Chattanooga Area Chamber of Commerce, said no property is ever taken off the tax rolls. For the past five years, business investments have been required to pay at least the school portion of their property tax bill, which is just over 29 percent of the total city and county taxes most businesses would otherwise pay.

"Jobs are the most important thing for any community right now so we're in a fiercely competitive market with every other community in the United States and increasingly the entire world," Mr. Marston said. "Businesses look at a lot of factors in deciding where to locate. But if they think they can get the labor, transportation and their other needs in more than one community, then they are going to look at the incentives to decide where to go."

Changing attitudes

Tennessee's Constitution prohibits local governments from selectively abating taxes on private property. To qualify for tax breaks, businesses give title to their property to an industrial development board, a tax-exempt organization that lets the private business use the property and make payments in lieu of taxes to city and county treasuries.

In the 1960s and early 1970s, local business leaders balked at issuing tax-exempt bonds or granting property tax breaks for other companies. The original industrial development board in Chattanooga, comprised of many bankers, was often philosophically opposed to granting businesses tax breaks or issuing bonds that competed with bank bonds, retired banker Ted Mills recalled.

In the 1970s, former Mayor Robert Kirk Walker replaced the original board and created a new panel that would issue bonds to help encourage business. Mr. Mills was appointed to the Chattanooga Industrial Development Board in 1972 and now is its chairman.

"We've made it more attractive for companies to locate and grow in Chattanooga," Mr. Mills said.

Driving for Volkswagen

Chattanooga upped the recruitment ante to a record level two years ago when it lured Volkswagen of America to build its only U.S. assembly plant at the Enterprise South Industrial Park.

The city and county gave the car maker the plant site and will exempt all but the school tax portion of its property taxes for 30 years. The state is providing job tax credits, on-site worker training and roads and railroads to the plant site.


Property tax is assessed on only a portion of a property's value in Tennessee:

* 40 percent: Commercial and industrial property

* 25 percent: Residential property

Source: Hamilton County Assessor's Office

In all, the Volkswagen incentive package is valued at more than $577 million, which Mr. LeRoy says is the richest incentive package for any automobile plant.

Chattanooga beat out Huntsville, Ala., which reportedly was offering just over $400 million of incentives to recruit VW.

"All we are doing is taking a big ol' funnel and pouring our money into Germany (where VW is headquartered)," Mr. Price complained.

But even fiscally conservative county commissioners supported the tax breaks. Volkswagen is projected to bring at least 2,000 direct jobs and 9,000 indirect jobs from suppliers and related business growth in the region.

Volkswagen will pay about $4.7 million a year in property taxes for local schools, and the economic and business spin-offs expected from the VW plant are projected to generate $28 million a year in extra state tax collections and $27.7 million in additional local tax revenues, according to an analysis by the Center for Business and Economic Research at the University of Tennessee.

Hamilton County Commissioner Fred Skillern, a former county school board member, said he had concerns in the past when businesses got a break on school taxes. But since businesses have been required to pay their share for local schools, Mr. Skillern said he has supported the tax breaks.

"From the county's perspective, we're getting additional money for our schools and extra jobs for our community from these incentives and the business they help bring," Mr. Skillern said. "In a perfect world, you wouldn't be giving these breaks to anybody. But if Huntsville or other communities are offering these type of incentives and we are not, then we probably aren't going to get the business."

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