Be wary of offering business tax abatements

August 1, 2016

Local municipalities considering granting financial incentives to companies looking to expand operations in their communities need to look for other ways to attract and retain business before jumping on the tax abatement bandwagon.

The ability for local governments to offer businesses large tax breaks on industrial property taxes was granted more than 40 years by the state legislature. Under the law, up to half of a company's personal property tax – that's taxes paid on buildings, machinery and equipment, rather than the value of the land itself – can be exempt for new construction of facilities. Tax on property purchased for renovation of older facilities may be 100 percent exempt. With each industrial tax exemption available for up to 12 years, such incentives have the potential to save companies millions of dollars on investments.

Such tax abatements act as a powerful economic development tool. Take for example a recently approved tax abatement by Rochester Hills for the German-based technology company Jenoptik, which plans to expand its North American operations at a soon-to-be-built facility in the city. While already operating in the city for the past eight years, Jenoptik plans on spending more than $12 million by the end of 2017 to build a new facility in Rochester Hills, bringing with it dozens of new jobs. In return, the company will save about $312,000 in tax payments over the next 12 years, per approval from the city.

On the surface, such tax exemptions seem to offer a win-win agreement between industrial businesses and local municipalities. However, there are several underlying factors that should cause local governments to give pause before granting tax abatements as an assumed policy.

Once considered an option to attract businesses, tax abatements have become more of an expectation from businesses looking to move or expand operations. As such, some businesses will shop various communities to find the best deal. However, when tax abatements expire after a dozen or so years, the same businesses may uproot operations for a new community offering new incentives. The process has the potential to leave communities high and dry when they can no longer offer tax breaks. 

The system has also given an unfair advantage to newer communities with more land available for development. We have already seen dozens of major corporations relocate facilities in the past from Detroit to suburban Oakland County communities. The expectation that those same companies won't one day uproot operations in favor of more savings is unrealistic and foolish.

While we can't blame businesses for doing their due diligence in order to maximize their investments, we have and will continue to philosophically oppose the use of tax abatements to attract new businesses in newer communities. We believe they should be reserved as an economic incentive for older communities which need reinvestment, and we would like to see lawmakers limit the use of tax abatements to older communities that are struggling to retain businesses due to a lack of development space.

In cases where tax abatements are granted, we'd like local governments to track the number of jobs actually created by the company, and not just moved from another location, as required by state law.

Under the agreement between Rochester Hills and Jenoptik, the company must provide an annual report on the number of jobs created in the community. With eight years of operation in the city, city council members say they believe Jenoptik has a history of meeting and exceeding projections on personnel. Long-term plans by the company suggest the company will stay in Rochester Hills well after the abatement expires. So, while we don't support the use of tax abatements as a way to retain local business, we recognize the decision to partner with Jenoptik will be an overall benefit to the city.

We are further encouraged by the city's other efforts to attract new businesses through zoning proposals, which don't require a financial incentive. For instance, a city-initiated zoning ordinance up for final approval this month will allow for more targeted and enhanced uses in the area of M-59 and Crooks Road. The ordinance will not only allow for additional business uses not permitted in the area now, it is intended to establish a gateway to the city as a regional employment center. Likewise, a council-approved study in January will look for ways to incentivize redevelopment in the city's Auburn Road corridor by means of rezoning. 

Such efforts, we feel, are a more appropriate way to attract and retain business. Valuing a community for its residents, character and governing philosophy, rather than temporary financial incentives, is the key to creating long-term economic stability.

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