Tag Archives: tax breaks

Roll out the tax break bidding war for Amazon HQ#2

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Amazon want to build a second headquarters with some 50,000 workers. Expect the tax break war to begin:

Amazon is seeking proposals from local, state and provincial government leaders, and says it is focusing on metropolitan areas with more than 1 million people. It is also looking for areas that can attract and retain technical workers and “a stable and business-friendly environment.”

News of the search has unleashed a wave of speculation about where the world’s largest online retailer could set up shop. But experts say the company’s decision is likely to be as much about politics as it is about logistics and incentives. Bezos has been a vocal opponent of President Trump’s immigration bans, and earlier this week was among hundreds of tech leaders who urged him to reconsider his stance on the “dreamers” immigration program…

Among the criteria it will consider, Amazon says, are tax exemptions and other incentives, including relocation grants and fee reductions. “The initial cost and ongoing cost of doing business are critical decision drivers,” the company said in its request for proposals.

It added that the location does not need to be in an urban or downtown location, or a development-prepped site. The site should, however, be within two miles of a major highway and have access to mass transit. Amazon said it will give priority to existing buildings that are at least 500,000 square feet and undeveloped sites that measure about 100 acres.

Here is the actual language from page 6 of the RFP:

AmazonRFPp6

This may seem like a perfect scenario for locations (cities and states) to offer tax breaks: the company is growing, it is a major player, and it comes with a large number of jobs. Headquarters are a status symbol for areas but this one includes real jobs and a high-status company.

However, I would still argue a tax break war is a bad idea. Here are a few reasons why:

  1. There will be one winner and a lot of losers. Those who do not win may just offer even deeper breaks to the next possible company. When does this stop?
  2. A massive tax break will offset at least some of the benefits of the headquarters. While it is hard to pass up 50,000 jobs, significant tax breaks mean local governments and residents get less than they might otherwise.
  3. A bidding war puts Amazon in the driver’s seat and may have local governments begging for this. A victory would wipe out groveling but going all in on an offer and losing may reduce the status of a location. (Think of unsuccessful Olympics bids in the past.)

The locations involved could be many but this will not turn out well for many or maybe even all.

Naperville adds another corporate headquarters

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It isn’t the full headquarters for the company – just the North American headquarters – but Naperville is gaining another impressive office as Chervon North America announced plans to move in:

A Chinese maker of power tools plans to bring more than 200 jobs to its new North American headquarters in Naperville over the next three years.

Chervon North America, the U.S. arm of Nanjing, China-based Chervon Holdings, confirmed plans to move workers from Michigan and several suburban Chicago locations when it opens a new headquarters in Naperville sometime in the spring…

Chervon also considered locations in California, Texas, Georgia, North Carolina and Tennessee, Turoff said. The company is not receiving any incentives from the Illinois or Naperville governments, Turoff said.

“In the end our decision came down to three key factors: proximity to talent, proximity to current and acquired employees (and) Naperville’s pro-business attitude,” Turoff said in the email.

No tax breaks needed. This has been the story of Naperville for several decades now: the community is attractive to a number of businesses. This started with the move of Bell Laboratories just north of the city in the 1960s along the East-West Tollway. Since then, white-collar firms have moved into the suburb, attracted by the quality workers and bucolic setting. These moves have boosted the reputation of Naperville even as it has helped attract even more residents. It is the sort of cycle that many suburbs would like to emulate but would have a hard time pulling off.

Going forward, it will be interesting to see whether this can continue for Naperville. There is increased competition for businesses. Naperville has a very limited amount of open land for new commercial or residential development (unless they make a major decision to build up). This space for Chervon opened up because another major company decided not to use the space.

Can you plan suburban growth around an Amazon distribution center?

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Thanks to state tax breaks, Amazon will soon begin construction on a new distribution center in northeast Aurora. The new facility is said to bring 1,000+ jobs. The latest newsletter from the City of Warrenville discusses the new facility. The facility is located near the border with Warrenville and the city thinks this will be a good for Warrenville:

warrenvilletifamazon

Can an Amazon facility be an economic boon for a suburb, particularly in a portion of the community that is underdeveloped? At the least, the 1,000+ workers will have to live somewhere. Could there be certain facilities that pop up to serve the workers – fast food places? Gas stations? Dry cleaners? Tattoo parlors (wait, Warrenville has enough of those)? Adding students to the school system?

I’m sure the city is either working on estimates of this and it would be worth sharing with the public. Connecting the dots between a warehouse/distribution facility and other community amenities is not obvious and what is Warrenville willing to do to capitalize on this opportunity?

Should Baltimore provide $535 million in TIF funds for a new private development?

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The CEO of Under Armour wants to develop roughly 260 acres of land in Baltimore but is asking for public funds. A large debate has ensued:

The problem is that Plank, despite being a self-made billionaire, wants a lot of help to make his vision for Port Covington a reality. To that end, his real estate firm, Sagamore, has asked the city of Baltimore for a record-breaking $535 million in so-called tax increment financing. TIFs, as these types of loans are known, are used to fund infrastructure by selling municipal bonds to private investors, and then property taxes generated by the new development are used to pay them back. Though beloved by titans of commercial real estate, TIFs tend to draw scrutiny because they divert so much money away from a city’s general fund. MuniCap, a consulting firm that Sagamore hired to analyze its TIF application, projects that Plank’s development would not yield property tax revenue for Baltimore’s coffers until about 2040, even as the site would require substantial city resources in the interim…

“[We are] outraged that, one year after the world bore witness to the decades of disinvestment in poor neighborhoods and communities of color, city leaders would respond by bending over backwards to back a $535 million playground for the rich,” Charly Carter, the executive director of Maryland Working Families, a progressive political advocacy group, says. “This is the new Jim Crow—black and brown families subsidizing wealthy developers while our own neighborhoods crumble.”…

The campaign to remake Port Covington has been aggressive and well-funded. Sagamore has already spent hundreds of thousands of dollars on marketing the development to the public, and its forceful slogan—“#WeWill build it”—suggests that the project is a fait accompli.

Which isn’t far off the mark. The Baltimore Development Corp., a public-private agency, approved Plank’s $535 million TIF request in March, and the city’s Board of Finance backed it in April. Now all it needs is the Baltimore City Council’s final approval, which could come as early as August. Activists have urged the council to postpone its vote to give the public more time to comb through the 545-page proposal. But according to Councilman Carl Stokes, who heads the body’s economic development committee, Sagamore wants the deal approved by the end of the summer.

This is often how such things are done: a wealthy business leader wants to make more money in real estate development and asks for a tax break from the city or state to help make it more profitable. (There’s nothing in this article to indicate that the Plank has threatened to move to another city.) The big city, often desperate for large projects that supposedly bring lots of jobs but also spruce up areas that few developers would be interested in, doesn’t want to hinder business. The approval is made, the money is diverted, the big development occurs, and the business leaders behind the scenes are the ones who profit the most. This is the essence of the growth machines model in urban sociology and it often involves tax breaks for developers.

What will be interesting to see is if such a project would be voted down or the money significantly cut. Again, most cities are not in the business of angering leaders of big business. But, it isn’t unheard of to negotiate for some changes to the development that might benefit more people or reduce the dependence on public funds.

Illinois tax breaks often fail to add jobs or keep companies

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The Chicago Tribune finds that tax breaks from the state of Illinois often do not work as intended:

In the first comprehensive analysis of 783 EDGE agreements, the Chicago Tribune found that two of every three businesses that completed the incentive program failed to maintain the number of employees they agreed to retain or hire.

State officials can’t say how many jobs have been created through the job program; nor can they say how many jobs EDGE companies have eliminated. The Tribune, however, found that 79 current or former EDGE recipients have reported eliminating 23,369 jobs through layoffs and closures since entering the program.

Officials have long pitched tax breaks as a competitive tool that bolsters the state’s fragile economy, and the program has seen explosive growth as Illinois battles with other states to attract and retain businesses. Leaders of the EDGE program say it has been a lifeline for dozens of companies, helping to create new jobs and improve workplaces.

But the Tribune’s analysis suggests that tax credits often do little to help companies expand or create sustainable jobs. A pattern of deals emerges in which businesses lobbied for maximum rewards and minimum requirements — and the state said yes.

Tax breaks may help politicians claim they are bringing in new jobs and money but they don’t often benefit taxpayers as much as the political and business leaders suggest. See earlier posts here and here. And perhaps the biggest issue is that once come communities or state start offering tax breaks, everyone feels like they have to play the game as well just to get a hearing from major corporations. It can then become a race to the bottom: as governments offer more and more breaks, companies benefit more and more yet the local area gets less and less.

If the Tribune‘s analysis is correct, perhaps a better route for the state would be to improve business conditions overall rather than resorting to tax breaks to simply survive.

Ferguson doesn’t get much revenue from the Fortune 500 companies in town

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Many suburban communities give tax breaks to corporations so that they locate in their community. Ferguson, Missouri is one such case where Emerson Electronics and other businesses don’t pay as much as they might in local taxes:

In 2014, the assessed valuation of real and personal property on Emerson’s entire 152-acre, seven-building campus was roughly $15 million. That value has gone up and down over the last five years as Emerson has sold off some buildings and built others, but it has not exceeded $15 million in the period since the data center was completed. So what happened to that brand-new $50 million dollar building?…

For tax purposes, Emerson’s Ferguson campus is appraised according to its “fair market value.” That means a $50 million dollar solar-powered data center is only worth what another firm would be willing to pay for it. “Our location in Ferguson affects the fair market value of the entire campus,” Polzin explained. By this reasoning, the condition of West Florissant Avenue explains the low valuation of the company’s headquarters.In fact, the opposite is true: The rock-bottom assessment value of the Ferguson campus helps ensure that West Florissant Avenue remains in its current condition, year after year. It severely limits the tax money Emerson contributes to the Ferguson-Florissant district’s struggling schools (Michael Brown graduated from nearby Normandy High School, a nearly 100 percent African American school that has been operating without state accreditation for the last two years), and to the government of St. Louis County more generally. On the 25 parcels Emerson owns all around St. Louis County, it pays the county $1.3m in property taxes. Ferguson itself receives far less. Even after a 2013 property tax increase (from $0.65 to the state-maximum $1 per $100 of assessed value), Ferguson received an estimated $68,000 in property taxes from the corporate headquarters that occupies 152 acres of its tax base—not even enough to pay the municipal judge and his clerk to hand out the fines and sign the arrest warrants.

St. Louis County doesn’t just assess Emerson a low market value. It then divides that number in three—so its final property value, for tax purposes, ends up being one third of its already low appraised value. In some states, Ferguson would be able to offset this write-down by raising its own percentage tax rate. Voters would even be able to decide which services needed the most help and raise property taxes for specific reasons. But Missouri sets a limit for such levies: $1 per $100 of property. As Joseph Pulitzer wrote of St. Louis during the first Gilded Age, “millions and millions of property in this city escape all taxation.”…

Emerson Electric isn’t the only business on Ferguson’s West Florissant Avenue. The street is also home to a number of big box stores including a Home Depot, a Walmart, and a Sam’s Club, located at the city’s northern limit. These companies all came to town in 1997 through something called tax increment financing—known (to the extent it’s known at all) by the acronym TIF. Along with low appraisals and tax abatements, TIF districts are one of Missouri’s principal tools for encouraging new development.

The conclusion here is that these tax policies reproduce the economic inequalities in Ferguson. Hence, the community has to find alternative sources of revenue, such as targeting motorists.

Here is where this gets trickier: if Ferguson didn’t offer these deals, could it have attracted these businesses? If many suburbs participate in the game of tax breaks, wouldn’t someone else offer good tax breaks? Where race matters here is that communities like Ferguson – lower income, transitioning from white to black over recent decades – have to offer even better tax breaks to compete. But, for all of these communities, it is a race to the bottom as a better deal to attract a corporation means less revenue for the city. Still, local politicians can sell the jobs created or the prestige generated. But, as this article points out, the jobs and prestige may not help much in the long run.

What you might need here is a metropolitan wide policy against such tax breaks or TIF districts to reduce the competition. Or, perhaps some tax revenue sharing program where sales tax and property tax dollars are partly redistributed to reflect who shops at or works at these facilities (they all don’t come from the community in which the firm is located). Yet, such policies require a lot of political will and again encounter the problem of race as communities, especially wealthier ones, will not want to share their revenues with others.

Obama administration proposal to limit tax-free government bonds for stadiums

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Federal policy might change how sports teams and municipalities negotiate stadium deals:

That’s what the Obama administration proposed in its budget last month: to end the issuance of tax-free government bonds for professional sports facilities, a practice that has, according to research by Bloomberg, siphoned $17 billion of public money into arenas for NFL, MLB, NBA, and NHL franchises over the last 30 years and cost Americans $4 billion in forgone federal taxes on top of that. It’s too late for residents of Cobb County, but Congress might yet save the rest of us some dough…

So how did we wind up in this situation? Local authorities have long used tax-exempt bonds to raise money for certain private uses—whether factories, train stations, or home mortgage loans—in addition to schools, sewers, and other infrastructure projects. In most cases, the ensuing economic growth was at least intended to pay back the municipal investment. Sports stadiums were no different: Governments could raise money in exchange for a share of future revenue…

Much of the rest of the article summarizes the research that shows cities and taxpayers tend not to come out ahead in these deals. So, this new policy might solve the problem?

Still, it wouldn’t stop cities from paying for stadiums. The last time Congress made public financing more onerous, in 1986, the result was a disaster: Cities jumped to meet the new, harsher terms, opening a three-decade stadium construction spree.

In other words, the policy might close the loophole for this particular financial instrument but there are other ways to make such deals. As I’ve said repeatedly, few politicians are willing to let the big team get away. Of course, the historical record suggests that everything does not necessarily fall apart when teams move. Many of the cities since the 1950s that saw teams move away later saw new teams take their place. Sports teams only have limited numbers of places they can move to make the kind of money they want; this is the reason Los Angeles looms so large right now in the NFL’s urban landscape because the next options are not very good.

The bigger question may be whether cities and suburbs can stop themselves from making bad deals, even with federal policies that take away some of their options.

Suburban communities add business district taxes but what are developers doing with the money?

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A number of Chicago suburbs have instituted business district taxes that partially funnel money to developers:

The business district tax is becoming more common as municipalities struggle to recover from the Great Recession and loss of shoppers to the Internet. Leaders in both Roselle and Villa Park initiated 1 percent business district taxes within the past year, the maximum rate on districts that cannot exceed 1 square mile. In some suburban locations, the additional business district tax can raise the sales tax to 9.25 percent, equal to the sales tax in Chicago…

Bloomingdale has two such districts. One adds a 1 percent sales tax to purchases inside Stratford Square and another adds the same percentage at Indian Lakes Resort, where it’s used to help pay off $4.8 million in village-issued debt that went to the resort for improvements…

Last year, the village paid the owners of the mall $1,199,151, which is more than 95 percent of all the money generated by the business district tax. Since the tax was implemented, the village has paid the mall owner more than $8 million. According to village finance records, the mall owner still is owed more than $11 million…

Lombard has a similar deal with its mall owner. The village instituted a 1 percent business district tax almost a decade ago. It helps push the sales tax rate at Yorktown Center mall to 9.25 percent.

Lombard’s deal allows up to $25 million in business district taxes to be rebated to Yorktown’s owner through 2024, in exchange for an addition that was built onto the mall where an abandoned Montgomery Ward once stood. So far, the mall’s owner has received almost $4.2 million from the business tax…

Taxpayers in Oakbrook Terrace are the ones with skin in the game. The city borrowed nearly $8.2 million to spur development of the Oakbrook Terrace Square Shopping Center. City officials did not return calls seeking comment about the city’s stake in the shopping center. However, according to the city’s budget documents, the investment has yet to pay off.

Given the problems facing the American shopping mall as well as the financial difficulties facing many suburbs, perhaps these suburbs think such taxes are necessary to help keep sales tax generators in the community. Yet, if the extra money generated is given to developers who then line their own pockets, how much is the local taxpayer helped? This raises similar questions to giving corporations tax breaks to locate their headquarters or facilities in suburban communities. Few politicians or residents want to lose a potential tax revenue generator – especially a large shopping mall, even if they are relatively ugly and detract from local businesses given their reliance on chain stores – but there is often little public discussion of the trade-offs involved with the tax breaks.

Are there suburban shopping centers that don’t have such a tax and if not, do they advertise to this effect?

Nevada’s proposed $1.25 billion tax break for Tesla would just crack top 10 biggest tax breaks

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Nevada is determining how much in tax breaks to offer Tesla – and the current deal appears to be $1.25 billion.

The tax incentive package assembled by Gov. Brian Sandoval to woo Tesla’s “Gigafactory” battery plant is unprecedented in size and scope for the state of Nevada and is one of the largest in the country.

The overall value to Tesla is estimated to be $1.25 billion over 20 years—a figure that is more than double the $500 million package CEO Elon Musk said would be required to draw the company.

If the deal is approved by the Nevada Legislature, Tesla will operate in the state essentially tax free for 10 years.

In exchange, the company must invest a minimum of $3.5 billion in manufacturing equipment and real property in the state—a threshold that is much lower than the $10 billion state officials say they expect the company to invest in Nevada over the next two decades.

This is a big financial deal, one that Nevada apparently doesn’t want to let get away. If approved, this would be the tenth largest tax break offered by a state to a corporation:

If approved by the Legislature, the tax incentive package would be the 10th largest in the country, according to data compiled by Good Jobs First, a labor-backed non-profit that analyzes tax incentives. Here are the current top 10 tax incentive deals in the country:

  • Washington: Boeing, $8.7 billion
  • New York: Alcoa, $5.6 billion
  • Washington: Boeing, $3.2 billion
  • Oregon: Nike, $2 billion
  • New Mexico: Intel, $2 billion
  • Louisiana: Cheniere Energy, $1.7 billion
  • Pennsylvania: Royal Dutch Shell, $1.65 billion
  • Missouri: Cerner Corp., $1.64 billion
  • Mississippi: Nissan, $1.25 billion

It would be interesting to know a few things:

1. What happens if Tesla does not provide the jobs or the value projected? Does their tax break adjust downward accordingly?

2. Who is Nevada competing against and what are their offers? With such high stakes, it wouldn’t be unheard of for a party to overbid against themselves.

3. What do Nevada residents think of this? Tesla could lead to jobs and tax revenues a decade down the road but this is a lot of potential revenue that a corporation will benefit from.

With this kind of money being thrown around (or at least theoretically available), don’t most municipalities and states have to play this game in order to attract businesses? And in the long run, who can keep up with this competition?

When housing values rise, so do property taxes and concerns about how those taxes are collected

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Austin, Texas is a hot real estate market which means housing prices are going up – which means property taxes are also rising and this has some homeowners up in arms about how the city and state pursue property taxes.

The arrival of this year’s appraisal notices — which in Travis County showed homes’ average market values jumped 12.6 percent and average taxable values rose 8 percent for 2014 — is sparking a push for reform. Similar jumps have occurred in Williamson and Hays counties.

Real Values for Texas, a statewide group advocating for property tax reform, local officials and others say they believe enough momentum is building around the state to put pressure on the Legislature to fix what they say is a flawed property tax system. The issue is an especially hot one in Austin, where property values have risen at a much faster rate than wages in recent years, leaving more and more area homeowners saying they are struggling to pay their property tax bills.

At issue is what can be done. Market forces generally dictate home values. And with no state income tax, the state government and local taxing entities rely heavily on property tax for revenue to fund schools and many local services…

A key problem, critics say, is that the current system has shifted a disproportionate share of the burden of paying for schools and local services on homeowners, in favor of commercial and corporate interests who can afford to appeal their values and win big reductions year after year. The share of property taxes from homeowners to support public schools grew from 45 percent to 54 percent over a 12-year period, while commercial and industrial owners’ share has declined to less than 20 percent. (Other sectors, from oil and gas to personal property, make up the rest.)

One way to read this would be to see this in a long line of American homeowner complaints about property taxes. This has been a common theme in recent decades, famously illustrated by the Prop 13 campaign in California in the 1970s. Homeowners may enjoy owning a home but they tend to resent continually rising requests for money for local governments, even as they tend to want good, or even better, local services. Most homeowners want rising housing values as this increases the value of their investment yet don’t necessarily want to pay for it while living there.

Yet, the property tax reform suggestions here are interesting. Just how much should local homeowners pay compared to corporations? Is the best comparison to look at the rates each pays or the cumulative percentages each group contributes to the local pot of tax money? This could be related to a larger issue that goes beyond property taxes: what kind of tax breaks should corporations get from municipalities? This is a difficult issue to sort out as communities like jobs and important businesses yet homeowners tend to resent “handouts” for corporations that they think could afford to pay more.