City Council will be meetingÂ Tuesday evening.Â This is a fifth Tuesday meeting, so regular council business will not be conducted.Â However, tax abatements and the guidlines used to determine how, when and where they are used will be discussed.Â The public will be given 30 minutes to ask questions.Â It should be an educational evening.Â Look for an mp3 file of the meeting tomorrow night on this website.
City Council tackles tax abatement rules
Falling revenue, state law change spur fresh look
A new Fort Wayne City Council and a looming financial crunch have placed a bull’s-eye on business tax incentives.
Although the council has granted several tax abatements this year with little discussion, and even less opposition, the group will meet this week to refocus its philosophy on how and when it grants help to business investments.
Part of that discussion will involve how the state’s new property tax law could cost local governments revenue when they grant abatements.
Councilman Tom Smith, R-1st, will lead the council’s abatement discussion Tuesday. The council decided to meet on this month’s fifth Tuesday, when it is typically off, to have a broader discussion on the issue.
Tax abatements allow businesses to delay paying taxes on new investments. For example, a company getting a 10-year abatement would typically pay no taxes on the new investment the first year, 10 percent of its taxes the second year, 20 percent the third year and so on. The business continues to pay all the original taxes for the property.
Because abatements are only on new investments, proponents argue they don’t increase taxes for other property owners, as some argue. They just prevent tax bills from decreasing immediately, proponents say.
The meeting comes after the council started giving tax breaks to retail stores and fast-food restaurants in parts of the city targeted for development. In October, the council unanimously supported granting the abatement to a nearly $2 million McDonald’s restaurant at 7640 S. Anthony Blvd.
The 10-year abatement was estimated to save the company $242,812 in property taxes.
The council granted a similar abatement in November to a $450,000 Subway restaurant relocating within the downtown area.
Smith said the council should set rules on when, or whether, these types of tax breaks are reasonable instead of approving whatever abatements are presented by the administration.
“We’ve pretty much taken things as they’ve come to us,” he said. “I don’t know if we’ve ever turned down an abatement. I think we need to have some more stringent oversight.”
Greg Leatherman, the city’s executive director of redevelopment, said he has no problem with the council changing its abatement policy, but his staff needs to clearly know what is appropriate. He said he doesn’t want to tell a company a tax incentive is likely, only to have it rejected by the council.
“The best thing for all is certainty,” Leatherman said.
The city follows state law in what is appropriate for an abatement, Leatherman said. There are unqualified developments that seek incentives and must be rejected administratively, he said.
As the city faces an estimated $9.5 million budget shortfall in 2010 because of changes to the state tax law, at least one member of the council believes that should change the way the council views abatements.
House Bill 1001 cuts the average Hoosier homeowner’s tax bill by about a third, partly by raising the sales tax and partly by capping the amount of taxes property owners can pay. Those caps are the reason the city won’t be able to collect enough in property taxes to finance its current budget.
Councilman Mitch Harper, R-4th, said he is concerned that granting more abatements could widen the gap created by those caps – or at least prevent the city from shrinking it.
Under previous law, abatements didn’t affect how much money governments could raise. For example, if an abatement saved a business $10,000, that money is simply spread over the rest of the taxpayers in the district. This keeps those taxpayers’ bills from decreasing marginally but does not prevent the city, county or school district from collecting all its revenues.
Under the state’s new law, the property tax bills on many properties would be capped, creating the nearly $10 million shortfall for the city. A new business investment creating an extra $10,000 in taxes with no abatement under this scenario would generate more money for local governments. The new tax revenue would be collected, reducing the shortfall caused by the tax caps.
The more properties at the cap, the more beneficial new investment would be to a community. In Allen County, 31 percent of all property will be at its cap in 2010, according to the state. But if an abatement is granted, the local governments won’t get the new tax money.
Kathy Friend, chief financial officer for Fort Wayne Community Schools, said she would be concerned about any decisions made locally to exacerbate the revenue hit facing the schools because of the tax caps. She said the schools are estimated to lose $2.6 million in 2010.
While about half of most property tax bills go to local school districts, the decisions on abatements are made by local cities and counties.
Rep. Jeff Espich, R-Uniondale, said there was no discussion in the legislature about the tax bill’s effect on tax abatements. After talking with someone at the Legislative Services Agency, he said abatements under the new law could cost local governments some money, but said that amount would likely be inconsequential.
According to the Allen County Auditor’s Office, there was about $150 million worth of property abated in Fort Wayne in 2007, the most recent data available. Those abatements saved companies about $880,000 worth of property taxes. Of that, between a quarter and a third would likely go to city coffers. This means that even a complete repeal of abatements would not truly dent the massive tax shortfall facing the city.
Harper said that some incentives are warranted, but he is concerned about their use for retail businesses. He said he is glad the council will at least investigate the issue.
“The fact city council is taking time to examine the issue should be a signal to the community,” he said.
He said the council typically votes on individual abatements and has not made any policy decisions on how they should be used.
Cost vs. benefit
To even argue that abatements cost taxpayers – or local governments – money, it would first have to be assumed that businesses would invest in the community without them, according to Councilwoman Karen Goldner, D-2nd.
Goldner, who previously was the city’s economic development director, said that if a business decided not to invest locally because it couldn’t get a tax break, the area would lose.
“If it weren’t for the investment, you wouldn’t have the taxes anyway,” she said. “Tax abatement is a very, very low-cost way of incenting business development.”
She also added that the incentives given to businesses pale in comparison to those given to homeowners, who get permanent tax breaks with homestead exemptions and credits.
Friend realized this as well, saying any investment in the city benefits the district.
“We have to look at the long-term health of the community,” she said.
Goldner said it is appropriate to look at tightening guidelines for different types of abatements. She said that the factors in granting incentives should depend on the situation, and that abatements for industrial and business development should be focused on job creation and wages.
There also should be abatements for retail and service companies looking to invest in economically distressed areas in the city, she said. Those incentives shouldn’t have to meet the same job requirements, said Goldner, adding that she hoped the council would help create formal guidelines when it comes to incentives for businesses.
“Our policies should be clear enough; if you meet those guidelines, there really shouldn’t be a lot of commotion about getting abatement,” she said.
Smith said he hopes this week’s discussion will bring the council, community and administration closer to a firm policy on granting future tax breaks.
The two-hour meeting will start with a primer on abatements from city and county economic development staff. Then, council members will discuss their preferred direction for abatements. Finally, Smith said, the floor will be opened to the community for about a half-hour to allow residents to comment.
Smith does not expect the meeting will complete the discussion on the issue, but it should be a good start. He said the council will likely discuss whether the city should even be giving abatements -though it would likely be difficult to stop, he said.
Goldner said it wouldn’t be wise to eliminate an incentive that so many other communities offer.
“Companies do expect it,” she said. “It’s reasonable for the community to make that accommodation.”