Tax abatements aren't worth cost

TRAVERSE CITY -- A statewide analysis questions the effectiveness of property tax abatements for businesses, and casts doubt on whether the tax breaks truly do spur economic growth.

A study released this fall by the Land Policy Institute at Michigan State University said local governments in Michigan are foregoing around $1 billion a year in property tax revenue through tax abatements designed to attract and retain jobs.

But the report said there's virtually no correlation between a community's economic health and the use of such tax breaks, which are pinching local coffers at a time when municipalities struggle to balance budgets and provide public services.

"This is radical and it scares an economic developer because it takes everything they've learned and turned it on its head," said Soji Adelaja, director of the Land Policy Institute at MSU.

Analysts said tax abatements are starting to work against local communities because these days companies are more interested in finding a solid work force, having good schools and "green" infrastructure like parks, bike trails and other recreational opportunities when siting their operations.

Catharine Hansford, an outreach coordinator at the institute, said abatements sometimes amount to a "zero-sum game" because they reduce local tax revenues and can limit a community's ability to fund the facilities and services that make them attractive to business. They can also shift jobs from one area to another without creating new employment in the state.

"It isn't really effective ... it's financially eroding a lot of our communities," Hansford said. "The new economy is completely different."

Some local officials defend the use of tax abatements and contend they're necessary for northern Michigan communities to attract and retain businesses that may be wooed by other states or countries.

"They are under so much pressure, and are recruited so heavily by other states, that we need to be able to level the playing field," said Pete Stalker, Cadillac's city manager.

Officials in the Wexford County community have approved almost 150 property tax abatements covering close to $50 million worth of land, buildings and equipment. That ranks 15th in the state, and is the highest among nonmetropolitan areas around Michigan.

Recipients also said the abatements are critical to growing their businesses and adding local jobs.

"I think it's a good thing to motivate business," said Chronis Vanias, general manager of Stone House Bread bakery, which received a tax abatement from Garfield Township in Grand Traverse County for a new production facility.

It's allowed the company to create up to 50 new jobs during peak periods, he said.

"(Stone House) made a major investment and needed some help," Vanias said. "We offered a lot of jobs in Traverse City."

Industrial Facilities Tax (IFT) abatements were created through a 1974 state law designed to help the state's auto industry and other manufacturing operations. The study reports that about 40 percent of Michigan's local governments issued one or more IFT abatements between 1980 and 2001, although they are widely issued in some communities. The top five communities that approved IFT abatements, including Grand Rapids, Holland and Detroit, issued 13.5 percent of all the abatements over that period.

Under the law, local governments can halve property tax rates for new equipment and property for up to 12 years in exchange for the creation of new jobs or to retain existing ones. Nearly $70 billion in business investment received some sort of abatement in the past 25 years, the study reports, and an average of 600 new abatements were awarded each year.

The study measured "economic health" of communities around Michigan in areas including median family income, percentage of households in poverty, and unemployment. Researchers said their work "fail(ed) to show a clear, consistent relationship between abatement activity and change in economic health."

The report also said abatements contributed to urban sprawl in some metropolitan areas because it led to industrial expansions in suburban areas, away from core areas of major cities.

Local officials in Traverse City recently re-evaluated their abatement policy in light of the study, city manager Richard Lewis said. The city didn't consider any tax abatements until it changed policy five years ago.

"We didn't do them for a long time," Lewis said. There are currently 11 IFT districts, and the city only approves abatements initially for two years. Lewis said the city may consider policy changes to limit or increase the oversight of its abatements, but will keep them in place at least for now.

In Cadillac, city finance director Owen Roberts said around $23.5 million in taxable value of real and personal property is covered by property tax abatements, costing the city more than $164,000 a year in property tax revenue. That's almost five percent of the city's total operating tax revenue of around $3.5 million.

Stalker acknowledged that adds up to a significant amount of revenue over two decades, but said the city would be in far worse financial and employment shape if its manufacturing base bolted for other areas.

"I see it as half-full, and not half-empty," he said. "It's a different view, but one that works for us."

Source: Land Policy Institute at Michigan State University and City of Traverse City

Photos

Mary Peel, an employee at Stone House Bread, places freshly baked bread onto racks. Stone House Bread received a tax abatement for the equipment at its production facility south of Traverse City. Record-Eagle