Kokomo — In a slow economic environment, one in which cities are luring businesses or encouraging them to expand, one method cities use to accomplish this is by offering tax abatements.
“Every city is in a battle with tax abatements,” said Michelle Kreb, senior editor of Edmunds.com. “There are bidding wars for [businesses] between cities and states. They are not uncommon. The incentives are the cost of doing business, and many of the abatements can be quite generous.”
A tax abatement is a temporary reduction or elimination of a tax on personal property. Government officials use them as an incentive for businesses to expand or relocate.
As Chrysler Group LLC receives million-dollar tax abatements from Kokomo, more good things may await the automaker, its Kokomo plants and the Hoosier State, said a Ball State University economist.
Last month, as part of an Economic Revitalization Area expansion plan that increased Chrysler’s work force by 399, Chrysler asked the Kokomo Common Council to abate personal property taxes on $43.3 million worth of new machinery, which the company is bringing to its Kokomo Transmission Plant.
Of the employees, 379 have already been recalled from layoff status, said Rich Boruff, president of United Auto Workers Local 685. The remaining 20 are supervisory positions.
Usually, new jobs are linked to abatements and typically, Kokomo has offered five-year abatements on personal property.
Monday, the automaker sought another abatement from the city, but there was no mention of new jobs.
Nevertheless, the abatement request is for 10 years and up to $300 million. If approved, the abatement will be used to prepare Indiana Transmission Plant I and the casting facility for the company’s “next generation” transmission.
Chrysler’s abatement request was unanimously passed at council’s first reading. It must pass two more readings before becoming final.
Jodi Tinson, of Chrysler’s manufacturing and labor communications department, said the company filed a $270 million tax-abatement application with the city and, “although an application has been filed, Chrysler Group has no announcement regarding its operations in Kokomo and continues to study a variety of options to support the robust product plan outlined on Nov. 4, 2009.
“The company appreciates the support of the city of Kokomo and looks forward to continuing a partnership that will see the Chrysler Group once again become a successful and competitive enterprise.”
Last month’s tax-abatement plan is being used as an investment at KTP to increase production of the 62TE six-speed transmission that is currently in the Sebring, Avenger, Journey and minivans, said Boruff.
When the 62TE was launched at KTP, the plant was scheduled to produce 440,000 transmissions annually. With the abatement, Boruff said, KTP can increase production to 531,000.
In addition, a Chrysler official said the abatement is also being used to support production of Chrysler’s World Engine and improve processes for the 62TE transmission program.
“We want to thank the city of Kokomo for approving our tax abatement request and their continued support,” said Scott Garberding, Chrysler’s senior vice president and head of manufacturing.
Garberding added since 1997, Chrysler has invested nearly $1 billion in its powertrain operations.
“As Chrysler works to implement a very robust business plan, our facilities in Kokomo will play an integral role in achieving those objectives,” he said. “This investment will keep our facilities at the forefront of innovation and advanced technology.”
Risky abatements
Although tax abatements usually include the possibility of new jobs, Chrysler officials indicate the abatements will retain at least 1,184 jobs. There has been no discussion of major job creation.
As a result, that can create a problem when offering tax abatements, said a macroeconomist: Cities may be taking a risk if abatements are tied to job creation.
“Tax abatements are kind of a risk,” said Dean Baker, co-founder of the Center for Economic Policy and Research and author of the weekly “Economic Reporting Review.”
“They either pay off or they don’t. There will be some loss and some gain,” continued Baker, who opposed the U.S. government bailing out Wall Street banks because the only people who would lose from a collapse would have been its shareholders and chief executive officers.
“Too many times, governments give up too much for them. What happens if business isn’t good and you only get half of the jobs or business that was promised? Then the government is stuck with the abatement.
“With abatements, you lose tax revenue if a number of jobs aren’t created or there aren’t a lot of spin-off businesses or further development from the abatement, but you don’t know that until you’re further down the road, but that probably won’t be the case here.”
Nevertheless, through abatements, the investments Chrysler is making in Kokomo are not only good for Kokomo, but the state, said Michael Hicks, director of Ball State University’s Center for Business and Economic Research.
“This shows more investment in Indiana. It’s expected and it has to take place within the automotive industry because Indiana is in the Midwest and the automotive industry wants to be part of that supply chain,” said Hicks.
“The tax climate is favorable for [Chrysler] in Indiana, and Kokomo’s leadership has done a good job of making a case to Chrysler about Kokomo. They are picking locations as the best places to do business, and Indiana is a place for them to do business.
“Chrysler is making an investment in their Kokomo campus. For the taxpayers, it’s good news, because it means [Chrysler] can pay back the full amount of their government bailout. People always think about that. It’s awful good news for Kokomo. I don’t know how much better to pitch that.”
However, according to a Washington, D.C., economist, until the abatements end and Chrysler and the city are pleased with the results, it may be difficult to say how positive the abatements can be for both parties.
“It’s a claw-back subsidy,” said Howard Wial, of the Brookings Institution, who has visited Kokomo and has written about the city’s economic climate.
“I don’t know how Chrysler negotiated the abatements, if they promised so many jobs for five years or what. But what happens if they don’t keep their end of the bargain? Can the city take back part of the abatement? That could put the city in a difficult position if they can’t claw back part of their abatement.
“Most times, when it comes to granting abatements, cities overpay for them and basically write a blank check to the company. The cities give away money and can’t get it back. I don’t know if Chrysler negotiated that way, but when you are competing for these plants, it is a necessity. With Kokomo, you have to look at how big of an abatement it is and what does the city get in return for it? If Chrysler is looking to expand, it means things can be looking up for Chrysler, but right now, I really don’t know.”
Adds Jim Hossack, automotive analyst for AutoPacific.com:
“Chrysler is going about their business in Kokomo; it’s not good or bad. It should be a good transmission they are building. But as for business, it doesn’t say if they are doing good or doing poorly. They are investing.”