Economic incentives like tax abatements aren’t the first consideration for a business eyeing a move to Indiana, the regional head of the Indiana Economic Development Corp. told the Kosciusko Redevelopment Commission this month.

The role incentives play in the expansion of existing companies may be a different story, especially at the local level.

Tax abatements throughout Kosciusko County currently amount to close to $100 million, representing millions more in growth in businesses from grocery stores to orthopedic manufacturers.
Most recently, printing company R.R. Donnelley in Warsaw requested from the county an abatement on a $22 million equipment investment that’s expected to add 75 jobs by the time it’s up and running. It will receive a public hearing Thursday at 7 p.m. in the county courthouse.

It’s the IEDC’s job to first get companies to come to Indiana, Dave Behr, director of the north-central region, said at the July redevelopment commission meeting. Then they offer state and local incentives when it comes down to site selection within Indiana, he said.

“The main thing in attracting new business to Indiana is not incentives – they’re just the icing on the cake,” he said, adding that companies that consider moving into a state look instead at factors like location and the cost of doing business. The incentive eventually goes away, he observed, while local assets like schools and infrastructure will still be there.

“What sells Indiana is its financial strength. We have an AAA bond rating – one of only six states that can say that,” he continued. “The local labor force is very skilled, they have a strong work ethic, and the cost of living is affordable. We encourage companies to look at our statistics before we give incentives.”

Kosciusko Economic Development Corp. President George Robertson noted that site selectors and what CEOs are looking for when considering a move has been a topic at many redevelopment commission meetings.

“If they want an existing building and you don't have one, it doesn’t matter what your incentives are. If they want a four-lane highway, a community on a two-lane highway can offer no taxes forever and they probably won't land the prospect,” Robertson said. “What (Behr) said was that incentives are critical in the end-game. This has been the operating principle among most economic developers for years. If a company has several sites that meet their basic criteria, the incentives (which are also a reflection of a local community’s desire to have the company locate there) are essential to compete successfully.”

But the state doesn’t have the tools to help in the case of a business considering growth at its current location, Behr noted – that’s when local incentives come into play.

Those include exemptions of up to 10 years from new taxes applicable to site expansion or equipment purchases, with taxes commonly waived by 100 percent in the first year and phased in by a certain percentage every year after. Incentives are performance-based, with local governments weighing the tax revenue against benefits such as the number of jobs added, and reviewing them every year for compliance.

Tax increment finance districts, which focus tax revenue from within a district on improving surrounding infrastructure, are another incentive, though less commonly used. The industrial park north of Syracuse and the Trupointe site near Milford are two recent major TIFs.

Kosciusko County government currently has personal property tax abatements on the books for seven companies, with a total amount of $32.7 million subtracted from assessed value at tax time; and real estate tax abatements for nine companies, altogether amounting to $1.7 million. Towns and cities themselves have together granted $6.1 million in real estate abatements in the last 10 years and nearly $48 million in personal property.

The assessed value of abated business property in Kosciusko grew from less than $10 million in 2002 – lower than most surrounding counties – to more than $300 million in 2011, on par with many central Indiana counties, according to studies last year by Ball State University’s Center for Business and Economic Research.

Counties in Indiana lose an average of $2.75 million in taxes per year to abatements, according to the center’s statewide survey of incentives between 2005 and 2012. The average is based on an estimated statewide $253 million in lost property tax revenue per year on $50.78 billion in property value in that period.

The studies calculated that $30,000 in lost local tax revenue is required for each new manufacturing job created. The authors also conclude that local incentives may be less effective than state-level offerings.

“Our findings suggest that, as a job creation tool, local tax incentives in Indiana appear to be minimally effective,” CBER Director Michael Hicks said in the center’s announcement of the studies. “There also is not a strong relationship between abatements and the growth of assessed value over time. The implication is that, on average, the use of abatements as a tool for growing a property tax base is not particularly effective in the short to intermediate term.”

The authors also note a correlation between local use of abatements and local tax rates, but aren’t able to conclude which way that relationship goes.

“Property tax abatements shift the property tax burden onto other property owners, including other businesses or residents,” the December study states. “Counties that regularly use abatement have higher tax rates (but) we are not able to distinguish whether these counties with higher rates offer more abatement to attract businesses, or if the use of property tax abatement is causing rates to increase.”

Stiffening competition between counties to remain attractive to businesses is one reason Kosciusko Councilman Larry Teghtmeyer sees behind the growth of abatements. He also doesn’t see abated taxes as “lost” revenue, since the company isn’t paying any less in taxes than before.

He noted that, according to county calculations, a company pays about $13,000 in personal property taxes per $1 million in investment over the life of a 10-year abatement. Real estate taxes are calculated differently and result in much higher taxes paid over a 10-year abatement, he added.

“They don’t ever pay any less than they’re paying now. They always pay as much or more, depending at what point in the abatement they’re at,” Teghtmeyer said. “The abatement can’t reduce what they’re paying.

He also said that abatements lead, in a way, to everyone paying less taxes.

He explained that the county and all municipalities operate under a frozen levy, allowing them to only raise a fixed amount in taxes per year based on the previous year’s levy plus a “growth quotient” established by the state, based on non-farm personal income growth.

“Therefore, considering a fixed amount of tax dollars to be raised from property taxes, there is a direct correlation between assessed value and the tax rate used to compute an individual’s or a company’s actual taxes. If there is a growth in assessed valuation the tax rate decreases accordingly and that new lower rate will result in the savings I referred to unless there is a change in an individual's assessed valuation (possibly based upon real estate values increasing or decreasing),” he said.

“This is an oversimplification of a complex subject, but the basic premises is valid I believe. With the frozen levy concept, if we experience industrial, retail or housing assessment growth it likely will result in lower tax dollars for everyone. Conversely, if we would lose a large employer, property tax payer and their supporting or business partners, property taxes could dramatically increase.”

Robertson considers $30,000 for a new manufacturing job a good investment, noting that the average job produced by using incentives in Indiana pays about $17 an hour. That amounts to $34,680 on new taxable income per job per year and $346,800 in income over the life of a 10-year abatement, he said.

He doesn’t think the CBER research tells the whole story, since local government budgets and tax rates are caused by a host of factors. He named a number of other considerations, such as birth rates, which affect school budgets; or social services costs, or crime rates.

He also noted that property tax caps placed on municipalities by the legislature created unique problems for differing local jurisdictions, besides the age of residential housing and falling housing values.

“If you target abatements to higher-wage new-wealth businesses, you will tend to stabilize residential housing values,” Robertson said. “If you are good at keeping and attracting good paying jobs, you will begin to see new housing construction (look at the area off of North Ind. 15 in Warsaw) and you will begin to see new retail (again, look at the new retail on North Ind. 15 and East U.S. 30).”

He also considered the reverse premise, and what would happen if a county did not stay attractive to business.

“If businesses take their expansions to another community; if good paying jobs are gradually lost because capital investment in equipment was made in another community, what happens to property tax rates as housing and retail values decline. As (Economic Development Income Tax) taxes to a community decrease. As secondary businesses (retail, services) start laying off employees and even closing because new wealth jobs decline,” he asked. “Not competing for expansions and new companies by using incentives in a reasonable and thoughtful way would cause a weakening economy.”