To Forgive And Forget

July 21, 2006
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Tax abatements are a useful economic tool, but things do not always go as planned.

When companies downsize, lay off employees or move their facilities to another state or country, municipalities have options on how to handle the terms of tax abatements being broken.

Grand Rapids, for instance, recently chose to forgive Steelcase its violations of an exemption in 2001. Deputy City Manager Eric DeLong said the firm had been a good corporate citizen and recommended the city not attempt to recapture the tax dollars.

Eric Lupher, director of local affairs for the Citizens Research Council, said it is not unusual for municipalities to forgive companies the tax abatements, particularly considering the economic competition between cities, states and countries.

“It’s a lot easier for (companies) to move to another jurisdiction — a lot easier than it was 50 years ago,” he said. “Local governments still want to stay friendly with those companies with the hopes that five years from now, they will pick up and get the jobs they were promising.”

Whether a municipality decides to recoup the taxes abated or not, Michael LaFaive of the MackinacCenter for Public Policy said there are not always a lot of options for local government.

In the 1990s, a “claw back” was instituted to allow municipalities to protect their interests in the event that a company violates its agreement.

“The claw back is basically a stipulation in an agreement that forces a recipient of government favor, sub-abatement or tax credit to pay back some or all of the favors that they have gotten in exchange for creating jobs that are later removed in the agreement reached upon between parties,” he said.

Lupher said that prior to claw backs, there wasn’t much a local government could do about a company that violated a tax abatement agreement.

Joe Ohren, a professor at EasternMichiganUniversity, has studied tax abatements in Michigan and said many municipalities have begun to adopt policies that have conditions or requirements for tax abatements.

“The evidence, however, is that most municipalities do not follow up on the conditions of the abatements,” he said. “They may not have the staff to do this. Companies may be reluctant to provide proprietary information to the municipality that would become a matter of public record, or it just simply doesn’t get done.”

Ohren said many municipalities grant requests for abatements without evaluating the likelihood that a development would occur without abatements.

“Evidence from most national studies does not support the claim that abatements are critical to development,” Ohren said. “Indeed, the firm location literature suggests that businesses target regions because of transportation systems and access to natural resources and/or a skilled workforce, then identify specific areas available for development.”    

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