Tax Breaks Under Fire In
Report From MSU

October 12, 2007
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GRAND RAPIDS — The city of Grand Rapids leads the pack, but a recent report said having that status isn't necessarily a good thing.

According to a report authored by two university professors and released by the Land Policy Institute at MichiganStateUniversity, Grand Rapids has awarded more industrial tax breaks than any other city in the state since 1980.

Gary Sands, professor of urban planning at WayneStateUniversity, and Laura Ann Reese, director of Global Urban Studies at MSU, compiled data that shows 16,700 PA 198 industrial abatements have been granted by municipalities in the state over the past 25 years, and the city has approved 522, more than any other locale.

The problem with that lofty rating is Sands and Reese said the tax breaks don't generally stimulate economic growth, but the abatements do contribute to the fiscal distress that many cities, like Grand Rapids, are experiencing. They went a step further by claiming the locales that don't offer incentives to manufacturers were as likely to "experience economic growth as communities that were generous in granting abatements."

Here are highlights of their findings from an aggregate of secondary statewide data:

  • Local governments in the state give up about $1 billion in tax revenue annually in a "futile effort" to retain and attract manufacturing jobs.
  • The tax breaks did "little or nothing" to increase employment in the industrial sector, except for companies that make heavy transportation equipment.
  • The 70,000 jobs that abatements were to produce in the high-tech manufacturing sector either never materialized or left the state.
  • The abatements have not attracted new industries, and cities haven't been able to diversify their economies through the tax breaks.
  • Suburban locales that have awarded abatements have created sprawl.

So what is a city official to do? Many economic development directors across the state, including Susan Shannon, the city's long-serving, former director, have said the abatements are tools they need to keep existing jobs and create new ones, and cities are willing to give up property-tax revenue for sustained and increased receipts from income taxes.

"They're essential," said Rick Chapla, a vice president with The Right Place Inc., the economic development organization for the region, of abatements.

"As long as every other state in the union has tax abatements and incentives, the reality is that Michigan has to have these incentives to compete. We have to fight to be competitive, and tax abatements are the cornerstone of economic development tools," added Chapla.

Sands and Reese don't completely disagree with Chapla. Reese told the Business Journal that if abatements weren't available cities and the state would have a tough time competing.

"We are not recommending getting rid of tax incentives. However, what we are saying is that cities need to use them 'smarter,' meaning more strategically. Every firm asking every city should not have a tax abatement at all costs," said Reese.

The reason underlining her statement is that most abatements have been directed at industries that are suffering from "permanent structural decline." As an example, they cited the high-tech manufacturing industry. Statewide abatements awarded to those firms from 1999 to 2002 linked 107,000 jobs to those tax breaks. But in 2002, they said the industry employed less than 37,000 workers, or 8,000 fewer than the sector had a decade earlier.

"Despite billions of dollars in foregone tax revenue, manufacturing jobs have declined in Michigan in almost every category," said Reese.

By making "smarter" choices, Sands and Reese said the tax breaks should be directed to industries outside the declining manufacturing sector. They feel information technology, biotech, biofuels, computer sciences and software development are some of the industries cities should target with tax breaks, as these are likely to grow and contribute to a locale's economy for decades to come.

Sands and Reese also disputed the belief that the current PA 198 industrial exemptions are absolutely necessary.

"If Indiana and Ohio kept on giving firms abatements, then, yes, some plants would leave, but most of the investment covered by tax abatements could continue to happen," said Sands.

Sands told the Business Journal that although no one can exactly say what the outcome would have been if firms that received an abatement hadn't gotten one, he said most companies choose a location for reasons other than the tax climate. He said the location of supplies, labor and customers are key factors in selecting a site, and once a company gets comfortable, it is likely to stay put unless circumstances change drastically.

"For these established firms, if tax breaks were not available, they might not invest as much, or perhaps not at all, but they are unlikely to go out of business simply because an abatement was not granted," he said.

Reese added that local officials throughout the state may be a bit frightened to reject an abatement request because they fear they might be branded as being anti-business if they took that action. Then pro-business groups could target them for defeat at the next election.

This is where Reese said Lansing needs to step in. She said the state should put limits on which industries can get abatements and the areas of the state where these can be awarded. Reese favors industries that are growing and offer the promise of more jobs, and areas with the necessary infrastructure already in place.

"Cities can't be expected to place limits on abatements on their own, because they are competing with each other. The state needs to be the one to place restrictions on how cities use abatements, so Michigan, as a whole, uses abatements more strategically," she said.

Reese also pointed out that some companies get these tax breaks "over and over again." Although not an abatement, city officials recently allowed a tool-and-die firm to enter the nearly tax-free Tool & Die Renaissance Recovery Zone for at least five years, and possibly up to 15 years, even though the firm has had that tax-exempt status in the city's Renaissance Zone since 1997.

There is another aspect to the abatement issue that isn't brought up often. Even though city commissioners are willing to trade property-tax revenue for income taxes, other units that depend on property taxes can't replace that income because they don't receive income tax revenues.

For instance, the city recently awarded an industrial abatement for 12 years, and the city estimated it would lose $27,000 in property-tax revenue from the company over that period. But the city also estimated it stood to gain $89,000 in income-tax revenue from the new jobs the company's project promises to create. So the award is a win for the city, if the jobs materialize. But it's a loss for the other units.

The abatement means another $93,000 in property taxes won't be going to those units. The Grand Rapids Public Library, Grand Rapids Community College, the state's education fund, Grand Rapids Public Schools, the Kent Intermediate School District, the Interurban Transit Partnership and Kent County will all lose tax revenue for 12 years due to the city's decision, and none can collect income taxes to make up for the loss.

Multiply that abatement by the 522 the city has awarded the past 25 years, and those units have lost more than a substantial amount of tax revenue.

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