Economic Development Tool Requires Planning, Partnership
When considering a tax abatement application, economic development expert Diana Miller asks a set of key questions including:
ü What value will the company bring to the city, county and school district in the form of tax dollars?
ü Will the company go to another city or state if we do not offer an abatement?
ü How many jobs will be created?
“A tax abatement is an economic development tool used to entice industry to Johnson County,” said Miller, executive director of the Johnson County Economic Development Commission. “We are in competition with many cities in the Dallas/Fort Worth area, and they all offer incentives to companies looking to come to North Texas.
“A partial tax abatement gives new businesses a fiscal reason to move their business to Johnson County while providing tax revenue and jobs to our community,” she maintained. Most of Johnson County’s abatements are partial abatements, offering differing percentages based on investment levels and jobs.
In Washington County, a tax abatement is used as a “deal closer” to encourage companies to expand or locate their operations in Washington County,” explained Clint Kolby, project manager for the Economic Development Foundation of Brenham. For example, a recent abatement granted to Quest Chemical helped “seal the deal” for the company to relocate operations from Houston to Brenham.
Quest Chemical will be creating more than 100 jobs and is projected to generate up to $4 million in payroll, Kolby reported. In addition, Quest will be adding more than $1.7 million in new value to the tax roll. At the end of the tax phase-in period, the company will have paid more than $22,000 in tax revenue to Washington County.
Brazoria County Commissioners Court recently approved tax abatements for Freeport LNG, which plans to construct a gas extraction unit in the county.
“The abatement was approved because our commissioners court feels that the project will create jobs and in a few years add values to our tax roll,” said Brazoria County Judge E.J. King.
An abatement is defined as the full or partial exemption from ad valorem taxes of eligible properties in a reinvestment zone designated as such for economic development purposes. Cities, counties and other special districts are authorized to enter into tax abatements. Generally speaking, school districts do not participate.
Tax abatements entered the scene in Texas in 1981 when state law allowed their issuance by local government entities. The 81st Legislature’s House Bill 773 extended the provisions of Chapter 312, Tax Code, the Property Redevelopment and Tax Abatement Act, until Sept.1, 2019. Without this legislation, the authority of counties and cities to approve new tax abatement agreements would have expired on Sept. 1, 2009.
Abatements can last for up to 10 years. They may exempt real property and personal property for eligible properties, including inventory and supplies, according to the Texas Property Tax Code. The agreement may exempt all or part of the increase in taxable value.
Senate Bill 1458, also passed by the 81st Legislature, clarified the authority of a county to grant a tax abatement on leased property and tangible personal property. Attorney General Opinion GA-600 (2008) had cast doubt upon the validity of these abatement agreements, which included wind turbine projects and many other abatement agreements involving leased property and tangible personal property, said Jim Allison, general counsel to the County Judges and Commissioners Association of Texas. Senate Bill 1458, effective June 19, 2009, clarified this authority and contained a provision that ratifies and validates tax abatements granted prior to that date.
If the property in question is located inside the city limits, the city must initiate the tax abatement. When the property is inside the city’s extra-territorial jurisdiction (ETJ), either the county or city may initiate the process. Regarding property outside the city’s ETJ, the county must initiate the abatement procedure.
The lead taxing unit designates the required reinvestment zone, said Tom Pollan, attorney with Bickerstaff Heath Delgado Acosta, LLP.
Pollan laid out the “nuts and bolts” of abatements during a class on economic development at this year’s South Texas County Judges and Commissioners Association Conference.
The lead unit must conduct a public hearing before designating a reinvestment zone and give notice to other taxing units; each unit then adopts a resolution declaring participation and terms.
In order to participate in an abatement, each taxing unit must adopt tax abatement guidelines and criteria, Pollan said. The different taxing units may have different sets of guidelines.
A tax abatement agreement must:
Be approved at a regular meeting of the commissioners court by majority vote confirming that the agreement meets the guidelines and criteria.
List the property and proposed improvements.
Provide for access to ensure compliance.
Limit uses of property to those consistent with the agreement.
Provide for recapture if the owner fails to make improvements and meet targets in the agreement.
To Abate or Not to Abate?
“With the economic slowdown, counties are facing difficulty in the area of economic development,” Allison said. “Tax abatement agreements can be a valuable tool in attracting new activity.”
However, while tax abatement agreements provide a strong incentive for new development, commissioners courts bear a heavy responsibility to use them judiciously, Allison maintained.
“One size does not fit all,” he continued. “The county’s guidelines and criteria must be carefully drafted for the benefit of all taxpayers. Each abatement proposal must be evaluated and structured for maximum economic development. You only get what you negotiate.”
In Washington County, eligible companies must produce a good or provide a service that serves a market primarily outside the county and results in new wealth for the county, Kolby said. Also, a company must retain or create a minimum of 10 jobs at an average base salary of $30,000 per year or higher. Only ad valorem property taxes are eligible for abatement, and the project must add new value to the tax roll of qualified property.
In the mid-1990s, Johnson County realized it needed to take action in order to compete with other cities and states when it came to attracting and retaining large companies, said Johnson County Judge Roger Harmon.
Miller, who has developed tax abatement policies and incentive packages for cities and counties for 15 years, works with companies seeking partial tax abatements by providing information and negotiating the terms of incentives. Once an application has been made, Miller provides the information to the county tax attorney for review and then takes the request before the commissioners court for consideration.
“We create a proforma to present to our court showing the value added to the tax roll and the calculation of revenues over the term, in addition to the jobs and the multiplier value to the community,” Miller said. One of Johnson County’s most successful abatements was with the SABRE plant in Alvarado. The owner of SABRE planned to move the plant from Fort Worth to Ohio.
“We convinced them through a comprehensive incentive plan to build in Alvarado,” she said. “The tax value added to the tax roll is $32 million, and we have 300-plus new jobs.”
Johnson County uses the following criteria when considering abatement applications:
How many jobs will be brought to Johnson County?
What type of jobs will be created?
What will the total annual payroll be?
How much real and personal property value will be added to the tax rolls?
What infrastructure construction would be required?
What is the projected total annual operating budget of this facility?
What effect will the project have on the local housing market?
What environmental impact, if any, will be created by the project?
How compatible is the project with the county’s comprehensive plan?
Johnson County abatement agreements include a clause that requires the company to payback all abated taxes if the company moves during the term of abatement, Miller stated. In addition, if the company fails to meet the investment and job requirements, the abatement is not in effect.
Sometimes citizens think that the city and/or county are “giving away our tax dollars,” Miller said.
“They believe that economic development just happens, and that is correct. However, without incentives, the economic development happens somewhere else!” she quipped. “I believe that the public understands why incentives are provided since we have been in a down economy. They understand the concept of competition and that the taxing jurisdictions have economic development professionals to make the best decision for the community when it comes to an incentive package.
“Long gone are the days of giving incentives without calculating the ‘gap’ in the deal and whether the company really needs an abatement, and exactly what the community will receive in return,” Miller continued. “Very seldom do we see citizens protesting the approval of incentives for a large retail project or large company that is providing skilled jobs.”
The economic development professionals communicate with constituents, explaining that in the broad picture, the county is not giving up tax dollars but rather gaining them. In addition, the county tailors abatements to the particular company and conducts audits after the abatements take place.
“We make sure the value is reflected on the tax roll, and we make sure the jobs are created,” Miller stressed. “A good decision for an abatement is when the value to the city or county far outweighs the abated amount.”
When it comes to existing properties, the abatement applies to the value of new equipment and new jobs that are being added, Miller said. The agreement does not affect the existing tax value.
Washington County chooses to grant tax abatements to qualified businesses because they realize that it will create a significant positive economic impact in the area, Kolby said.
“Tax abatements help companies create jobs, which leads to more income, which leads to more housing and retail, which leads to more property and sales tax revenue for the county,” he explained. “Even though the county will receive less tax revenue in the short term than they would normally by granting tax abatements, the long-term effect of tax abatements will end up generating more tax revenue for Washington County.”
The Economic Development Foundation of Brenham and the county judge and commissioners “have a very healthy relationship when it comes to promoting economic development in this area,” Kolby said.
Miller expressed similar sentiments, describing the commissioners court as “business-friendly.” For example, Johnson County recently granted an abatement for Johns Manville for its $20 million production line upgrade, “knowing that they provide a great number of jobs here in Cleburne and a large tax base,” Harmon said. The company is a leading manufacturer and marketer of building insulation, commercial roofing, and specialty products.
“We wanted to be sure that we could keep this corporation in our taxing district,” Harmon added.
“The commissioners court supports us going out and recruiting industry and business,” Miller said. Tax abatements have been a valuable tool in doing just that.
By Julie Anderson