TAX NEWS - JUNE 2010

Indiana Tax: Tax breaks likely to remain despite job cuts

Lafayette city officials are recommending that city council members allow companies to keep their tax abatements despite failure by some of those companies to create or retain jobs as agreed.

Dennis Carson, the city's redevelopment director, said the reasons for job decreases are traceable directly to the national recession, not an unwillingness of companies to comply with the abatement requests.

Also, companies have the entire abatement period to meet their job goals outlined in the abatement agreements, and those periods aren't over.

"At the time they put those abatement applications in, they give their best guess of what's going to happen," Carson said. "They're projecting into the future, and we're there with them, projecting into the future as well. And you don't always know what's going to happen with the economy."

Lafayette conducts an annual review of abatement-holders. The city council will hear the results of that review at its meeting Monday.

The council also will vote on a resolution that would grant Toyota Motor Engineering & Manufacturing of Northern Kentucky a 10-year abatement on $42 million in equipment upgrades. The equipment would be used to build the 2012 Toyota Camry inside Subaru of Indiana Automotive Inc.'s Lafayette facility.

Tax abatements allow a company to pay little or no property taxes immediately after installing equipment or upgrading buildings. Instead, property taxes are gradually phased in over the period of the abatement -- usually 10 years.

In the case of Toyota, a 10-year abatement of taxes for the planned investment of $42 million in new equipment could reduce the company's property taxes on that equipment from an estimated $3.3 million over 10 years, without the break, to an estimated $1.3 million with the abatement -- a savings of about $2 million, or 60 percent.

That's according to an online abatement savings calculator provided by Hoosier Energy.

When companies apply for tax abatements, they are required to file paperwork stating what economic benefits the community will receive as a result of the company's investment.

Those benefits usually consist of new jobs the company plans to create or jobs the company plans to retain as a result of the investment.

Abatements are granted for improvements that are planned to take place; they don't reduce the amount of taxes a company already pays, Carson pointed out.

According to state law, Lafayette's city government has the responsibility to determine whether companies are in compliance with their tax abatement agreements.

Each year, companies with abatements fill out forms that state their job count as of March 31, their total payroll for those jobs and the information they provided about projected job growth or retention when applying for the abatement, said Jody Hamilton, economic development director for Greater Lafayette Commerce. Hamilton helps the city coordinate compliance information.

If an issue arises with a company's compliance -- for example, if jobs at the company are down -- the city asks company representatives to explain in writing and at a council meeting the conditions that led to the job reduction, Carson said.

If the city determines that jobs are down due to the recession, the council can find the company in compliance.

Fourteen Lafayette companies have active abatements, according to city documents.

Some of those companies -- such as Subaru of Indiana Automotive Inc. -- show an increase in jobs. Others, such as Wabash National, show a significant decrease.

However, Carson said good news can be found in the fact that payrolls have increased, meaning companies are still paying well and giving raises. Also, the documents don't reflect job changes since March 31, he said.

"A vast majority of these companies have announced that they're adding jobs after they put in their paperwork," Carson said.

For example, Wabash National reported that by the end of May, it plans to hire an additional 500 temporary workers to build trailers this year, according to a May 14 article in the Journal & Courier.

City officials said the crash of the housing market hit Wabash National particularly hard. The company manufactured 12,000 trailers last year -- one-fifth the 60,000 units it produced in 2006.

It expects to build between 18,000 and 22,000 trailers this year, according to the Journal & Courier article.

Company representatives plan to address the council regarding its abatements at the Monday meeting, said Allison Henk, marketing communications manager.

Offering companies the incentive of a tax abatement is one way to help local entities stay competitive with companies across the world, Mayor Tony Roswarski said.

Lafayette factories compete with factories in other parts of the world that waive property taxes, relax environmental regulations and in some cases pay their workers much less, he said.

"When our local companies are competing against companies who pay their workers $1.50 or $2 an hour, and provide no benefits or insurance," Roswarski said, " ... then we have to find ways to help companies here be competitive -- companies who are paying a good wage, good insurance and benefits, and are good stewards of the environment."

The city closely examines abatement applications to ensure that the improvements will benefit Lafayette, he said. The city also looks at the applying company's capacity for future growth.

Tom Easterday, a Subaru of Indiana Automotive vice president, said tax abatements are a major boon to the factory when competing with others, even ones in the United States.

For example, he said, a Subaru plant in Georgetown, Ky., doesn't pay any property tax at all.

"It would be much more difficult to compete in the global auto market without having the playing field leveled through tax abatement. With the (tax) phase-in, it helps us," Easterday said.

Tax abatements particularly are helpful to car manufacturers when installing equipment for a model change, Easterday said.

Auto sales before the release of a new model are fragile because the company is putting resources into building it but cannot yet sell it to distributors.

In addition to helping create and retain jobs, tax abatements can have a ripple effect across the community, city officials and business experts said.

Roswarski and Carson said research shows that for every auto job created, between seven and 10 other jobs are brought into the area. That's because, they said, auto industries attract suppliers and service-based employers.

D.C. Chambers, owner of DC's Clock Shop in Lafayette, said he thinks the general idea behind tax abatements is good for the local economy.

However, he thinks that tax abatements should be granted over a shorter period, such as five to seven years.

That would give companies time to reap benefits from their investments but also would help relieve other property taxpayers more quickly.

"We're having a hard time with supporting our government now, and I feel like the individual citizen is doing a significant amount of helping the government," he said.

Chambers also said he thinks that due to the shaky economy, granting tax abatements is a riskier business for the city than it used to be.

Roswarski said that six years ago, the city passed an ordinance that allows the city to recoup uncollected taxes if a company fails to comply with its abatement terms.

Officials haven't activated that power since the ordinance was passed but would do so if a company were found in blatant noncompliance, Roswarski said.

"Fortunately, we've got some great companies here in the community that are community-minded and are trying to do the right thing," he said.