Tax abatement clawback 101

Used to be that taxes were paid by working people to provide them with services from the government. The services included shared infrastructure like roads and sewers, safety services like police, fire and national defense, public education, immunization- the list goes on. Most of what government spent money on was for the good of all.

Somewhere along the line- government got into the “economic development” business (although building all that infrastructure could be called economic development- it was for the use of everyone- not just one company or person). Government started using tax dollars to “invest” in “jobs” following the line of thought that if there are more jobs- people pay more taxes and we’ve spread the responsibility for supporting all this expense to maintain infrastructure among more people.

Sounds grand. Until you realize that by taking the money from all of us, and giving it to a few of us is exactly what George Orwell warned us of in “Animal Farm,” “All animals are equal, but some animals are more equal than others.”

All of a sudden- big companies, that promise lots of jobs, small companies that promise high-tech jobs, companies that threaten to relocate all became more equal than others- and needed your tax dollars to “persuade” them to stay or grow. This is now what is passed off as “economic development.”

Problem is- the companies that get the money, put their competition at a disadvantage. It’s no longer a fair and level playing field in business. Often times the money flows to the companies that spend the most money on lobbyists, or in campaign donations to the feckless people we elect. Accountability for following through with the promises made in the back rooms is nil- as we’ve seen in Montgomery County, Ohio, for quite some time (the list of failures is too long to cite- search the archives of this site).

In most cases, nothing is done to recover the taxpayers’ money when promises weren’t kept (which has been most of the time). Of course, the politicians who love these deals never personally sign on the line to take responsibility for their actions because it’s not their money, and the CEOs who take the money never sign personally either- because they don’t have to.

Everything was grand in this game as long as tax revenue kept expanding, but now that there has been a prolonged sucking sound in the economy, some communities are getting smart and saying: “Where’s our money?” Summit County in northern Ohio seems to be getting smarter:

Summit County says Chrysler owes it $7.9 million because the auto maker is closing its Twinsburg Stamping Plant this month, violating terms of two tax abatement deals.

The county has asked the U.S. Bankruptcy Court for the Southern District of New York to put its claim for tax reimbursement in a first tier of “preferred creditors” in the bankruptcy — those most likely to get a portion or all of what they are owed.

“We gave them enormous tax breaks,” said Councilman Pete Crossland. “The county is arguing it’s a primary obligation to pay your taxes.”

via Summit County wants Chrysler to repay $7.9 million in tax abatements | cleveland.com.

Call it clawback, call it a return on the investment, call it an acknowledgment of accountability, call it honest government- call it anything you want- but, tax dollars aren’t supposed to provide venture capital, that’s what Wall Street was supposed to do.

If you want to call something socialist- which is a severe twisting of the word by morons talk show hosts in this country, this “economic development” spending would qualify perfectly using the “radical right” definition. It takes from all of us, but gives to a few. “All animals are equal, but some are more equal than others.”

Kudos to Summit County.

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13 Responses

  1. Shannon July 16, 2010 / 7:57 am
    Locally, here is some of what is available from what I have found while trying to start a business in Dayton, but only if your business meets the Eligibility.
         INCENTIVE:  The City of Dayton will provide, as an incentive, an annual grant for up to
         three years at the following percentages:
    ·     Downtown Dayton – 75% of income tax withholding from new job creation.
    ·    Key industry sectors – 50% of income tax withholding from new job creation.
    For the complete Guidelines:
    http://www.cityofdayton.org/departments/ed/Pages/DEAPGuidelines.aspx 
     
     Who’s getting the grants?
    ·         The Neon Movies, 130 E. Fifth St., will add fresh exterior paint,
             replace front entrance doors, improve exit doors, and enhance
             exterior lighting. The $12,600 project is supported by a $6,300
             grant.
            • Price Stores, 52 S. Jefferson St., will replace signage and lights,
            paint selected areas, and install downspouts. The $8,600
            project is supported by a $4,300 grant.
            • Wine Gallery and Café, 5 W. Monument Ave., will further
            enhance its recently opened location with signage and awnings.
            A $4,400 grant is supporting the $8,800 project.
    http://cityofdayton.org/PressReleases/publications/Pages/BizBites.aspx
    Is this really a “New Business success” story? Sounds like a handout.

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  2. Jesse July 16, 2010 / 8:18 am
    Bravo Shannon.  Way to call a spade a spade.

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  3. Teri Lussier July 16, 2010 / 9:11 am
    >tax dollars aren’t supposed to provide venture capital
     
    Amen.
    And not only has the government freely given tax abatements, taxpayers usually get stuck with clean-up costs when that corporation moves along, and EPA (always) swoops in to discover a mess of environmental issues.
     
     

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  4. jstults July 16, 2010 / 9:16 am
    Great comment Shannon, I’d give you two thumbs up if I could.  These are exactly the sorts of programs that a public official can tout as “leveraging private investment, we’re getting more than a dollar of private investment for every public dollar spent”.  What they leave out is that if the public handout wasn’t there, then the business would likely have simply spent $5k on signs instead of $10k.  So what are we really doing?  Driving up the cost of signs and paint!  Great investment for the future fellas, keep up the good work…

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  5. truddick July 16, 2010 / 10:04 am
    This problem arises: communities and states are put into competition with one another.  So which one is going to be the first to voluntarily put itself at a competitive disadvantage by not providing tax breaks or other incentives (beyond good infrastructure and an educated work force)?
    It is true that businesses (at least the ones not run by morons) consider a wide range of factors when locating, and tax breaks/grants alone might weigh relatively little in a decision.  But which politician would want to take the risk of losing jobs by not doing what’s common practice?
    There’s also global competition.  Do we really want the USA to fall further behind the EU or China, where generally no one is conflicted about government feeding economic development?  This is an especially important consideration in the growth industries: health care, sustainable energy.
    What’s needed is an amendment to the US constitution that would stop the nonsense nationally, all at once.  The amendment should state that no legislature at any level may levy taxes on individuals.  If a government wants to give a tax break to a big automaker, fine–it has to give the same break to all big automakers, and all other similar-sized manufacturers of durable goods.
    At the same time, governments will be able to predict revenues more accurately because the tax rate will apply evenly across each community’s projected share of GDP.
    Governments would still be able to encourage individual industries, but they’d do it through the relatively more transparent process of grants; at the same time, they’d be able to balance budgets easier by adjusting the amount of grant money available when needed.
    So who’s going to start the constitutional amendment process?

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  6. joe_mamma July 16, 2010 / 3:12 pm
    “This problem arises: communities and states are put into competition with one another.  So which one is going to be the first to voluntarily put itself at a competitive disadvantage by not providing tax breaks or other incentives (beyond good infrastructure and an educated work force)?”
     
    Cities or states or countries that subsidize specific companies or industries are actually making the those products and services cheaper for “outsiders”.    For example: If the city of Dayton subsidizes the hell out of the Neon Movies so that admission is only $2, then why would I as a citizen of Kettering be upset.   As a resident of Kettering that’s a real benefit for me every time I go to Neon Movies …paid for by the unfortunate residents of Dayton.  As Milton Friedman would say  “If the Japanese government wants to subsidize their steel industry, then why should we object to them giving us foreign aid?” http://www.youtube.com/watch?v=j0pl_FXt0eM

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  7. Civil Servants Are People, Too July 17, 2010 / 2:39 pm
    @ Shannon,   the press release you cited was for a Facade Grant program, not the incentive program.   Neither program is a tax abatement, which has to do with property taxes.   Perhaps a minor distinction, but different programs have different goals.
     
    A facade grant, which is used in cities across the country, encourages businesses to improve the appearance of their building.  Cities hope that it has a muliplier effect of making the area more attractive for customers and other businesses that might come there.   Would the company make that investment anyway?   Perhaps, but maybe not now when the economy is bad.    If the city is trying to help downtown, this is a good way to do it.  Any downtown company can apply for the same benefit.
     
    There is room for debate on the advantages of these programs, but civil servants will tell you that generally  the number of true “economic development” failures in the region is very small compared to the number of successes.    Why?  Because most go to existing local companies that are in the process of growing and creating jobs.    That’s helping home-grown talent making good on their potential.   Plus, businesses naturally have a life cycle and will eventually succeed or fail on their own, regardless.   The community can support them along the way – or choose not to care at all.
     
    As someone else said, who is going to be the first to quit the game?    I agree that inter-state competition is the biggest problem (i.e. NCR).    If the Feds could put a stop to it, that would go a long way.   In the meantime, let’s help our local companies grow.    You can call it what you will, I still think its a good idea.    Better to do SOMETHING than do nothing.    If you have a better something, let’s hear it!
     

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  8. David Esrati July 17, 2010 / 3:02 pm

    @CSAPT the “better something” has been the subject of this site for the last 4 years. Apparently, you missed it. How about concentrating the number of municipalities down to one- eliminating the massive duplication and high overhead of all these mini-cities and their minor chiefs.

    Then- let’s look at providing schools and public safety that do the job- so that the whole system has Oakwoods scores and low crime rate.

    Let’s simplify taxes- so that there is at most- ONE local income tax rate. And while we’re at it- one levy for things- much like Metroparks (the best example of regional cooperation we’ve got).

    That’s just for starters- better and more efficient use of our tax dollars for what they are intended for.

    Get the basics right- and the “economic development” and “jobs” follow- not the other way around.

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  9. Civil Servants Are People, Too July 18, 2010 / 2:05 am
    I completely agree with the idea of a regional government.   Let’s do it.    But to argue that regional government will solve all the problems in our community is an overly simplistic answer.   Dayton will not be the next Centerville overnight, nor should it be.
     
    I’ve raised this point before here – how would you propose to help small businesses TODAY?   Not 5 or 10 years from now…. today.    That’s economic development.    We can argue about specific programs, but whatever you call it, this is going to continue, and should continue, until our economy is back on track.
     
    Designing the future is called city planning.    Both are needed.
     
     
     

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  10. jstults July 18, 2010 / 10:13 am
    CSAPT:

    how would you propose to help small businesses TODAY?   Not 5 or 10 years from now…. today.    That’s economic development.
    Designing the future is called city planning.

    I’d be interested in what metrics you track to tell you that you are accomplishing what you set out to accomplish (in either of those areas, econ dev or planning).  The impression I get from most of the PR puffery is that we are just throwing money at things, but I’m sure it’s more involved than that.  How do you know if what you’re doing needs to be changed?  Maybe what we’re doing today is really great and we just don’t realize it.

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  11. joe_mamma July 19, 2010 / 8:34 am
    “There is room for debate on the advantages of these programs, but civil servants will tell you that generally  the number of true “economic development” failures in the region is very small compared to the number of successes.  “  (CSPT)  
     
    I guess that explains why the unemployment rate in the region is at all time low…
     
     “Why?  Because most go to existing local companies that are in the process of growing and creating jobs.    That’s helping home-grown talent making good on their potential.” (CSPT)
     
    Not really.  It’s government picking winners plain and simple.  It’s giving existing business a leg up which in turn also throws up a barrier to potential start ups by giving existing business a cost advantage.  Consumers are the losers.  The only winners are the existing business and government.
     
       Plus, businesses naturally have a life cycle and will eventually succeed or fail on their own, regardless.   The community can support them along the way – or choose not to care at all. ……”(CSAPT)
     
    The community supports business if they offer something of value to them.  If the business can produce enough of a profit then it will succeed.  The community does not need the government to play any part in those transactions.  
     
    “Better to do SOMETHING than do nothing.” (CSAPT)
     
    This short sentence really encapsulates what is wrong with the mentality of our elected and non-elected “servants” in government.  One short sentence shows how easy it is to spend other peoples’ money and at the same time shows that government doesn’t give a damn what the citizens think.  If doing something is better than doing nothing please send me a personal check for $10,000 and I will spend it as I see fit. 
     
    I’d be interested in what metrics you track to tell you that you are accomplishing what you set out to accomplish (in either of those areas, econ dev or planning). (jstults)
     
    Generally the metrics that government uses to measure success is 1)  do they have a good intentions, 2) are they able to grow their budget year over year, and 3) can they get re-elected.

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  12. David Esrati July 19, 2010 / 10:10 am

    @Joe Mama: EXACTLY. That’s what I’ve been saying for years.

    And the only metric the “economic development” people use- do I still have a job?

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  13. shannon July 20, 2010 / 8:14 am
    @CSAPT:  A “Better Something”
    Let’s start at the source of the problem.  Let’s start being better stewards of the tax payer’s money.
    1.       Regionalize the Water Department; The City of Dayton should leverage a deal with Montgomery County to purchase the county’s water distribution system.  This would cut down or at the least reduce the redundancy of the administration and engineering departments.  This would open up opportunities so that the city could more easily negotiate water contracts with Greene Country, WPAFB, Miami County and suburbs south of Dayton, in turn utilizing more of the available water resources and city facilities already in use.
    2.       The City of Dayton should contract out the fleet management and transfer the work to local garages, reducing the overhead cost to maintain the city’s fleet of vehicles.
    3.       Make Dayton more business friendly; reduce the amount of “Red tape at the One Stop Shop”
    4.       How about “cutting the income tax” of the residents and business in Dayton.  Future growth in a lower income tax bracket is better than an increase of more uncollected income taxes.  http://www.daytondailynews.com/news/dayton-news/dayton-going-after-unpaid-income-taxes-259197.html
    5.       Offer property tax abatement for new “Green”  technology like the City of Cincinnati does. http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=OH22F&re=1&ee=1
    6.        Offer a Buy out for “Civil Servants” who have reached retirement age.    

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