Archive for Wednesday, December 6, 2000

All about those tax abatements

December 6, 2000

My concluding thoughts in this series have to do with tax abatements and nothing to do with any specific site. During my comments to the Chamber of Commerce in October, I stated the primary purpose of advancing a business park concept is to increase the assessed value in the community and the city council is not presently fond of giving a tax abatements to encourage a company to locate in Baldwin City. Not all the council weighed in on this. The ones who have are serious "No's."

Following the chamber meeting, several people came and said there is a purpose for the abatements and that they should be considered. Their reasons were centered around the competition between cities and if we didn't offer an abatement we would not be competitive. This will be a policy question answered sometime in the future if and when a company asks for an abatement.

Fortunately, the State Constitution and the Legislature gives us some sufficient guidance on how to handle this issue. The 1961 legislature provided for use of Industrial Revenue Bonds (IRBs). Their purpose provided for the acquisition and improvement of property. In 1986, Kansas voters approved a Constitutional amendment (Article 11, Section 13) authorizing cities and counties to grant property tax exemptions for certain economic development purposes. The constitutional exemption has to be used for either manufacturing articles of commerce, conducting research and development or storing goods or commodities which are sold or traded in interstate commerce. In 1994, the legislature prohibited use of abatements to exempt property used by a retail enterprise.

Now, before XYZ, Inc. can secure an abatement from the city, two other steps must be handled before the abatement is granted. The exemption request must be approved by the State Board of Tax Appeals (BOTA) and a Tax Abatement Cost-Benefit Analysis must be completed and presented to BOTA. The state funded a project (in 1994) to provide a computer model for use in determining the cost-benefit of an abatement. The League of Kansas Municipalities updated the model in 1998 using the original consultants. We have it available in City Hall. The University of Kansas has a service available for this purpose also.

Sample data is analyzed to evaluate the public benefit for each taxing entity. The analysis reviews sales taxes, individual income taxes, corporate income taxes, property taxes, utilities, utility franchise fees, school funding and revenues from all other taxes and fees for new residents and new workers.

There is more to the analysis. But, as you can see, a city council cannot just give away a tax abatement.

Key to any discussion of tax abatements is the impact on the community before and after the abatement, if granted. Both the companies and the communities have several major hoops to get through. If the abatement is in the best interest of both, it gets approved. I am certain this is why the Legislature wanted assurance there would be a public benefit.

This is a very technical process and if you have persevered to read this far, congratulate yourself. My purpose with this report has been to let you know about the "red tape" associated with this issue. The granting of an abatement is not simple.

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