TIF VIEWPOINTS: Opinions vary, but everyone says its valuable
(from Maine Townsman, February 1998)
By Michael L. Starn, Editor
Over the past four years, tax increment financing agreements (TIFs) in Maine communities have been popping up like mushrooms after a summer rain. According to information from the Maine Department of Economic & Community Development (DECD), 72 TIFs were approved from 1994 through 1997. Since 1985, a total of 97 TIF proposals have been approved by DECD, the state agency with authority over the establishment of TIF districts.
The number of TIF approvals has grown steadily over the past four years from 13 in 1994, to 16 in 1995, to 20 in 1996, and rising to 23 in 1997.
Those familiar with tax increment financing are well aware that the introduction of credit enhancement agreements (CEAs) in 1993 was the impetus for the tremendous growth in TIF districts. CEAs provide a mechanism whereby some or all of the property tax revenue generated by a TIF project is returned to the business. Businesses have found this enticing because it lowers their project costs, and municipal officials seem to like it because no municipal bonding is required and if projects fail or never get off the ground, the municipality assumes no financial liability.
SOMETIMES NOT ENOUGH
Recent announcements of major manufacturing plant closings in Winslow (Kimberly-Clark tissue mill) and Wilton (Bass Shoe) have prompted some to ask, "Are Maines economic development incentives enough?" Municipal officials from both of these communities say that sometimes economic development programs, like TIFs, are not enough to keep a company from closing.
"Taxes are a small part of a companys operating costs," says Winslow Town Manager Ed Gagnon. In Winslow, Scott Paper Co., which sold the tissue mill to Kimberly-Clark in 1996, had completed a TIF agreement with the town in 1995, but had never used it. When the mill was sold to Kimberly-Clark, the TIF agreement was transferred as part of the sales agreement. Like Scott, Kimberly-Clark never utilized the TIF.
"Many aspects of (big) business are out of the control of a municipality or the state," says Gagnon. "The bottom line is what its all about."
In both Winslow and Wilton, town officials were far removed from the corporate offices where decisions were made that closed the plants. Kimberly-Clarks corporate headquarters are in Dallas, Texas and Phillips-Van Heusen, the parent company of G.H. Bass & Co., has its corporate offices in New York City.
Phillips-Van Heusen had a marketing strategy change and corporate executive wanted to lower their labor costs, according to Wilton Town Manager Richard Davis. So, company officials in New York decided to close the Bass Shoe in Wilton putting 350 people out of a job "with little consideration for the local economy and the local workers", says Davis.
The Town of Wilton had offered a TIF to Bass Shoe, and according to Davis, the company had indicated at the time that the TIF would enable it to continue operations in Wilton. But, the $35,000 value of the TIF was not enough. In fact, it was peanuts to a company the size of Phillips-Van Heusen.
Phillips-Van Huesen is a billion-dollar company and its subsidiary, G.H. Bass Co., has annual sales in the hundreds of millions, reporting $86.3 million in the second quarter of 1997.
"The TIF wouldnt have made a difference," says Davis. The Wilton manager does say, however, that two other TIFs that the town has used are working very well. One was to assist Forster Manufacturing in the financing and construction of its manufacturing facility in Wilton, which produces plastic cutlery. The other was to provide water and sewer lines to a subdivision development.
To depict the frustration that local and state officials can feel in trying to lure businesses to Maine, Winslows Gagnon relates a story he was told.
"A very large company was interested in locating in Maine. No other state could match what Maine was offering, nevertheless the company located in Virginia. When the company president was asked why, he replied, Its too damn cold up there!"
ONLY TOOL WEVE GOT
Even though the TIF program was not sufficient to hold major industries in Wilton and Winslow, municipal officials at least those interviewed for this article sing the praises of tax increment financing because as Brewer City Councilor Donna Thornton says, "Its the only development tool weve got."
The City of Brewers experiences with TIF have been very rewarding, says Thornton. Brewer was one of the first municipalities to use tax increment financing. Back in 1985, the city cut a deal with Lemforder Corp., a German automotive parts manufacturer, to build a manufacturing facility and lease it back to the company. The city had to borrow $1,750,000 to build the facility, but the return on the investment has been substantial.
According to Thornton, who was the citys economic development director at the time of the TIF, Lemforder put $20 million of its own money into the project, for machinery and equipment, and created approximately 225 jobs. On top of that, the citys bond was paid off in five and a half years allowing the city to begin to get additional property tax revenues from Lemforder in year six.
In 1996, Brewer Automotive Components (BAC), a spinoff of Lemforder, undertook an $11 million expansion of its manufacturing facility, where automobile suspension parts are made, with the help of a TIF. This time the city used a credit enhancement agreement (CEA) that front-loaded the benefits to the company during the first half of the 20 year agreement.
Lemforder came back last year with another TIF project that is expected to add 125 new jobs and invest $24.2 million over three years into the community.
One of the recurring controversies over TIFs is whether or not job creation should be a condition of their use (see below). "Weve had substantial job creation in the TIFs weve done," says Brewers Thornton.
City officials in Brewer have rejected some TIF proposals where job creation and the economic development impact were not enough, according to Thornton. She says that city officials look at each proposal on a case-by-case basis, working closely with EMDC (Eastern Maine Development Corp.) to make sure that the businesses are maximizing resources available to them.
"If we feel its appropriate, then we step up to the plate," says Thornton. "We want to be a partner and this is the tool we have to be a partner."
FOSTERING LOCAL BUSINESS DEVELOPMENT
Dan Feeney, community development director in Lisbon, says "We spend so much time trying to sell Maine to other people. Its time to sell it to ourselves." Which is his way of saying, focus on the businesses that you already have in town rather than spending large amounts of time and money trying to lure new business into your community.
To municipal officials in communities like Wilton and Winslow, that have lost big employers and hundreds of jobs, Feeney advises, "Maine communities need to bring back jobs in smaller amounts. We need to focus economic development on companies with 15 or 25 or 30 employees." TIF can make a difference for these companies, says Feeney.
"We seem to forget what we have going for us," says Feeney. "There are a lot of benefits to doing business here (in Maine)."
One of Feeneys chief concerns about tax increment financing is that sometimes communities are placed in a bidding war for business. "The State of Maine should not be in the business of pitting community against community," he says.
"TIF should not be a vehicle to move businesses around the state," says Feeney. Thats why he believes that the primary focus of TIF should be on existing businesses within a community. "We dont try to compete with other municipalities to take their businesses away from them," he says. "We are more interested in fostering our own businesses."
The Town of Lisbon has been successful with the type of economic development philosophy espoused by Feeney.
In 1989, Maine Electronics, the towns largest employer, closed putting 350 people out of work. In 1990, Lisbons unemployment rate spiked to over 9%. In the nineties, town officials through their economic development programs have worked steadily to reduce that unemployment rate to its current 3.4% level.
One of the notable success stories for Lisbon has been Dingley Press, which moved there in 1989. According to Feeney, over the past nine years Dingley has expanded ten-fold.
Two TIFs for Dingley, one just announced, have helped to make the difference. Dingley Press is a printer of specialty catalogs. Since 1989, they have been incrementally increasing their capacity and size with additional land, buildings and machinery. Employment in the company has grown from about 100 in 1989 to around 250 today.
The latest TIF, approved at a special town meeting in January, will help fund a $25 million expansion of the company. The TIF agreement is a CEA with roughly a 50-50 sharing of the captured tax revenues over the life of the 20-year project.
TIF NOT PERFECT
The original intent of tax increment financing was to promote economic development through improvements to public infrastructure. The programs focus was on blighted areas of a community where infrastructure improvements were needed in order to entice businesses to locate or expand there. Tax revenues to finance those public improvements were to come from the increased value in the TIF district.
In the early history of tax increment financing, the captured value in the TIF district was not excluded from state valuation. Without the ability to shelter value from the "lost revenue" under state reimbursement programs (revenue sharing, education) and increases in the county tax, municipalities showed little interest in using the TIF program. A change to the TIF law in the 1980s, allowing the captured value to be excluded from state valuation, made the program more attractive to municipalities.
Credit Enhancement Agreements
It was the introduction of credit enhancement agreements in 1993 that really gave the TIF program a jumpstart. But, CEA is not without its critics.
Roland Miller, community development director of Auburn, is a long-time supporter of TIF. He is, however, concerned about the CEA.
"Using TIF as a long-term investment tool is appropriate," says Miller. "Very narrow, single purpose use to avoid legitimate costs (get a tax break) are inappropriate."
Miller says that TIFs are creating expectations among businesses that they are entitled to a "tax break". "Every development project today asks," says Miller.
Because of the onslaught of businesses asking for TIFs, the City of Auburn has had to develop a policy. Miller says it is a fairly tight policy that links the TIF to significant employment and economic development in the community.
While Miller is not a fan of credit enhancement agreements, he says there is really no way to avoid them. State and municipal officials and businesses have charged ahead with CEAs. By far, they are the most popular form of TIF today and they are clearly the driving force behind the rapid increase in TIF projects over the past four years.
That said, Miller believes that rebating tax revenues to a private entity to enhance its competitiveness is an issue that continues to need public debate.
"My hope is that when the public debate is concluded that we still have mechanisms that cities and towns can offer to assist business expansion and economic development," Miller says.
"Taxpayers cant afford it (economic development). If CEAs are not the right approach, then lets find a way of funding it," says Miller.
Double Dipping With BETR
The BETR (Business Equipment Tax Reimbursement) is another concern of Millers. Not that he doesnt like the program, actually he thinks its an extremely valuable program. Millers problem with BETR is that some businesses use it to "double dip".
Double dipping occurs when business gets a TIF that covers the acquisition of equipment, for which they get a CEA, and then turn around and ask the State to reimburse under the BETR program for the personal property taxes the business paid on that equipment.
Miller says, "In this environment, where peoples motives are always questioned, we expect people not to react, not to be cynical?"
Miller is dubious to the claim of some state officials that municipalities can reign in double dipping with local TIF policies. "Unrealistic," he contends.
There are a number of municipal officials who do not agree with Miller on the double dipping issue. Lisbons Dan Feeney says he has no problem with double dipping. His viewpoint is that its a program available to all businesses and that the smart ones will take advantage of it.
Brewers Donna Thornton says the BETR double dipping issue is not "cut and dried". "I would prefer not to see a business going to BETR after they get a TIF. But, they (BETR and TIF) are tools available to them and I would not want to preclude them from using both if they need to."
MMAs Legislative Policy Committee, during last years legislative session, voted to oppose a bill that would have ended the practice double dipping from both the BETR and TIF programs.
Linking Jobs To TIF
Linking jobs to TIFs is one final area of controversy that surrounds TIFs. Again, the municipal officials seem to be split on the issue.
Lisbons Dan Feeney thinks it is unwise for town officials to insist that companies put into writing that they will create "X" number of jobs. He says that in todays competitive economy neither businesspeople nor town officials can determine what the market will be for a given product. In the case of the Dingley TIFs, Feeney says, "We just could not hold their feet to the fire for jobs."
City officials in Brewer, Auburn and Lewiston view the job creation link differently. "Absolutely, the TIF should have employment and job creation tied to it," says Brewers Thornton. "TIF applications must represent significant employment and economic development opportunities," says Miller of Auburn.
The City of Lewiston is currently drafting a TIF policy that will link job creation to the awarding of a TIF. Finance Director Richard Metivier says the city council directed staff to develop a set of guidelines that would establish job creation guarantees under a TIF.
According to Metivier, the city council felt that it was important that the neighboring city of Auburn be brought into the process. Not wanting to create situations where businesses would move from one of these communities to the other, Metivier says its not a matter of having different positions on the idea of linking job creation to TIFs, but rather a matter of coming together on a set of guidelines that are workable for both communities.
The TOWNSMAN has extensively covered tax increment financing and related economic development programs in previous issues. Some recent articles appearing over the past few years include: A TIF Policy, January, 1997; Personal Property Reimbursements, February, 1997; Personal Property Tax Relief, February, 1996; and Tax Increment Financing, June, 1995.