|
|
|
Local governments should do their homework before offering economic incentives for business projects.
That was the message from Larry Winn III, customer development strategist for the engineering firm BHC Rhodes.
“If these things don’t make good business sense, don’t do them,” he said during the Dodge City Area Chamber of Commerce’s luncheon Wednesday at Victory Electric.
Winn gave the audience an overview of various tools used by cities and counties to attract new businesses or encourage existing companies to expand. He said the state has offered tax incentives for at least a decade, but they’re not very well known.
Those programs include:
• Tax-increment financing: This tool encourages development by using future tax revenues to pay for improvements. Local officials designate an area known as a tax-increment financing district for improvement, then earmark any future growth in property tax revenues in that district to pay for the improvements.
In Kansas, TIF projects must be located in a redevelopment district. Those districts may be established in blighted areas, conservation areas, enterprise zones, major tourism areas, major commercial entertainment and tourism areas, and bioscience development areas.
Winn said the principle behind tax-increment financing is easy to understand.
For example, he told the audience to assume that property near U.S. Highway 50 is currently planted in soybeans, and the landowner pays the county $450 in property taxes each year. Then he asked the audience to imagine that a developer was interested in building a project — perhaps a franchise restaurant or an apartment complex — on that property.
“The county assessor’s going to say to you, ‘When that’s completed, I’m going to put that on the books at — pick a number — $3 million in completed development value,’” Winn said. “So what you have there is a difference between my hypothetical $400 worth of taxes — basically nothing — and $3 million worth of value.”
Winn said if local officials assume the new project generates $100,000 a year in property taxes, they could multiply that number by 20 years and issue bonds for that amount.
“And so, if you’re a developer, that’s just like having an equity investment,” he said. “That’s a huge deal.”
He noted that the city would initially lose money on the project, but that property wasn’t generating any money to begin with — except for the $450 in annual property taxes.
• Tax abatements: A city or county uses tax abatements when it grants a business a tax reduction or exemption for a specified period. The goal is to encourage certain activities, such as investment in capital equipment.
Winn said under a tax abatement program, the government owns the land and building and leases them to the user. The government then issues bonds and lease payments to pay the principal and interest on the property.
“And you can do that for up to 10 years,” he said. “You can issue a full tax abatement for 10 years, or you can negotiate with the developer and say, ‘Hey, we’re not going to give you full tax abatement for 10 years. You don’t need it. But we’ll give you 80 percent tax abatement for the first two years and 60 percent for the second two years and structure that tax thing.’”
• Special benefit districts: Under this program, the city pays for street upgrades, water and sewer lines in the district. The city recovers the cost by tacking a special real estate assessment onto the user’s property tax bill for up to 20 years.
“So when you get your bill from the county, it’s got all the county levies — schools, libraries, parks and rec, fire, whatever’s on your normal levy,” Winn said. “Then you’ll see a separate levy for a special benefit district. That’s the benefit district that was used to put those streets and sewers and infrastructure in.”
Local governments should do their homework before offering economic incentives for business projects.
That was the message from Larry Winn III, customer development strategist for the engineering firm BHC Rhodes.
“If these things don’t make good business sense, don’t do them,” he said during the Dodge City Area Chamber of Commerce’s luncheon Wednesday at Victory Electric.
Winn gave the audience an overview of various tools used by cities and counties to attract new businesses or encourage existing companies to expand. He said the state has offered tax incentives for at least a decade, but they’re not very well known.
Those programs include:
• Tax-increment financing: This tool encourages development by using future tax revenues to pay for improvements. Local officials designate an area known as a tax-increment financing district for improvement, then earmark any future growth in property tax revenues in that district to pay for the improvements.
In Kansas, TIF projects must be located in a redevelopment district. Those districts may be established in blighted areas, conservation areas, enterprise zones, major tourism areas, major commercial entertainment and tourism areas, and bioscience development areas.
Winn said the principle behind tax-increment financing is easy to understand.
For example, he told the audience to assume that property near U.S. Highway 50 is currently planted in soybeans, and the landowner pays the county $450 in property taxes each year. Then he asked the audience to imagine that a developer was interested in building a project — perhaps a franchise restaurant or an apartment complex — on that property.
“The county assessor’s going to say to you, ‘When that’s completed, I’m going to put that on the books at — pick a number — $3 million in completed development value,’” Winn said. “So what you have there is a difference between my hypothetical $400 worth of taxes — basically nothing — and $3 million worth of value.”
Winn said if local officials assume the new project generates $100,000 a year in property taxes, they could multiply that number by 20 years and issue bonds for that amount.
“And so, if you’re a developer, that’s just like having an equity investment,” he said. “That’s a huge deal.”
He noted that the city would initially lose money on the project, but that property wasn’t generating any money to begin with — except for the $450 in annual property taxes.
• Tax abatements: A city or county uses tax abatements when it grants a business a tax reduction or exemption for a specified period. The goal is to encourage certain activities, such as investment in capital equipment.
Winn said under a tax abatement program, the government owns the land and building and leases them to the user. The government then issues bonds and lease payments to pay the principal and interest on the property.
“And you can do that for up to 10 years,” he said. “You can issue a full tax abatement for 10 years, or you can negotiate with the developer and say, ‘Hey, we’re not going to give you full tax abatement for 10 years. You don’t need it. But we’ll give you 80 percent tax abatement for the first two years and 60 percent for the second two years and structure that tax thing.’”
• Special benefit districts: Under this program, the city pays for street upgrades, water and sewer lines in the district. The city recovers the cost by tacking a special real estate assessment onto the user’s property tax bill for up to 20 years.
“So when you get your bill from the county, it’s got all the county levies — schools, libraries, parks and rec, fire, whatever’s on your normal levy,” Winn said. “Then you’ll see a separate levy for a special benefit district. That’s the benefit district that was used to put those streets and sewers and infrastructure in.”
