Posted by – Steve Cohen, Director of Community Development
It’s a very good question to ask. A co-worker inquired last week during our session with the 2015 Auburn Hills University class if such incentives made sense and if they have hurt the City’s coffers. The answer needs some explaining. So, I’ll give it my best shot.
Answering “why” is important because the City has a duty to be transparent with its reasons for why it offers a benefit to one particular class of taxpayers over another. The simple answer is that the program is a “loss leader” authorized by Michigan law. The City Council uses tax abatements as a tool to attract and retain industrial manufacturing-based companies as we compete with other regions in North America. The Council has largely pursued this incentive policy for the past 35 years in an effort to lower the overall tax burden for its residents by shifting that burden to businesses.
How has it helped us? By allowing an initial 50% discount on taxes, typically for 8 to 12 years, the City increases its tax base by adding new investment (e.g., a new building on a lesser tax producing vacant piece of land or additional capital investment into an existing building). The City also benefits by maintaining its tax base over time by increasing the value of an abated site and the properties surrounding it. This policy has led to the successful clustering of R&D and manufacturing businesses in Auburn Hills. This clustering has historically fed off itself creating a cycle of investment and momentum for growth. Today, businesses pay roughly 80% of the tax burden in Auburn Hills.
A real world example of this theory in action is the redevelopment of the former Showcase Cinema site on Opdyke Road so that it could accommodate GKN and a future business. Showcase was blighted and contributing to disinvestment in the area. By assisting the developer repurpose the site, the City has helped stabilize the tax base in the area as GKN’s investment raised the value of the Showcase site and the properties surrounding it. The State also allows the use of incentives like this because the people employed by companies, like GKN, create a ripple effect in the economy by spending their money locally (e.g., buying gas, eating out, going shopping, purchasing homes, and paying taxes themselves).
A popular saying in Auburn Hills for decades has been … “50% of something is better than 100% of nothing.” As, one former Auburn Hills elected official used to say, “If we don’t bring development in, we’ll receive 100% of the taxes for a vacant field. But, if we bring development in and offer a 50% tax break, we’ll be collecting 50% of a building on that vacant land.” Thus, more incremental revenue is gained with each added project.
Although it may be obvious, the key disclaimer with the logic and theory explained in this blog is that the City’s collective incentive program must not create a situation where more expenses (e.g., infrastructure improvements, police and fire calls, staff overhead, etc.) are incurred than the incremental revenue gained from added business investment. No doubt, tax abatements are not suitable for every community and must be used wisely. A significant level of business clustering and investment must be achieved to generate enough tax revenue to offset the expenses that come along with development.
Has it worked for us? With the benefit of history, it’s undeniable that Auburn Hills’ incentive program facilitated the creation of an automotive R&D cluster unparalleled for a geographic area of its size in North America. Such industrial growth has benefited all the City’s taxpayers with excellent infrastructure and services. So, yes … we believe partnering with the business community has been a good long-term strategic investment for the City of Auburn Hills.
Interested in learning the math behind a tax abatement? – click here