Tax Abatements: A Boon For The City, Or Not Worth The Cost?

Apr 25, 2016

Credit 401(K) 2012 / Flickr Creative Commons

The City of Wichita waives millions of dollars in tax revenue each year in the name of economic development. It’s called tax abatement, and it allows private companies to forgo certain tax burdens for a set amount of years. The plan is to help businesses expand, improve and hire more staff. Tax abatements are a common practice in cities across the country. KMUW’s Sean Sandefur explores how these incentives work, and whether they’re effective.

In a warehouse in southwest Wichita, a massive screen-printing machine is moving back and forth over a sheet of soft plastic. The word “SALE” is printed in thick, red lettering. Randy Vautravers, president of Rand Graphics, says the machine is as big as they come.

Randy Vautravers stands in front of signs at Rand Graphics in Wichita.
Credit Sean Sandefur / KMUW

Rand Graphics works with a host of national companies, most notably Budweiser and Walmart. They print advertisements for the outside of restaurants and bars, as well as smaller displays for supermarkets. The company has been in business for decades, and Vautravers credits that to always having the latest technology.

“You gotta invest to keep up. And we spent a lot of money in the last couple of years on some other equipment. Last year wasn’t as much and this year not as much, either—up to this point," he says. "But, you have to have the equipment in order to produce the work that your national clients will buy.”

To help with the costs of upgrading equipment and facilities, Rand Graphics relies on tax abatements from the City of Wichita. They’re not alone—Cessna, Learjet, Spirit, High Touch and many others do, too.

How do the abatements work? A business must agree to invest a large sum of money on capital improvements. They might also agree to create a certain amount of jobs. In return, the city will give them tax breaks. Vautravers says his company needs these breaks in order to afford the upgrades. He says they’re a big incentive for staying in Wichita.

“And the sad thing is, if you don’t get it here, we could go to Kansas City and get it, we can go to Dallas and get it. Dallas would be a wonderful market," he says. "I like it here in Wichita, and we’ve got great people. But we’d be a lot bigger company in Dallas.”

Back in 2008, Randy Vautravers' company agreed to invest more than $5 million of its own money to build a large warehouse, purchase new equipment, and add 21 jobs. If the company met those goals, it would only have to pay about 15 percent of the new building’s property taxes for 10 years, which can amount to as much as $400,000. Without the abatement, roughly half of that money would have gone to Wichita Public Schools.

“Obviously, August of 2008, the world changed. And it really hasn’t been the same since. It’s been a bit of a roller coaster since then. And that’s kind of where we’re at right now," Vautravers says.

Rand Graphics did build the warehouse and they did buy new equipment. But Vautravers says that because of the Great Recession, the company didn’t meet its benchmark of adding 21 employees. In fact, it has lost more than 50.

"I like it here in Wichita, and we've got great people. But we'd be a lot bigger company in Dallas."

Most tax abatement projects are reviewed after 5 years, and if the company has met its goals, it gets another 5 years of relief. Because Rand Graphics didn’t create enough jobs, the business might have to pay back about half of the taxes that were forgiven.

But for now, they have until 2018 to make up the difference.

“We’re on a bit of a roll right now, and hopefully we can continue it and then it won’t be an issue. I don’t know what’s going to happen tomorrow, nobody does," Vautravers says. "My goal is we’ll be able to.”

These agreements are a bit of a gamble. Before they’re approved, they’re analyzed by a group of number crunchers--like Tim Goodpasture, an economic development analyst for the City of Wichita.

“We are required for any property tax abatement to do a cost-benefit analysis. And we’ve contracted with the Center for Economic Development and Business Research at Wichita State University to handle those analyses for us. It’s an independent third-party," he explains.

Experts at Wichita State look at three key benefits: First, new facilities, which can produce added property taxes when the 10-year abatement period is over; second, brand new, state-of-the-art equipment, which keeps companies competitive; and finally, new employees, who have a multiplying effect. If a company adds jobs, there’s added income tax revenue from wages, added sales tax revenue from people spending their paychecks, and added property tax revenue from people buying cars or houses.

“And we weigh that against the costs—the costs being the property tax abatement and sales tax abatement potentially and look what the ration of benefits to costs is,” Goodpasture says.

The City of Wichita won’t approve a tax abatement project if the cost-to-benefit ratio isn’t in their favor. But there’s a problem with these estimates: They’re just estimates.

Take, for example, Big Dog Motorcycles, a company that made custom choppers in Wichita. The company received tax abatements for many years, but eventually went under in 2011. It meant the loss of hundreds of jobs, and their large warehouse sat vacant on Douglas Street for three years.

Of course, the city can’t predict the future. But currently, they don’t have a good way of tracking the success of tax abatement projects.

In 2014, the city approved more than $16 million dollars worth of tax abatements in Wichita. Goodpasture says that’s a lot to manage.

“It’s a real challenge with all the tax abatements we have out there to try to track this information. And that’s why we’ve been working with the county over the last couple of years to try to develop a system or process to be able to pull that information so we can track it more clearly—just to see how that compares with our typical initial projections are," he says.

But while the effectiveness of these incentives aren’t proven, the city does know a couple things: Rand Graphics stayed in Wichita. They didn’t move to Dallas. And while the company didn't add more jobs as a result of the tax abatement, most businesses that receive these incentives do.

So, the question then becomes whether all of this economic development would have happened without giving up large amounts of tax revenue.

“If anyone tells you they know that for sure, they are either much smarter than anybody else who’s thought about this process, or they’re making it up,” says Ken Kriz, director of the Kansas Public Finance Center at Wichita State.

He says it’s also impossible to know whether a company is truly willing to leave Wichita for a more favorable tax climate. A recent study from the Lincoln Institute of Land Policy, a think tank in Boston, says a typical manufacturing company spends nearly 75 times more on labor than on property taxes. 

Kriz says there are many other factors for companies to consider.

“Things like quality of the workforce, quality of infrastructure, [and] the amount of infrastructure available tend to be way up on the top of the list and are weighted much higher than incentive programs,” Kriz says.

Randy Vautravers at Rand Graphics would agree. He says a strong workforce is "everything."

"Well, for us," he says. "We’ve got great people. And so, we’re blessed with that.”

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Follow Sean Sandefur on Twitter @SeanSandefur

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