The National Bureau of Economic Research announced a nascent recession in the United States in 2007, and then cited its end in 2009. There has since, however, been an economic malaise, with the national unemployment rate at 7.3 percent and state unemployment rate at 8.8 percent.
Since the start of the “Great Recession” in 2007, the city of Ypsilanti has provided tax abatements to local businesses on six different occasions in order to spur economic development.
Tax abatement is a form of subsidy, which lowers tax liability, and is awarded to commercial, industrial, and residential property by municipalities in order to provide financial relief or increase desired economic activity.
The most recent tax abatement was awarded to American Broach, a local manufacturer, this year. The tax abatement is valued at an estimated $236,000 spread over six years according to city records. American Broach was previously provided tax abatements in 2008 and 2011.
Teresa Gillotti, who took over as city planner in 2010 said that most tax abatements were awarded to businesses that wanted to renovate dilapidated buildings.
“In the case of having an OPRA [type of tax abatement], the numbers don’t work without an abatement,” she said. “And we see the benefit of increased occupancy.” This is important to a city that is “built out” and has little room for further development.
The city of Ypsilanti offers five types of abatements for businesses: Obsolete Property Rehabilitation Act Tax Exemption Certificates (OPRA), Commercial Rehabilitation Exemption Certificates, Industrial Facilities Act Tax Exemption Certificates, Personal Property Tax Certificates and Brownfield Incentives.
Brownfield incentives require the approval of the city council, but are provided by the Washtenaw County Brownfield Redevelopment Authority. The Personal Property Tax Certificate applies to equipment purchased by a company, such as a new drill press for a manufacturer.
An Industrial Facilities Tax Exemption Certificate requires that the city council vote to create an Industrial Facilities district. Property within the district can have up to 50 percent of both real and personal property exempted on new facilities, and 100 percent exempted on renovated structures. This abatement only applies to industrial and high technology firms.
With a Commercial Rehabilitation Exemption Certificate the city council creates a Commercial Rehabilitation district where properties within the district have their taxable values frozen so any repairs or renovations do not cause increases in tax liability.
The OPRA serves a similar function and is the tax abatement most commonly awarded to local companies. Tax abatements awarded by the city council also need the approval of the state.
General contractor Mack and Mack received a tax abatement in 2008. Bertram Design, an art and architectural company, received a tax abatement in 2009. The value of the exemption was estimated to be $28,319 by the city assessor’s office.
The owners of the Mellencamp store property received an Obsolete Property Rehabilitation Act Tax Exemption in 2010 valued at $740,057.
With the most recent tax abatement awarded to American Broach, which has yet to be approved by the state, the company has received tax abatements with a total estimated value of $1.1 million. The company has also received tax subsidies from the state valued at $526,000.
“The reason the council voted for the tax abatement [to American Broach] is to encourage businesses to locate in Ypsilanti and provide employment opportunities for our residents,” said Susan Moeller, a professor of finance at Eastern Michigan University’s College of Business and member of the city council.
But there is skepticism about the supposed increase in commerce that comes from tax subsidies.
“At best they do no harm,” said professor Justin Ross of Indiana University’s School of Public & Environmental Affairs. “The general consensus of the academic literature is that they do not provide much of a return. They end up financing growth that would have developed anyway.”
The Federal Reserve Bank of Boston released a report in 2013, titled “The Effective Use of Property Tax Incentives for Economic Development,” which cautioned local governments to be careful when awarding tax abatements.
“To make property-tax incentives for business more effective, do not approve every incentive request, target use of incentives, avoid incentive wars, cooperate with surrounding localities, and conduct regular evaluations,” the report said.
The report continued to make the point that businesses consider a number of factors when they look for new areas of developments. Labor cost, the level of education of the local workforce, location relative to suppliers and customers, access to transportation and the cost of real estate are all factors that enter into a company’s considerations.
“The likelihood that property taxes will tip an organization’s location decision depends on the taxes’ share of business costs relative to those other factors, and how much property taxes vary across other potential sites compared with those factors,” the report said.
Tax abatement is not the only course of action for the city planner’s office explained Richard Murphy, who held Ms. Gillotti’s post from 2008 to 2010.
“The other half of our tool box was local knowledge and relationships,” Murphy said. “Ann Arbor Spark would come in saying ‘We have a company that needs 10,000 square feet’ and we would say ‘We have that.’”
Gillotti said tax abatements still have been used to curb job losses.
“Similar to small communities in Michigan we saw a shift from manufacturing,” she said. “We saw the closing of the [Visteon] ACH plant. The slowdown hasn’t gone away, but it has shifted.”
Over the course of the early 2000s, the US manufacturing sector shrank. Small communities in Rust Belt states like Michigan have been all but powerless to stop plant closures. In 2008, the Visteon plant owned by Ford Motor Company and located in Ypsilanti, closed.
Before the plant’s closure, the city council attempted to ease the financial burden on the plant, as Ford and the other auto manufacturers careered toward bankruptcy.
“They received a few abatements to retain those jobs, which unfortunately did not work out,” Gillotti said.