Memorandum
City of Lawrence
City Manager’s Office
TO: David L. Corliss, City Manager
CC: Diane Stoddard, Assistant City Manager
FROM: Roger Zalneraitis, Economic Development Coordinator/Planner
DATE: April 21, 2009
RE: Tax Incentive Use in Northeast Kansas from 1990 to 2008
Summary
The following report analyzes the use of economic development incentives in Northeast Kansas from 1990 to 2008. The report specifically looks at two incentives that are commonly used to reduce property taxes for firms: constitutional tax abatements (EDX), and abatements issued in conjunction with Industrial Revenue Bonds (IRBs). This report finds that:
· The use of tax abatements has generally increased over time in Northeast Kansas;
· Johnson County has issued an increasingly larger share of total abatements;
· Controlling for the number of business establishments, Wyandotte and Franklin Counties issue the largest proportion of abatements; and
· Douglas County is the only county in northeast Kansas that has consistently issued fewer abatements over the last two decades.
Purpose and Background on Data Used
In January of 2008, City staff produced a map of northeastern Kansas and the number of tax abatements still in effect in the region. As a follow-up, staff was asked to analyze the use of abatements over time. This report provides an assessment of the use of tax abatement incentives in Northeast Kansas from 1990 through the end of 2008. The information on abatements was provided by the Kansas Court of Tax Appeals.
Tax abatements can be issued through one of two methods. Either a tax abatement can be approved as permitted under the Kansas Constitution (an “EDX”), or in conjunction with the issuance of Industrial Revenue Bonds (“IRBX”). An EDX abatement can only be issued for manufacturing, warehouse, or research and development facilities. Industrial Revenue Bonds can be issued with or without tax abatements. IRBX abatements may be granted for any purpose authorized under Industrial Revenue Bond statutes, except retail, making them more broadly applicable than EDX abatements. For example, IRBX abatements can cover such uses as convention centers and office space. In addition, Industrial Revenue Bonds provide a sales tax exemption on materials used to construct the facility.
The Court of Tax Appeals receives two notifications on abatements. The first occurs when an abatement is approved by the local taxing jurisdiction. The second is when the abatement is issued. For example, an abatement might be approved in 2008. The construction may not begin until 2009, and be completed in 2010. At that point, the company may come forward and ask for its abatement to begin in 2011. Thus the abatement would be approved in 2008, but not issued until 2011. This report looks only at abatements that have been issued.
For the purposes of this report, “Northeast Kansas” is comprised of the following nine counties: Douglas, Franklin, Jefferson, Johnson, Leavenworth, Miami, Osage, Shawnee, and Wyandotte. Of these nine counties, almost 90% of all abatement activity and business establishments can be found in Douglas, Franklin, Johnson, Shawnee, and Wyandotte Counties. Thus the county analysis that follows will focus on these five jurisdictions.
Finally, this report will look at both the number and value of EDX and IRBX abatements issued. The value of the abatements is defined as the estimated construction value of the abated project as reported to the Court of Tax Appeals. This data may be incomplete for two reasons. First, there are some records that report a zero value for the project. Second, the construction value does not always match the final appraised value of the project. For these reasons, the value data will only be used as a supplement to the information on the number of abatements issued.
What This Report Does Not Say
While this report documents abatement use in Northeast Kansas, it is important to note that there are several key questions that it does not answer. For example, this data does not speak to local business conditions, such as whether it is easy or difficult to receive a tax incentive, whether there are expansion opportunities available, or whether the local labor market attracts the types of firms that would seek abatement incentives. Also, this report cannot say whether IRBX and EDX incentives are a cause of or caused by more economic growth, or whether there is any correlation at all between the issuance of incentives and additional economic growth in a local jurisdiction.
Abatement Incentives in Northeast Kansas
The nine counties in Northeast Kansas
issued a total of 540 EDX and IRBX abatements from 1990 to the end of 2008.
The number of abatements issued has been growing steadily with time. Only
about 100 abatements were issued from 1990 to 1994, averaging about 20 per
year. In each successive five year period, however, the average number of
abatements issued per year has increased. In the most recent period—2005 to
2008—there have been about 35 abatements per year issued in Northeast Kansas.
As the number of incentives issued has risen, so too has the amount of project value associated with incentives. From 1990-1994, roughly $67 million of project value received incentives each year. This increased almost four-fold in the 1995 to 1999 period. Since 2000, about $353 million of project value each year has received abatement incentives in Northeast Kansas.
Keep in mind that in the most recent period, 2005-2008, there have been about 35 abatement incentives issued each year in northeast Kansas. Thus, on average tax abatements have been issued to projects valued around $10 million. Also note that the values presented have not been adjusted for inflation. Adjusting for inflation would not affect the trend in Chart 2, but it would lower the magnitude of the change across periods.
County Comparisons
The County that has issued the most abatement incentives is Johnson County. Of the 540 abatement incentives issued since 1990, Johnson County has issued 175, or about one-third of all incentives in northeast Kansas. Johnson County has also seen the most consistent increase in abatement incentive use over
time. In the early 1990s, Johnson County was actually one of the more
“conservative” counties in terms of issuing abatements. From the mid 1990s to
the early part of this decade, Johnson County was closer to average. Since
2004, the average number of abatements issued per year has almost doubled in Johnson County, from about 10 per year earlier in the decade to over 19 per year recently.
Incentive use has also generally increased in both Wyandotte and Shawnee Counties as well. Wyandotte has not only increased its use of incentives, but has also consistently issued a high number of incentives relative to most other counties. Shawnee County has been increasing its use of incentives, although more moderately than Wyandotte or Johnson Counties. The number of incentives issued in Shawnee County appears to have fallen slightly since 2004. Franklin County has consistently issued about 3-4 abatements per year until 2005, when the number of incentives issued each year declined.
Since 1990, Douglas County has issued 56 abatements, with 47, or about 84%, of these issued in Lawrence. Many of these incentives occurred in the early 1990s, when the County issued about 5 per year. This fell to about three incentives per year in the late 1990s, and then slightly less in the early part of this decade. Since 2004, only two abatement incentives have been issued in Douglas County, both in 2005[1]. Among the five largest counties evaluated, Douglas County is the only County not to have issued an abatement incentive since 2005.
One factor that may drive the number of abatements issued in each county is the size of the business market for abatements. To control for the size of the business market, Table 1 evaluates the number of abatements issued relative to the number of business establishments in each county.
When comparing the use of abatements relative to the number of business establishments, the use of abatements in Northeast Kansas is increasing. In the early 1990s, there was one abatement issued for every 376 business establishments in Northeast Kansas. This fell to one abatement for every 316 businesses in the 2005 to 2008 time period.
Controlling for the number of establishments changes how frequently some counties appear to have issued abatements. For example, prior to 2005 Johnson County actually issued fewer abatements per establishment than average. Even in the last four years Johnson County has only modestly exceeded the average for Northeast Kansas. On the other hand, both Franklin and Wyandotte Counties have generally issued abatements at two to three times the regional average for much of the last two decades.
Douglas County was one of the more frequent users of abatements in the early 1990s, issuing one abatement for every 114 business establishments. This was more than three times the regional average. By the 2005 to 2008 time period, however, Douglas County issued incentives at a rate six times lower than surrounding counties (one incentive for every 2,033 establishments versus a Northeast Kansas average of one incentive for every 316 establishments). The rate of issuance of abatements in Douglas County has fallen in each five year period evaluated.
The changing use of abatements in Douglas County has resulted in the County making up an increasingly smaller share of abatements still in effect in Northeast Kansas.
By 1994, there were 96 abatements in Northeast Kansas on projects valued at about $300 million. Douglas County accounted for over a quarter of all these abatements. Over time, this total has fallen steadily for two reasons. First, the number of active abatements and the value of construction associated with these abatements have increased substantially in Northeast Kansas. By 2004, there were almost 270 active abatements in Northeast Kansas on projects valued at close to $3 billion. Second, as already noted the number of abatements issued in Douglas County has been falling. As a result of these two conditions, by the end of 2008 Douglas County accounted for fewer than 5% of the outstanding abatements in Northeast Kansas and just over 1% of all outstanding value. With only 12 outstanding IRB and EDX abatements, this is less than half the total active abatements in Douglas County in 1994. In contrast, the number of active abatements at the end of 2008 in Northeast Kansas was almost three times higher than the number of active abatements in 1994.
Conclusion
This report has looked at the changing use of IRBX and EDX tax abatement incentives in Northeast Kansas from 1990 to 2008. In general, the use of tax abatements has been increasing. These increases are driven chiefly by Johnson County, but despite some recent slowdown both Shawnee and Wyandotte Counties have used tax abatements more frequently as well. Even when controlling for the number of business establishments, the use of abatements appears to be generally increasing in the region.
Douglas County has issued a smaller number of abatements over time. In the early 1990s, Douglas County was one of the most frequent users of tax abatements. However, in 2005 the County issued only two abatements, and has issued none since. Douglas County now accounts for less than 5% of all outstanding abatements in Northeast Kansas.