Posted: 7:00 a.m. Sunday, July 6, 2014

Ohioans forego millions in tax revenues in exchange for new jobs

How a jobs deal is made

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Ohioans forego millions in tax revenues in exchange for new jobs photo
Interstate Warehousing in Hamilton is renovating its 20-year old facilities, including the parking lot. GREG LYNCH / STAFF

By Chelsey Levingston

Staff Writer

In the competition to win new jobs from businesses, tax breaks for companies cost Ohioans at least $63.1 million last year in foregone tax revenues, according to state government budget projections.

While millions in tax breaks were awarded, Ohio businesses grew payrolls by 43,100 jobs, according to state estimates.

“The benefit outweighs the cost in every instance,” Daryl Hennessy, chief of the Business Services Division for Ohio Development Services Agency, said. The state department administers and monitors incentive agreements with companies.

Incentives are necessary for Ohio to be competitive against other states with no income tax such as Florida, Tennessee and Texas, Doug Moorman, vice president of Development Strategies Group LLC, said. The Cincinnati consulting firm is hired by businesses to find and negotiate financial incentives.

And incentives like these tax credits help a company decide on Ohio as the place to bring economic impact and additional revenues — even if the company isn’t paying 100 percent of their tax bill. The state doesn’t lose any revenues to pave roads, for example, because its revenues Ohio wouldn’t get otherwise, Moorman said.

Arguments in favor of incentives are that tax credits are not the only, nor the main reason a company picks Ohio to expand or relocate. A talented workforce, geographic location and quality of life are more important factors for a company selecting a site, Moorman said.

“When you’re competing now, you’re competing not just for jobs, but you’re competing for talent around the United States and around the world,” Moorman said.

An Ohio Department of Taxation report shows that since 2012, state government is foregoing an increasing amount of money for tax credits to businesses that promise to create and retain jobs. The value of these tax incentives awarded grew from $55.7 million that year to a projected $65 million this fiscal year 2015, according to taxation department estimates.

“The overall improvement of the economy has led to more projects,” Moorman said.

“I think companies are always looking for the best deal they can get. It may be a little more acute now because of the recession and what companies endured during the recession,” he said.

The criticism against tax credits is that the largest corporations are leveraging a still-recovering economy to get bigger breaks, said Greg LeRoy, executive director of Good Jobs First, a Washington, D.C., think-tank studying economic development issues.

Ohio ranks third nationally, tied with Texas, for the number of “megadeals” awarded companies in tax subsidies, according to a 2013 report by Good Jobs First. The group identified 240 tax incentive packages that cost at least $75 million a piece over the past 35 years. Michigan has awarded 29 such deals, New York has done 23, and Ohio and Texas have done 12 each.

It was also found that since 2008, the average frequency of these “megadeals” per year doubled compared to the previous decade.

“There’s no way to prove or disprove the idea that the company is making this investment because of the tax credits,” LeRoy said.

Economic development is so competitive that one local expert compared it with going to war.

Tax credits, low-cost loans, grants and other incentives offered by state and local governments to companies are among the weapons in their arsenals to win a business project over.

“You can’t unilaterally disarm because new jobs and new tax revenues to the local community are so important if you don’t participate and you don’t offer these kinds of things, there are hundreds of communities across the country that are willing to participate,” David Smith, a member of the Ohio Tax Credit Authority, said.

The authority, an independent body of appointed business and government leaders, votes whether or not to approve state-funded job creation and retention incentives offered to companies.

It’s hard to determine if taxpayers get the best deal, sort of like buying a new car, said Smith, also an executive with Duke Energy. With negotiations, putting a lower offer on the table may win or lose versus another state competing for the same business deal. If development agencies lose the project, they would question if they should have offered more, Smith said.

“With a performance-based incentive like a tax credit, taxpayers aren’t giving up anything. They’re really deferring a collection of a tax to some point in the future,” Smith said.

How it works

Job creators are expected to claim $63.1 million in state job creation and retention tax credits and credits for research and development costs during the budget year that ended June 30. Credits are claimed against their Commercial Activity Tax bill.

It is not the same as saying Ohio would collect $63.1 million if the companies did not receive the tax credits, because in that case, it’s unknown whether the business project would generate the same tax revenues.

Also, the $63.1 million is just the state budget impact. Local governments often give companies additional incentives in the form of low-cost loans, property tax abatements, earnings tax credits and other incentives. There’s no statewide estimate for that amount.

To be eligible for state-level tax credits, projects must add a minimum of $660,000 a year in new payroll to Ohio; be economically sound; and tax credits must be a major factor in a company’s decision to move forward with a proposed project in the state, Hennessy, of Ohio Development Services Agency, said. Other factors considered include the level of return on investment for Ohio from the project’s job creation and investment.

The terms — percentage level and length (years) — of an incentive deal are determined by the number of jobs to be created, jobs retained, wages, capital investment, location, local incentives, and other factors.

Typically retail, restaurants and health providers do not qualify.

When the state awards a tax credit or other financial assistance to a company, officials are looking for companies to generate a return on the public investment by adding payroll and investing money in land, buildings and equipment. Hopes are new employees will spend money on coffee, houses and cars that generate more sales tax revenues.

“Sometimes the return does not warrant the level of state assistance,” Hennessy said.

Credits can only be used if jobs are actually created, according to Ohio Development Services Agency.

If the full projected commitments aren’t reached after a three-year hiring period, companies still receive tax credits for jobs created, but the terms might be modified to reduce their tax benefits.

If a company ceases operations during the time period of its agreement, any tax credits claimed could be clawed back. Companies can also overperform, and create more jobs than they’re required to by tax agreements.

Once Ohio approves an offer to a company, the offer is the same no matter where the company locates within the state, also according to the state development services department.

Competition with other states and countries for securing a business expansion site is a major factor in determining if a company is eligible for a credit and in setting the credit amount, Hennessy said.

However, the majority of projects that receive state and local incentives, including in the Cincinnati region, are relocations and expansions of existing businesses.

“We’re not just trying to attract new companies, but we are trying to attract new incremental growth in jobs or new capital investment,” said Johnna Reeder, president and chief executive officer of REDI Cincinnati, a private nonprofit responsible for leading the 15-county Cincinnati area’s job creation activities.

No project is the same, Reeder said.

“We go out and find the projects that are looking to relocate or existing companies looking to expand in place,” Reeder said. “It’s up to the local community to decide what they’re willing to do to close the deal.”

Any city government will consider the overall economic impact that would come from providing financial assistance to an expanding company, said Jody Gunderson, economic development director of Hamilton.

“Ultimately you’re talking about employing residents, you’re talking about their involvement in community organizations, and the company and employees as a consumer of local goods and services,” Gunderson said. “There’s a multiplier you always have to take into consideration when assisting a company to expand.”

The payoff takes a long-term view, said Steve Tippmann, executive vice president of Interstate Warehousing. The Fort Wayne, Ind.-based company announced plans earlier in 2014 to spend $3.1 million to upgrade their 20-year-old Hamilton cold storage facility and create 25 new jobs.

The same company also completed a $14 million expansion of its Hamilton warehouse in 2011.

For the most recent renovation project, the Ohio Tax Credit Authority approved a 40 percent, seven-year tax credit for Interstate Warehousing in exchange for the project creating $900,000 in new annual payroll. Credits are valued at $219,074 over the life of the agreement. The tax credit deal requires the company to maintain operations in Hamilton for at least 10 years.

“We have facilities in seven states and we look pretty hard at the whole package. Different states offer different incentives,” Tippmann said. “We really look at the total cost and it includes labor, utility, taxes, insurance, capital costs over a 10-year run when we’re selecting where we’re going to put our additional investments.”

Freezer storage rates charged to customers have decreased at least 20 percent the last 10 years across the industry, yet utility costs have risen 50 percent for Interstate over the same time period, Tippmann said.

“It would have significantly changed the project without the incentive package,” Tippmann said.

The dealmakers

A private, nonprofit agency — JobsOhio, which was established by Ohio Gov. John Kasich’s administration in 2011 — negotiates with taxpayer money on deals with companies.

The private JobsOhio replaced economic development activities of the public Ohio Department of Development, since renamed Ohio Development Services Agency.

JobsOhio leads efforts to recruit companies to Ohio, and sometimes leads negotiations on tax and other financial incentives with prospective companies. Any incentives negotiated are recommended for approval to Ohio Development Services Agency, which reviews it. Then Ohio Tax Credit Authority votes on it.

JobsOhio and Ohio Development Services Agency meet regularly to discuss ongoing projects, said Thomas Seward, project manager for JobsOhio.

Moreover, JobsOhio has a revenue stream from which it can offer its own financial aid to companies. The development organization signed in 2013 a 25-year lease, paying $1.4 billion for the rights to Ohio’s wholesale liquor profits.

“At the end of the day a negotiation isn’t worth very much if the tax credit authority doesn’t approve it,” Seward said. “It’s our job to put together a package that wins jobs for Ohio but that maintains a strong return for the state.”

Six regional JobsOhio Network Partners, which are private development agencies such as REDI Cincinnati and Dayton Development Coalition, were also named in 2011 to act as liaisons between local governments and JobsOhio statewide.

Local governments are not required to match tax credits approved by Ohio Tax Credit Authority, but are encouraged to do so in partnership with the state if resources are available, Hennessy, of development services, said.

Some companies receive local incentives, but not state-level incentives. County, city, village and township governments, depending on their relationship with the company, might also take a lead in negotiating a deal with business.


MORE ONLINE

Find out which Cincinnati-area companies have received financial incentives since 2012 online only at www.journal-news.com

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