I Take Your Bank Before I Pay You Out
By now, it’s old news that state and local governments awarded IBM a $31 million incentive package to persuade the company to build a service center in Columbia, Mo. What’s astounding, though, is the following headline in the Columbia Missourian:
In the article, reporter Molly Harbarger writes that at a press conference, Columbia’s mayor claimed that the new service center could bring in an additional $4.3 million in tax revenue for the Columbia Public School District during the next decade. District Superintendent Chris Belcher said that would amount to about $400,000 of extra income for the district per year.
Yet the school district, the city, and the state are forgoing large amounts of tax revenue to bring IBM to Columbia — that’s what this $31 million incentive package represents. To say that the school district will see its property tax revenues increase as a result of this project is, at the very least, to rely on uncertain and disputed methods to calculate the economic benefit of a new development.
As research analyst Christine Harbin wrote on Monday, the total $31 million price tag is actually an understatement of all the incentives awarded to IBM. Because the city owns the property where IBM will locate its service center (and will be leasing it to IBM for only $1 per year), the company will not have to pay property taxes on that property. In Harbin’s words, “this is a bigger subsidy than the $3 million the city paid for the building.” Furthermore, she noted, the $31 million does not include the sales tax exemption on personal property or the 50-percent property tax abatement on personal property awarded by Boone County.
So, at this point, there is no additional money going to the school district. After all, the city owns the building in which IBM will locate. Because the city will be leasing the property to IBM for the next 10 years, any improvements to the building will not bring additional tax revenue to the school district. In fact, it is a likely bet that some other company would have bought that building in the future, which means that the school district is not simply forgoing additional tax revenues, it is also missing out on the future property tax revenues that another, unsubsidized, company would have paid.
So, where exactly did the projected $431,000 in additional revenues for the district come from? The Missourian article doesn’t say. A quick search of Columbia’s website reveals a presentation from Regional Economic Development, Inc., about the purported benefits of the project, including the $431,000 figure — but no supporting research or background about how REDI came to that number is included.
In fact, as the Columbia Tribune reported, some government officials have suggested that the approval process for the IBM service center was less than transparent. Former city council member Karl Skala told Tribune reporter Jodi Jackson that “he was critical of Regional Economic Development Inc. for not providing more information to the Columbia City Council earlier in the economic recruitment process.”
I am skeptical of the claims made by Columbia’s mayor and district superintendent about the increase in property tax revenues. If nothing else, the school district cannot expect those benefits to accrue immediately. Had IBM itself paid for the building, the school district would have seen an immediate increase in its property tax revenues, to the tune of about $47,000.* Instead, the district appears to be banking on revenues that have yet to materialize — and probably won’t for a number of years, if at all.
In fact, most subsidized projects such as this fail to deliver on the promised economic activity. The Mackinac Center for Public Policy, a nonprofit think tank in Michigan, reported, after conducting an extensive survey and review of Michigan’s tax credits, that of 127 incentive packages awarded by the state, only 10 actually created the number of jobs initially promised within the expected time frame. That comes to less than 8 percent of projects that actually delivered the total number of jobs that had initially been pledged.
If projects supported by tax credits do such a poor job of delivering on job creation, we can likely expect similar errors to be made in the estimates of increased property tax revenue. There is a good chance that neither a total of 800 new jobs nor the additional tax revenue will come to fruition.
In short, the claimed future benefits of this project are promises, and nothing more.
* The $47,000 figure is based on the price that Columbia paid for the property. The purchase price of a property is not a perfect estimate of the appraised value of a piece of commercial property, but it is a good place to start.