Virtual Panel Examines ‘Tax Incentives: Promises Made, Promises Broken’

YOUNGSTOWN, Ohio — Two City Council members acknowledge the old way of stimulating economic development — tax abatements — hasn’t always worked.

During a virtual panel discussion June 24, First Ward Councilman Julius Oliver and Seventh Ward Councilwoman Basia Adamczak defended some of the incentives awarded in recent years, but acknowledged that companies not living up to their end of the bargain must be held accountable.

The virtual panel — “Tax Incentives: Promises Made, Promises Broken” — was hosted by The Business Journal in partnership with the ProPublica Local Reporting Network, which is examining the use of tax incentives in the Mahoning Valley. Co-sponsors were The City Club of the Mahoning Valley and WKSU.

Adamczak and Oliver were joined by Business Journal reporter Dan O’Brien and Greg LeRoy, executive director of Good Jobs First, a Washington D.C.-based nonprofit that focuses on government and corporate accountability. Michael Mishak, ProPublica senior editor moderated the panel.

In the series of articles, O’Brien worked with ProPublica to investigate area businesses that have fallen short of their promised milestones, particularly the Chill-Can project, which received a $1.5 million grant to develop a site on the city’s east side, while the city spent $360,000 to purchase and demolish homes of about a dozen residents who lived within the project’s footprint.

What the investigation uncovered was about half of the companies engaged in the enterprise zone program, which the city has operated since the 1980s, failed to create the number of jobs they promised, O’Brien said.

“About a fourth of them created no jobs at all,” he noted.

While Adamczak acknowledged instances where development projects that received tax breaks and other financial assistance “didn’t happen exactly as we were hoping to,” she said the series dismissed the “tremendous financial benefit that we were able to see” from other projects.

For instance, the city converted more than 500 acres of abandoned brownfield sites and developed three business parks that “substantially contributed to the tax base of the city” with income and real estate taxes, Adamczak said. The land is worth about $5,000 per acre in the city, generating about $55,805 annually in tax revenue.

“That generated tax is never abated,” she said. “Although we are giving some type of tax abatements and incentives to these companies, it is still generating more revenue had we had not given these tax abatements.”

At the Salt Springs Road Business Park, the city has been able to increase the land value there by 462%, she said. Similarly, the property at Performance Place increased by 219%, and Ohio Works was improved by about 58%. “And that is just for the value of land,” she said, as the income tax for those parks generates millions annually.

Nevertheless, tax abatement criteria such as hiring a certain number of city residents isn’t always met.

When he took his council seat in January 2016, Oliver was appointed to the Tax Incentive Review Council under the administration of then-Mayor John McNally. The committee regulates the companies that receive tax abatements and determines which will continue to receive benefits.

What he found is that “year after year for decades,” the city had been giving out abatements but the companies weren’t living up to their promises. To address the situation, Oliver organized quarterly reviews of the companies in lieu of annual reviews and has put the wheels in motion to start holding companies accountable.

“You’re rewarding these companies that are taking advantage of the city, taking advantage of the citizens,” Oliver said, “and basically pushing our city into more and more poverty by hiring outside the city; not hiring Blacks, not hiring women and not hiring city residents. All you’re telling these companies is it’s OK to screw us over.”

Since then, the city has revoked abatements from two companies, “but there are more on the radar right now that continue to take advantage,” he said.

In an email request for clarification, the city’s director of economic development, T. Sharon Woodberry, confirmed the Tax Incentive Review Council only voted to revoke incentives for Rudick Forensic Engineering. Action taken was to terminate the remaining period of the abatement, she said.

In 2009, Rudick received a 10-year, 75% abatement of property taxes to assist the company with the renovation of a warehouse it occupied at the rear of its property at 855 Tod Ave.

At the council’s next meeting on July 14, Oliver said members will likely discuss other companies that are in line to have their abatements revoked.

With regard to the Chill-Can project, Oliver said it initially seemed like a good opportunity. While there are always risks with providing financial incentives to a company, he said the decision wasn’t difficult to make considering the company is promising to create hundreds of jobs and build its headquarters in the city.

“Like any business venture, you go into it thinking about the risk, but without taking those risks you never get the reward,” Oliver said.

While Oliver continues to be optimistic about the project, where it currently stands is “an unfortunate situation,” he said. The company has begun erecting its third building on the site, “which doesn’t say a lot” because it’s supposed to be manufacturing product at this point, he said.

Oliver said he is working with Woodberry to put together different deals when it comes to tax abatements. One idea is for companies that can’t hire as they promised but are still saving millions of dollars in taxes to redirect that money back into the city, either with the schools or infrastructure investments.

LeRoy suggested a performance-based incentive structure, in which the incentive is back-loaded so the company doesn’t see the incentive until it makes good on its end of the deal.

“The most important safeguard is is making sure that you don’t structure the program so that it’s just a gimme,” LeRoy said. “That’s the big problem with most incentive programs now is that, over time, they have just kind of turned into political pork.”

And they rarely matter to the company’s bottom line, he said. In the cost structure of the average U.S. company, all state and local taxes combined – property, sales and income taxes – account for about 1.8% of costs. The other 98.2% are the “business basics” that drive decisions to relocate or expand, such as labor, occupancy, raw materials, proximity to customers and suppliers, quality of life, school systems and transportation infrastructure.

“Tax incentives almost never determine where companies expand or relocate,” he said. “They don’t, because they can’t. Because they’re too small.”

As such, elected officials should spend most of their time focusing on protecting the public goods that benefit all employers and make their cities competitive, LeRoy said.

When the city receives preliminary information from a company seeking a tax abatement, if the economic development department believes it to be a viable project, it will go to the mayor’s office for approval. From there, the Youngstown City School District board has 14 days to review the information and discuss the pros and cons. If the board approves it, the proposal goes to city council for a vote.

If a company isn’t meeting its hiring requirements, a frequent reason cited is unavailability of skilled workers, Adamczak said. To address that issue, the city looks to hold an open house and invite residents from Youngstown and surrounding areas to register their skills, she said. The list would then be provided to any company that can’t find local workers to fill the jobs as specified in an incentive agreement.

While the city can’t tell companies who to hire or where to hire people from, there are ways to improve the hiring of local residents, particularly minorities, LeRoy said. The first is to create a local hiring preference in the incentive program that allows businesses to qualify for job assistance through a local hiring program tied to the incentive.

The second solution is to redirect money away from property tax abatements to a customized training program to improve the marginal skills of residents so they can better compete against out-of-town workers for the available jobs.

“That would be a much better bang for your buck than giving automatic property tax abatements, and much more cost-effective,” LeRoy said. “And even if those people don’t end up keeping those jobs for a long period of time, they’re going to keep those skills, so you don’t lose your investment.”

Whatever path the city chooses, it needs to have the political will to enforce the agreements, The Business Journal’s O’Brien commented. One of the major points that the series uncovered was that despite the companies falling short on stated goals, the city in the past “hadn’t taken that initiative to really hold them accountable,” he said.

“You can have all the language you want in there, but you need to enforce it,” O’Brien said.

“It comes down to people actually doing their job,” Oliver agreed. “If your job is to keep track of the compliance of these companies and you’re basically just not doing that … the companies are going to automatically think ‘Well, it’s OK because nobody’s checking us.’ ”

Pictured: Two buildings constructed in 2017 have yet to begin production of the patented Chill-Can. Photo: Maddie McGarvey for ProPublica.

Copyright 2020 The Business Journal, Youngstown, Ohio.