What are tax abatements, and are Cullman residents losing money on them?

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Tax abatements encourage the location of new industries to a community, or the expansion of existing industries, such as the Reliance Worldwide Corporation distribution center built on Cullman’s southwest side in 2021. (Cullman Tribune file photo)

CULLMAN, Ala. – With the recent news of a new business coming to Cullman, and that business receiving a tax abatement as an incentive to locate here, questions have again arisen about what these abatements do, why they are offered and what they cost Cullman’s residents. The Tribune sat down with staff of the Cullman Economic Development Agency this week to find out more.

CEDA Director Dale Greer told The Tribune a few basics about abatements:

  • They offset or help offset the cost of constructing or expanding facilities that create jobs and bring more income to the community.
  • They forgive or refund a portion of certain taxes (usually property taxes) that the business or industry pays for a certain amount of time. Cullman’s standard is 10 years. After 10 years, the company must pay the tax. Even if the company asks for and gets another abatement for a new project or expansion, it must still pay the full tax on its previously abated facilities and equipment.
  • They do not take away any responsibility the company has for paying taxes that support education.
  • They are commonly used by communities across the country to compete for businesses and industries. If one community does not want to offer financial incentives, plenty more will.
  • They do not involve the City giving away to the company any money paid as taxes by residents. The abatement refunds to the company a certain amount of the taxes it has to pay. If the company does not earn enough to pay much in taxes, it does not get much abated.  If it does not meet certain standards set forth in the agreement, it sees no abatement.
  • CEDA only recommends an abatement after a study has shown that the construction or expansion will create a definite benefit to the City.

“We routinely do what we call a cost-benefit analysis,” said Greer, “saying here’s what the company is asking you for, and here’s what you get in return. Sometimes I tell the City, ‘Too much.’ I’ll say, ‘Y’all ought not do it,’ or say, ‘You do X but not as much as they’re asking for.’”

Sometimes the abatement of taxes just does not work out in the best interest of the City, so other incentives might enter the mix. Greer noted that incentives in the last several years have included road repairs and repaving around factories, along with installation of turn lanes and traffic signals, to make access to facilities easier and safer. Such incentives can benefit both the company and local residents who routinely use those roads.

As to the use of abatements and other financial incentives in the competition between communities for businesses and industries, Greer observed, “Every county and city in Alabama does it. They have the ability to do it; it’s legal. The State approved it through the legislature. It is competitive. You’re competing with other states.

“Every time a company expands here, they have options to go to other states. And they often call us and say, ‘Alright, we’ve got facilities here’ – and they’ve got facilities in five or six other states besides this – when they say, ‘We’re looking at an expansion in Cullman.’ Well, he can go to Georgia, he can go to Tennessee, he can go to Mississippi, he can go to all the other places he has, potentially. So even if it’s an existing company that you’re trying to do something with, other people are doing the same thing. And they’re calling them, they’re recruiting them, they’re trying to get them to expand or to relocate, or whatever.”

How exactly does tax abatement work?

Tax abatements involve temporary forgiveness or refund of a portion of a company’s annual tax debt, to offset the cost of that company’s investment in its local production or business activities that create jobs and boost the local economy.

Property taxes are measured in millage: one “mill” equals 1/10 of one cent.  The State of Alabama assesses property taxes at 6.5 mills, or $6.50 per $1,000 of value.  Cullman County assesses at 26 mills or $26 per $1,000, half of which is earmarked for education. The City of Cullman assesses at 38.5 mills or $38.50 per $1,000, with 20.5 earmarked for education. 

Tax abatements cannot reduce the education portion of the tax. That must be paid, regardless of other incentives. This means that on a $100,000 property, the County can abate $1,300 dollars in property taxes per year for 10 years while continuing to collect and keep $1,300 per year in taxes to be sent to schools.  On comparable property the City can abate $1,800 per year, and will collect and distribute to schools $2,500 per year on that $100,000 property.

In addition to property taxes, also known as Ad Valorem taxes, a city can abate portions of sales taxes on purchases for the construction or expansion, and equipment use taxes.

Not giving away money, but actually still making money

Tax abatements are based on the idea that an incentivized development will immediately contribute more revenue to a community than an undeveloped piece of land. Instead of giving a company money, the abatement offers the company a temporary discount on its cost of doing business, lowering the amount it has to pay. The various incentives are also given with a view toward not only tax revenue, but also to larger community impact.

CEDA pointed to Cullman Casting as an example. As an undeveloped piece of farmland, it generated around $300 per year in property taxes. In the first four years of its operation, the company enjoyed success and paid about $130,000 in education taxes.

CEDA Retail and Workforce Development Manager Susan Eller said, “You get all this education tax from that property that you didn’t have before, like hundreds of thousands of dollars, that now they can put back into the schools.  So yes, the City and the County did give up something, but we also got something in return.”

On a recent project in Cullman, the cost-benefit analysis showed that one company working on a $66 million expansion would, from that project alone (in addition to taxes it now pays on previous projects), generate over $3.5 million in education tax revenue.

In the 10-year period from the beginning of 2014 to the end of 2023, the great majority of industrial capital investment in Cullman County was in expansion of existing companies, not in new companies. In the 10 years, new companies accounted for $65,306,176 in capital investments, while existing industry expansion added up to $1,615,753,458, a difference of almost 1.6 billion dollars.  This means that most of the companies getting incentives like abatements are still paying taxes on their original facilities and equipment. 

Even with incentive discounts for various projects, 15 of the top 20 property tax payers in Cullman County are Cullman area industries or businesses. In some cases, companies that do not even operate in Cullman County are paying taxes through the companies that do. The U.S. branch of Mercedes Benz does not have a facility in Cullman County, but owns enough production line equipment housed and used at its local tier one supplier REHAU to be the county’s sixth largest property tax payer.

Eller told The Tribune, “We’re not giving away money. In this part of it, what we’re doing is they have to make money. Like we don’t take any money out of our General Fund.

“When you do an abatement, they have to generate money that they want to be incentivized. So if they don’t make it, they don’t get it. So you hope that they’re profitable, because if they’re profitable, they get their part, but the City gets money, too.” 

Greer added, “You let them keep a portion. They come in and say, ‘We’re going to do this: we’re going to  invest $10 million and we’re going to create 25 jobs, and we want some assistance. What we do is we agree to the 10-year property tax abatement. But you’re abating half of a tax that doesn’t exist (in the absence of the company or its expanded facility from the community) and then you get the education tax. So on whatever that 10 million is, we can run you a number and say, ‘Here’s what they would give back and here’s what they would get.’”

In addition to tax revenue, some of which might be temporarily abated, businesses and industries also provide a boost to local economies from day one of their operation, providing more money for new employees, spending their own money at local businesses and donating beyond taxes to local schools and charitable causes.

According to Greer, a focus on taxes “doesn’t take into consideration the number of jobs and the payroll associated with that. And then the company is sitting there and they hire a pest control company, and they hire a vending service to bring things, and they buy cars locally, and go to restaurants, and spend on these things.”

In short, the incentives offered to locate or expand a company locally tend to pay off in benefits to the company and local government, but also to local schools, churches, charities, other businesses and to members of the workforce far beyond the walls of the company’s facilities.

For more on the Cullman Economic Development Agency, visit www.cullmaneda.org.

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