Like many local governments do, the Washington County Commission offered tax incentives to help lure Bush Hog to Telford at the beginning of the decade. Since completing its 330,000-square-foot building in 2002, Bush Hog has paid less than full property tax, and less than full tax for its equipment, through the “Payment in Lieu of Tax” (PILOT) program.
“The parameters of the deal were struck mainly, I suppose, by the mayor (Washington County Mayor George Jaynes) and the director of economic development (P.C. Snapp),” Washington County Attorney John Rambo said Tuesday.
Many more recent PILOT agreements include employment and operational benchmarks to make it more difficult for a company to wring concessions out of a community without producing promised jobs, but the Bush Hog agreement included no such clauses.
“I think everyone recognized that was a risk, but that was part of what Bush Hog wanted,” said Rambo, who was county attorney when the agreement was reached. “Because companies have closed before the PILOT programs ended, a lot of governments have taken a look at making that part of their incentive (tax abatement) — meeting job creation requirements.”
Fred Mackara, an economist at East Tennessee State University, said offering tax breaks and other incentives has become routine to the point that few localities can successfully attract business and industry without using such tools.
“Once you get that ball rolling it’s pretty darn hard to stop on your own, unless somebody was to say, okay, everybody stop doing this now,” Mackara said.
He said such incentives aren’t a bad thing in and of themselves.
“It provides employment, it attracts other businesses in to do the same thing without the same kind of incentives, and it can be a net positive for a community,” Mackara said. “They can be carried too far, though, and you reach the law of diminishing returns. It almost is something that becomes a real competitive battle as to who can offer the biggest and most attractive perks.”
In Tennessee, to qualify for PILOT, a company that constructs and outfits a facility must allow the county’s industrial board to maintain title to the property during the tax incentive period. This ownership by the industrial board leaves the property tax exempt, and the board then “rents” the property back to the company for a percentage of what the property tax would have been.
In the case of Bush Hog, which has an agreement running from 2001-2013, the PILOT amount was $0 in 2002, 2003 and 2004. When the county appraised Bush Hog’s building and property in 2004, the value totaled a bit over $8.4 million, so the company probably saved at least $150,000 the first three years.
At the 2005 tax rate of $1.87 per $100 of assessed value, Bush Hog’s 2005 property tax would have amounted to $63,110, but the company paid a PILOT amounting to 10 percent of that, or $6,311 — a savings of $56,799.
Each year since, the amount paid has risen by 10 percent, so that last October the amount due totaled 40 percent of property taxes that, at a rate of $2.45, would have been $82,684. So as the company saw its production plunge amid the recession and prepared for layoffs, it paid $33,073 in lieu of property taxes — still a savings of $49,610.
Along with getting a property tax break, Bush Hog’s agreement gives it a break on “personal property” tax, which is based on the value of the factory’s capital equipment, another incentive that has amounted to thousands of dollars in savings since 2002.
This fall, if no one else has bought the Bush Hog plant, Bush Hog owner Crown Industries will pay 50 percent of its property tax through PILOT.
The latest reassessment put the property’s value at $12.1 million, and the normal commercial property tax would be $118,560.
Bush Hog is working hard to sell the property, and if it fails local officials will pick up the effort. But conceivably, Bush Hog’s owners could get more than $150,000 in additional property tax breaks over the next five years before the title reverts to them in 2014.
Situations like this have caused many communities to reassess how they approach tax incentives, Rambo said. In the same industrial park, for instance, auto parts manufacturers Koyo and Nakatetsu have PILOT agreements that give the county more leverage.
“A lot of the local governments, what they are willing to offer industry is contingent on them meeting certain employment and operational requirements,” said Rambo. “The trends are toward local governments wanting commitments that they will operate their business and hire folks. And if they don’t, they have to pay their full taxes.”
ETSU’s Mackara said governments don’t have a lot of money to be tossing out incentives these days, but that doesn’t mean they’ll go away.
“The question with regard to incentives might be ‘What kind of businesses do we want to attract?’” Mackara said.
“We have had in this region an over-concentration of manufacturing as the national economy has shifted much more quickly to a service-based economy.
“Johnson City and the Tri-Cities is uniquely positioned, I think, with a nice combination of colleges of medicine, pharmacy, public health and nursing that could give us an advantage in attracting a lot of higher-paying service jobs. I think the trick is to figure out what the proper balance is in our recruiting.”