Real and personal property tax incentives: the often-overlooked tax benefits.

There is currently much competition among states for in-bound corporate economic development opportunities. Admittedly, tax and other financial incentives usually are not the primary reasons a business decides to expand in or relocate to a particular location. The availability of an educated workforce, access to transportation and distribution networks, and other business considerations take precedence over the availability of tax breaks. All other factors being equal, however, the amount of economic assistance state and local governments are willing to provide to the business may determine final site selection.

While states are quick to tout the availability of income tax credit incentive programs, states do not always advertise the availability of local real and personal property tax abatements, exemptions, or other property tax relief. As a result, an expanding business might overlook property tax incentives in its site selection analysis. More important, property tax incentives might prove more lucrative than income tax credits, because the vast majority of state-sponsored income tax credit programs do not provide guaranteed benefits. Income tax credit programs can be riddled with limitations preventing otherwise qualifying businesses from utilizing earned credits. The most common limitation is that tax credits may only offset income tax liabilities generated at the new location. Some of the income tax credit programs are "use it or lose it"; to the extent that the business cannot utilize all or part of the income tax credits for the year earned, the business loses the benefit. Most income tax credit programs mitigate this hazard by providing carryforward periods to permit the business to utilize unused credits in future years, but very few income tax credit programs guarantee such utilization by refunding unused credits or permitting the businesses to sell unused credits to other taxpayers. (1) If the new business owes little or no income tax during the credit program's award year or carryforward period, the business stands to lose some or all of the economic benefit that the state has promised. Once a business has been granted real and personal property tax incentives, however, almost all incentives will directly offset property tax expenses that the business would otherwise have to pay, regardless of whether the business ever makes a taxable profit. Thus, if a business receives a property tax abatement or other reduction in its property tax liability, the business will actually receive the benefits that the government has promised.

More states are permitting local governments to offer property tax incentives as an inducement to businesses to restore historic properties or move to or expand within their boundaries. By the end of 2001, more than half of the states permitted local governments to provide property tax relief for the restoration of historic properties or permitted real or personal property tax incentives to expand within their boundaries.

In spite of the increasing availability of expansion-related property tax incentives, state income tax credit programs continue to get most of the attention. Economic development agencies in many states go to great lengths to advertise and promote the availability of their income tax credit programs. States have political reasons for not advertising property tax incentives because those programs are generally administered at the local level and states may not want to get in the middle of competition for the new business among their own local governments.

In addition, many state and local governments have pressing financial reasons to keep property tax incentives in the closet. Income tax credits are really not expensive from the states' standpoint because there is a chance that the business will not be able to utilize all of the credits and, even if all the credits are utilized, the lost income tax revenues will be more than offset by the other types of state taxes that the new businesses will pay. A temporary, one-time decrease in a state's corporate income tax revenues over a short period of years will be more than replaced in the long run by permanent increases in state withholding taxes, sales and use taxes, future income taxes, and other business taxes that the business will pay. By contrast, most property tax benefits are granted at the local level in the form of longer-term tax abatements, exemptions or other tax reductions that the new business would otherwise have to pay. Unlike the states, counties and cities have very few alternatives to recoup lost property tax revenue. As a result, state and local governments may not want to publicize the availability of these incentives to new and expanding businesses unless the incentives are absolutely necessary to attract the new businesses into the area.

This article shines much-needed light on the types of real and personal property tax incentives that may be available to new or expanding businesses. After identifying the different types of property tax incentives that businesses should seek, the article outlines common traps to avoid in negotiating these property tax incentives during the site selection process.

Types of Property Tax Incentives--Preliminary Considerations

1. Low Property Tax Rates

Because state and local governments offer property tax incentives in many different forms, it can be difficult to determine which local government is offering the best deal. To make a valid comparison, the business should compute each site finalist's property tax, net of the incentives offered. For instance, assume that two cities are competing for an industrial expansion. City A offers the new business a 50-percent property tax abatement for 20 years and City B offers no property tax incentives whatsoever. Is this too easy? Not so fast. Although a 50-percent tax abatement for 20 years sounds terrific, it might not be a good deal if City B's overall property tax rate is less than 50 percent of City A's tax bill, net of City A's incentives. (2) In this example, the added benefit is that the new business will not have to go through the tax abatement/exemption application process to receive the lowest property tax expense in City B. Now that is an incentive!

2. Percentage Reductions vs. Negotiated Benefits

Many real and personal property tax incentives take the form of either a low assessment percentage or an absolute abatement of all or part of the property, generally for a fixed period of years. Sometimes the incentive will be a statutory right applicable to all property within a particular classification and often the business must negotiate both the amount of the incentives and the number of years that the property will qualify for the benefit. With respect to negotiated benefits, care should be taken to avoid fixed dollar reductions in actual tax liability. If the reduction takes the form of a reduced percentage of the assessed value or the tax rate, businesses will receive proportionate additional reductions if the local government raises the tax rates in future years. In contrast, if the business negotiates a fixed dollar reduction per year in the business's total property tax liability, there is nothing to stop the local government from increasing the tax rate so that in subsequent years, the taxpayer pays more property taxes than originally anticipated!

Types of Property Tax Incentives

1. Property Tax Incentives for Historic Preservation 

Many businesses are choosing to relocate or expand into renovated, historic buildings. The governmental justification for providing special tax relief for the rehabilitation of historically significant structures is that local governments have an interest in preserving structures representing important periods or events in their heritage. Unfortunately, it is generally easier and cheaper for a business to demolish an old building and erect a new one than it is to refurbish the old one in accordance with established historic standards. In order to supplement federal and states' income tax credit programs for the rehabilitation of qualifying historic structures, (3) at least 31 states now offer supplemental real property tax relief for historic structures. (4)

Historic property tax relief programs range from statewide programs to benefits that are only offered if the relevant local government decides to grant them. Most, but not all, of these programs require the developer to adhere to the federal rehabilitation standards published by the U.S. Secretary of the Interior. Other jurisdictions require the developer to use renovation standards that are based on local determinations of historic merit and/or the age of the property being renovated.

The most common type of historic property tax incentive is an abatement or exemption for the value of all improvements made to the structure. More than one third of the states' historic programs "freeze" the assessed value of the historic property at its pre-rehabilitated value for a period of time ranging from as low as 4 years (Iowa) to as long as 15 years (Tennessee). Others provide an abatement for only a portion of the rehabilitation expenditures (e.g., California and North Carolina abate only 50 percent of the improvements). Some of the states provide graduated "phase-in" periods at the end of the abatement periods to lessen the burden of the historic property's being eventually subject to tax on its full-assessed value. Other states provide a statutory preferential assessment percentage for qualifying historic properties. For example, Alabama provides a 10-percent assessment ratio for historic properties compared with South Carolina's 60-percent assessment rate for commercial properties.

Caution: Remember the warning about computing tax liabilities net of benefits. Alabama's permanent 10-percent assessment ratio may produce better overall results than some of the other states' provisions providing for a 100-percent abatement for all of the rehabilitation expenditures over a fixed number of years. (5)

2. Property Tax Inducements for New or Expanding Businesses

At least 36 states (6) permit cities and counties to offer either real or personal property tax relief for new businesses that expand or relocate within their boundaries. Normally, these incentives are tied to particular types of businesses that the cities and counties wish to attract, such as manufacturing and other industrial plants that normally generate high employment and high capital spending. Some of these property tax incentives are tied to increased employment, not unlike their income tax counterparts. Although some of these

benefits are provided in the form of abatements or exemptions that must have the approval of local officials, others are in the form of more user-friendly fixed or favorable statutory assessment percentages. The following briefly summarizes examples of local property tax incentives that are geared toward business expansions.

a. Statewide Abatement/Exemption Programs for Expanding Businesses. Some tax abatement programs for new and expanding businesses are offered on a statewide basis for qualifying taxpayers with qualifying projects, that is, the business can be eligible for the benefits, regardless of where it relocates within a particular state. Some examples of states that offer such statewide programs are Alabama, Florida, Iowa, Louisiana, and Mississippi.

* Alabama offers several statewide real and personal property tax abatement programs to encourage new investment and employment throughout the state. Under the New Industry Property Act, (7) taxpayers planning industrial expansions or research enterprises can qualify for an abatement of up to 100 percent of the non-school taxes that would have been assessed on the project's real and personal property for up to 10 years.

* Florida's Economic Development Exemption (8) is available to any municipal government that obtains the necessary approval to offer qualifying manufacturing or industrial businesses that create at least 10 new full time jobs in the new or expanded locations. Other types of businesses can also qualify for this 10-year exemption if they meet higher employment requirements and otherwise satisfy the statutory requirements.

* Iowa's New Jobs and Income Act (9) permits local communities to negotiate up to 100 percent of the value of the property that is directly related to the activity that created the new jobs.

* Louisiana's constitution authorizes the Louisiana Board of Commerce and Industry and its Governor to negotiate property tax exemptions for five-year renewable periods for new or expanding manufacturing facilities. (10)

* Mississippi's New Industrial Enterprise Exemption (11) permits its local governments to obtain permission from the State Tax Commission to offer up to 10-year exemptions from certain types of property taxes (other than state-mandated or school-related) for personal property used in new warehouses, distribution centers, manufacturers, research facilities, corporate headquarters, and other specifically enumerated businesses.

b. Abatement/Exemptions for Businesses that Locate in Targeted Areas. Some states permit local governments to offer benefits to expanding businesses, if those businesses locate their facilities in targeted or blighted areas. Many of the property tax incentives complement state enterprise zone programs that provide income tax credits and other incentives for businesses that create jobs and make investments in specifically designated blighted areas.

* Indiana's Economic Revitalization Zone Program (12) permits its local governments to authorize deductions, for up to 10 years, for construction, manufacturing equipment, research and development equipment, and other items included in projects that are located in "distressed economic revitalization areas."

* Michigan has two such programs, the Enterprise Zone Act (13) and its Renaissance Zone Act, (14) that provide real and personal property tax exemptions for 10 and 15 years, respectively.

* Connecticut similarly provides a 5-year, 50-percent real property tax exemption for eligible urban reinvestment projects, (15) effective as of July 1, 2000.

c. Abatements/Exemptions for Acquiring Corporations--Qualifying As New Employers. Sometimes purchasers of existing facilities can qualify for property tax incentives for new and expanded businesses if the purchasers can prove they are actually new businesses. One taxpayer was able to convince Mississippi authorities that its retooling of an old factory and the hiring of all the former business's employees qualified as a new operation for purposes of qualifying for Mississippi's local property tax abatement program. (16)

d. Abatement/Exemptions to Keep Employers from Moving Elsewhere. While most property tax incentives are offered as an inducement for existing businesses to expand in the jurisdiction or for new businesses to move into it, sometimes an existing business may be able to negotiate those same incentives by just agreeing not to move the business. This is becoming a much more significant issue in our troubled economy and, in fact, states are actually courting companies that have announced plant closings by offering them tax incentives, including property tax relief. (17) Although a major risk is that such a grant of benefits would be an illegal private use of public funds, at least one state court has ruled that certain incentives, including property tax exemptions, granted to induce a large company to remain in Ohio did not violate Ohio's constitution. (18) Because many of the property tax benefits are negotiated between the business and the local jurisdiction, a business that is considering consolidating its operations into fewer plants should approach each of the jurisdictions in which it could either close or grow a plant to determine whether those jurisdictions would offer the business more incentives to keep the plant open. (19)

3. Favorable Assessment Percentages Provided By Statute for Targeted Property

Some jurisdictions grant selected businesses a favorable assessment rate as a percentage of the new real or personal property's fair market value. The absence of complicated pre-application processes generally ensures that the taxpayer actually receives the benefit the state has promised. Sometimes, the preferential assessment percentage is far greater than the amount the taxpayer would have received under another state's abatement scheme.

* Arizona provides an extremely low assessment ratio of 5 percent of the fair market value of "Category 6" property, including: Foreign Trade Zone Property, Military Reuse Zone Property (Williams Air Force Base), Enterprise Zone Property and Qualified Environmental Technology Manufacturing, Producing, or Processing Facilities. (20) Arizona also classifies historic property as either "Class 7" or "Class 8" property, both of which receive a favorable assessment ratio based on a formula that gradually increases over a 10-year period. (21)

* Cook County, Illinois, (the City of Chicago) provides favorable assessment rates of 16 percent for renewable 10-year periods to numerous categories of business property as a matter of right. (22)

4. Statutory Exemptions for Manufacturing Equipment

Some states provide absolute or partial property tax exemptions for certain categories of property, such as new manufacturing equipment, which are also a matter of right. Some examples of states that provide total or partial property tax exemptions for manufacturing equipment include Connecticut, (23) Iowa, (24) Maryland (25) and Rhode Island. (26)

Caution: There is much litigation over what constitutes "manufacturing" for purposes of these statutes, and the states strictly construe exemption statutes against the taxpayers. To complicate matters, what constitutes manufacturing in one state might not constitute manufacturing in another. A Kentucky circuit court recently held that limestone quarrying equipment did not constitute manufacturing equipment for purposes of its exemption. (27) Contrast that to Maryland, where the Maryland Tax Court held that quarrying equipment does constitute manufacturing equipment for purposes of its exemption. (28)

5. Dollar-for-Dollar Offsets for Remediation Costs

Some states are beginning to offer property tax relief for renovating property that is contaminated with hazardous waste, often called "Brownfields." For instance, Arizona's new "Tax Compromise" permits taxpayers to offset property taxes, penalties and interest by the amount of expenses necessary to remediate the Brownfields. (29) New York courts have held that taxpayers may deduct the actual cost to remediate environmental contamination from the value of the property. (30) Pennsylvania addresses the Brownfield issue by dropping the assessed value of a Brownfield to zero. (31)

6. State Income Tax Credits for Property Taxes Paid

These programs are rare, but can provide a sneaky way for a jurisdiction to potentially deny a business the property tax benefit it has promised. Under these schemes, the business must pay the property taxes and then receive a credit on its state income taxes (i.e., if it has any). An example of this property tax benefit is found in Arizona, where defense contractors may claim credits against their Arizona corporate income taxes for their real and property taxes. Arizona at least provides a carryforward provision so that unused credits are not automatically lost. The carryforward provision was recently extended until December 31, 2011. (32)

7. Sale/Leaseback Arrangements

These techniques utilize the local government's status as a tax-exempt entity to effect the abatement. The qualified business generally sells or deeds the manufacturing or industrial plant to the city or county, and the city or county leases it back to the business. Because the local government "owns the property," the property is not subject to tax. To mitigate the effect of a total abatement, the businesses must sometimes make grant payments, or payments in lieu of taxes, to the jurisdiction.

An example of this sale-leaseback technique is authorized by Missouri's procedures for "Chapter 100 Bond Financing." (33) Under Chapter 100 Bond Financing, Missouri's cities and counties are authorized to issue taxable or tax-exempt industrial revenue bonds to finance economic development and other projects. Although Chapter 100 provisions lay dormant on the law books for many years, large industrial companies are starting to use them to effect lucrative, long-term real and personal property tax abatements in Missouri. The following briefly summarizes the steps necessary to implement a Chapter 100 Bond Financing:

* The county or city (County) issues the bonds and uses the proceeds to finance the construction of the facility. The company acquires the land and conveys it to the County. The company serves as the contractor that the County hires to build, operate, and maintain the facility.

* The company purchases the bonds and pays the proceeds to the Trustee of the Bond Indenture. The company pays for the costs and expenses related to the bond issuance, which is payable out of the bond proceeds.

* The county and the company execute a lease and a "grant agreement" (or fixed payments in lieu of the property taxes) for the benefit of the County and other interested parties (the schools and other taxing districts). Other interested parties also agree to the terms and conditions of the donation.

* The County directs the Trustee to make payments to the company, as contractor, to construct the facility. The company has total discretion and control over the construction, operation, and maintenance of the facility. The company makes lease payments (equal to the bond debt service plus expenses) to the Trustee, as assignee for the County.

* The Trustee uses the proceeds from the lease payments to make the debt services payments to the company.

* The company makes the scheduled donations to the County for the benefit of the County and the taxing districts.

* At the end of the lease, the County transfers the property to the company or its assignees.

By contrast, Tennessee's use of the Industrial Development Authorities (IDA) (34) to effect sale lease/back arrangements is much simpler. Under Tennessee's structure, the business deeds the property to the IDA, so the property is tax-exempt. The IDA and the Company enter a lease agreement for the negotiated period. Sometimes bonds are issued and sometimes they are not. In either event, no money changes hands. The business agrees to pay the property taxes that would normally have been due on the property each year, less the agreed-upon abatement. The company retains the right to contest the assessment. The abatement can be stated in terms of either a fixed annual dollar amount or a percentage of the taxes due.

Caution: Because most property tax assessors are locally elected officials and not under the control of the city and county officials, there is always a risk that the independent assessor will determine a separate value related to the business's lease. This is a real risk, because most states tax privately held possessory interests in publicly owned property. (35)

8. Tax Increment Financing 

"TIF" is a rather long and complicated process in which certain excess property taxes (and, sometimes, excess sales taxes) in a TIF district are rebated to the developer to use for public improvements to enhance development. All or a percentage of property (and often sales) taxes in excess of the taxes collected during the TIF district's base year are deposited into a fund to be used by the developer for public purposes like building streets, sewers and sidewalks that will facilitate the development. Obtaining TIF benefits can be extremely time-consuming and complicated. Normally, there are at least two levels of consent that must be obtained: one from the local TIF Commission and one from the city or county's governing board or council. Examples of states that permit TIF financing include: Missouri, (36) Ohio, (37) and Michigan. (38)

Site Selection Considerations

1. Include the Property Tax Expert on the Site Selection Team

The easiest way for a business to overlook property tax incentives is to fail to include its property tax experts on its capital expenditure approval committee or site selection process until after formal approval has been given for the final location. This omission can be fatal in terms of the business actually securing property tax benefits if those benefits are "discretionary" and not a matter of entitlement. (39)

Because expansion-related property tax incentives tend to be more difficult to locate or identify, one way for a business to maximize its real and personal property tax incentives is specifically to include its in-house or outside property tax accountants, lawyers, or consultants in the site selection process from the beginning. Those tax professionals will generally know what to look for and where to find it while the business still has the advantage of analyzing competitive sites.

2. Real Competition is a Good Thing

In the perfect site selection process, the site selection team will have identified several ideal locations. There will be no need for confidentiality, so all of the state and local government officials from the various locations will know, up front, that each site has competition from other cities and counties for the potential new jobs and capital investment that the proposed expansion promises. If a business is foresighted enough to be in this situation, state and local officials from each of the candidates will probably try to put all of their cards on the table without much prompting. Bidding wars by states vying for huge expansion projects tend to produce the most lucrative tax and financial incentives available, particularly in regard to property tax abatements or benefits that the local governments might otherwise try to hide. (40)

3. Other Useful Resources Help Identify Property Tax Incentives

If a business is not fortunate enough to be able to disclose its intentions to government officials because of confidentiality considerations or other reasons, or if the site selection team wants to "double check" the availability or the processes related to benefits that the various jurisdictions might have offered, further investigation into the following resources might be helpful.

* State Constitutions and Statutes, and Local Ordinances (If Available). Although property tax incentives are generally local benefits, most are either specifically authorized by a state's constitution or are otherwise permitted by statute. Many states that offer property tax incentives provide discretion to their local governments to negotiate economic development-related incentives on a case-by-case basis. For that reason, if a business only refers to these "primary" sources, the business runs the risk that it might miss "off the books" negotiated or recently enacted incentives.

* Secondary Sources. Most of the generally recognized tax services have property tax data bases (e.g., CCH or RIA) and businesses should consult these sources to gather information about the incentives that states may offer in regard to real and personal property acquired in connection with new investments or expansion. Another excellent secondary resource that outlines in great detail each state's property tax laws, exemptions and application procedures is the ABA Property Tax Desk Book (2001). This reference is prepared annually by local practitioners on a state-by-state basis and provides an excellent resource that can quickly be used to compare the property tax structures (including favorable assessment percentages for certain types of property) offered by the various states.

* Local Offices of the State Department of Economic Development or Commerce. Although property tax incentives tend to be awarded by local governments, some state economic development officials (in particular, those who are regionally officed) will also be knowledgeable about the availability of property tax abatements or other incentives in the counties and cities within their jurisdictions. Businesses should exercise caution in acting on the information that these officials give, particularly if the site selection involves several sites in different cities or counties within a single state. As previously explained, state officials might not want to get involved in local competition for obvious political reasons.

* Local Politicians and Elected Officials. It is crucial for a business to establish an excellent working relationship with these officials and encourage them to advocate the expansion project. The county council members or other locally elected or appointed officials will ultimately have to either vote on whether to grant property tax incentives to a particular business expansion, or in some instances, convince their constituencies to approve them. (41)

* Local Chambers of Commerce. It is also important to gain the support of the relevant city or county chambers of commerce or other associations of businessmen representing the communities in which the potential expansion sites are located. These men and women are colleagues and peers. They can become your best friends and advocates. They may be able to tell you what types of incentives that the state, city, and county gave to other businesses that recently moved to their areas, including your competitors!

* Local Consultants. Local consultants might be able to take much of the pain out of the negotiations or the application process if they have the requisite technical experience and already have established relationships with the local officials. Be sure, however, to review the consultants' fee arrangements thoroughly and get them in writing. Companies should assess whether the consultant is adding real value to the team or stands to earn a million-dollar contingency fee for less than a hard day's work.

4. Be on the Alert for Controversies by the Affected Taxing Districts

Unlike state income tax credits, local property tax incentives generally take money out of the pockets of the local school, ambulance, fire, junior college, library, and other taxing districts. The local school district might; be the most formidable opponent to granting incentives, particularly if the proposed new expansion will result in numerous children of the new business's employees invading the school system with substantially less property tax revenues than the business would otherwise have paid. Some companies may well decide, as a matter of policy, not to seek the property tax incentives for that very reason. This might not be an issue, however, if the development will not bring numerous new jobs to the local jurisdiction. Assuming that the business wants to proceed with obtaining the property tax incentives, it should develop a good strategy in terms of how to deal with the taxing districts because the battles can be fierce. For instance, in some jurisdictions, the taxing districts have filed lawsuits to block property tax abatements. (42) In some jurisdictions, the taxing districts might already be protected. Specifically, some state and local jurisdictions do not include school ad valorem taxes or other "essential" taxes in their incentive proposals. Examples of states that will not usually abate "school taxes" are Alabama (43) and Mississippi. (44)

5. Be on the Alert for Bad Publicity

Unanticipated bad publicity over a proposed incentives award might have the effect of "killing the deal" at any time during the site negotiation process. For example, last year, such a controversy caused major headaches for a company that was attempting to obtain state permits to build a proposed cement plant in Ste. Genevieve County, Missouri. The company was reportedly negotiating a property tax abatement equal to approximately 50 percent over a 20-year period, along with other incentives. The proposal was publicly threatened when environmentalist groups protested that the proposed plant site could potentially destroy the natural habitats of endangered bats and pallid sturgeon and otherwise upset the Mississippi River's ecosystem. (45)

6. Time is of the Essence!

It is very important for a business to formally secure governmental approval for property tax incentives before it makes the final decision to proceed with the expansion. This could cause logistical problems, because the procedures for applying for and securing the property tax incentives can be extremely complicated and time consuming. For instance, some property tax incentives are implemented through time consuming sale/lease back arrangements coupled with bond issuances. Also, almost all of the property tax incentives require formal action by state and local governments, including public notices and hearings before local governments or industrial development authorities. Obviously, all of this takes time but the issue becomes whether the business can delay formal authorization long enough to complete the process. If not, the business might lose the incentives.

7. Entitlement vs. Inducement?

Some local jurisdictions offer property tax incentives that are an entitlement or a matter of right. These types of "automatic" incentives include low assessment percentages for new property or statutory abatements for historic or other real and personal property that are part of the expansions or renovations. Because these benefits are a matter of entitlement, the application processes tend to be simple. Most property tax incentives, however, are awarded through "inducement" programs. Thus, the incentives must be an inducement for the business to expand or relocate within the jurisdiction and the application process is far from simple. The benefits are normally conditioned on the action of local governing bodies (e.g., the county council) after giving adequate public notice or worse. For instance, in Florida, before the Board of County Commissioners can grant a business an economic development ad valorem tax exemption, the local city authority or Board of County Commissioners must secure a vote of the affected constituency by calling for a referendum! (46)

8. "But For" Test

Some state laws and regulations provide that economic development incentives can only be granted to private businesses if the business would not have gone through with the expansion "but for" the incentives. If the business does not meet this test, it might be unconstitutional or illegal for the local government to grant the incentive because the grant would constitute an impermissible private use of public funds. In these situations, if the company breaks ground before the property tax incentives are formalized, it might be too late! If the business and the jurisdiction form a "handshake" deal so that the business can proceed with the development before the deal has been formalized, the business is taking a huge risk. Businesses should try to avoid this at all costs. There are generally no estoppel provisions that would bind the state or local jurisdiction, outside of following and completing the complicated application and approval processes. If the business breaks ground on the development before the ink is dry on the incentive documents, the jurisdiction can renege and there is probably no judicial recourse.

9. Confidentiality Considerations

Businesses are rightfully concerned about confidentiality. Given the public nature of awarding these benefits, a business should carefully consider how to protect its trade secrets and other company-specific information. Once a public official has knowledge of a proposed business expansion, there is a high probability that the news will break publicly. The business should determine whether the local jurisdiction and all individuals who must become privy to the proposal should execute confidentiality agreements. Even confidentiality agreements will not prevent leaks and there is practically no recourse once the news is out and the damage done.

10. Is It Certain that the Expansion Project Actually Qualifies for the Property Tax Incentive and How Much Money Is Involved?

Although not getting the benefits that the government has promised is a much higher risk in obtaining income tax credits than it is in obtaining property tax incentives, the business still needs to meet the jurisdiction's qualifications. The business must determine whether the offered property tax incentives could cost more to implement than they will save. Businesses should carefully watch for program limitations that might curtail all or part of the benefit, such as:

* Initial Program Qualifications--Does the Proposed Facility Qualify for the Incentive? Sometimes only certain types of businesses or projects can qualify for the incentives. This is a terrible discovery to make after your business has broken ground. For instance under Alabama's New Industrial Property Tax Abatement program, only certain types of businesses, including "manufacturers," can qualify. The Alabama Department of Revenue (ADOR) recently ruled that a business that would "provide parts sequencing, consolidation and distribution for a motor vehicle manufacturer" did not qualify as a manufacturer. (47) Similarly, the ADOR ruled that a facility that was intended to provide energy for the manufacturing part of its business use was not "industrial development property" eligible for the abatement. (48)

* Program "Caps" and Recapture Provisions. There is nothing more frustrating than qualifying for an abatement, only to discover that the state or county is out of money. Program caps can be deadly in this respect. Indiana's "deduction" for 50 percent of the increase in value (not taxes) for rehabilitating a building for either residential or commercial purposes is capped at $100,000 for buildings and $20,000 for single family units. (49) To the extent that the property tax benefits are predicated on the company's maintaining certain levels of employment, the benefit may be partially recaptured or lost in future years if the employment level at the new facility falls below agreed upon amounts.

* Fees In Lieu of Taxes Might Be Required. Rather than exempting some of the taxing districts (i.e., all school districts) from their property tax incentive proposals, some state or local jurisdictions require businesses to pay a fee, excise tax or grant in lieu of the forgone property tax amounts in order to make the essential taxing districts whole. New Jersey's property tax exemption program for certain urban residential developments requires the benefiting entity to make annual payments in lieu of taxes that will offset the loss to the local taxing districts. (50) As previously mentioned, this is also a common feature of sale/leaseback arrangements.

Caution: Businesses need to ensure that their preliminary abatement calculations take these additional charges into consideration when computing their net economic benefit arising from the incentives.

* When Will The Business Be Able To Claim The Benefits? Businesses must be careful to ascertain exactly when the property tax incentives will be come effective; miscalculations in regard to timing can also eliminate part of the anticipated benefits. An otherwise qualified Ohio taxpayer lost part of the promised property tax incentives because of confusion about when the exemptions became effective. (51) The Ohio Board of Tax Appeals held that the manufacturer's five-year, 75-percent exemption from county property taxes under its "Urban Jobs Enterprise Zone Agreement" started on the date that the manufacturer became a taxpayer in the county, not a year later when the manufacturer actually completed the construction of its warehouse distribution center. This timing error cost the manufacturer 20 percent of its anticipated property tax incentives.

11. Post-Mortem Constitutional Challenges

In addition to the risk that the property tax incentive constitutes an unconstitutional private use of public funds, there are several other potential constitutional challenges that might reverse a property tax incentive after it has been awarded.

* Unconstitutional Legislative Delegation of Taxing Power. Recently, Alabama's industrial development abatement statute was upheld against a challenge that it violated an Alabama constitutional provision forbidding the Alabama legislature from delegating its taxing power. (52) It also took a court case to uphold that Maryland's legislature had the constitution authority to enact new property tax incentives. (53)

* Discrimination Against Interstate Commerce. In 1997, the United States Court of Appeals for the Fifth Circuit held that a Louisiana statute that conditioned a taxpayer's receiving economic development tax abatements on using Louisiana products and employees violated the Commerce Clause of the United States Constitution because it discriminated against interstate commerce. (54)

Conclusion

Because property tax incentives can eventually become the decisive factor for a business in determining where to make a substantial capital investment, care must be paid to the available incentives. Although no two property tax incentive programs are like, the good news is that business executives do not have to memorize them all. The key for business executives is to know what to look for and where to find it. Throughout this article, we have discussed the more significant types of property tax benefits and have provided some practical advice on traps to avoid before, during, and after the negotiation process. There may seem like there are as many types of benefits as there are states, but there are also many available resources that can help identify all of the incentives that are available for a particular investment.

(1) Some states have tried to improve the utilization of their state income tax programs by making the credits either refundable or transferable, but these features are still very rare. Examples of refundable income tax credit programs include Iowa's historic tax credit program, Iowa Code [section] 404A (2002) and Missouri's BUILD Missouri Program for large manufacturing expansions. See [subsection] 100.700 to 100.850, Mo. Rev. Stat. (2000). Some examples of transferable tax credit programs are Missouri's historic tax credit, [subsection] 253.545-253.561, RSMo, and its credits for remediating Brownfields, [subsection] 447.700-447-718, Mo. Rev. Stat. (2000).

(2) In particular, businesses should examine whether the state even permits its local governments to impose personal property taxes; more than half the states do not!

(3) For a summary of the federal and most state income tax credits for historic preservations, see Lohman, Berger, Casey & Albers, "State Rehabilitation Credits: A Rebirth of History Across the U.S.," Journal of Multistate Taxation and Incentives, November/ December 2000.

(4) States that provide some sort of property tax incentive for the restoration of historic properties include Alabama (statewide), Alaska (local option), Arizona (statewide), California (local option), Delaware (Newark), Florida (local option), Georgia (statewide), Hawaii (statewide), Illinois (Class L property), Indiana (older buildings), Iowa (local option), Kansas (local option), Kentucky (Neighborhood Improvement Zones), Louisiana (local option), Maine (local option), Maryland (local option), Massachusetts (local option), Minnesota (local option), Mississippi (local option), Nevada (local option), New Jersey (designated neighborhoods), New York (local option), North Carolina (local option), Oklahoma (local option), Oregon (statewide), South Carolina (local option), South Dakota (statewide), Texas (local option), Vermont (local option), Virginia (local option), and Washington (State--local option).

(5) Much information about all types of incentives related to historic preservation incentives can be obtained from the National Trust for Historic Preservation. Accordingly, for more information about federal and state historic tax incentives, see http://www.nthp.org.

(6) States that provide at least one or more types of ad valorem tax incentives for new and expanded businesses include Alabama, Arizona, Connecticut, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Vermont, Wisconsin, and Wyoming. Other states may offer such benefits as well.

(7) Ala. Code. [subsection] 40-9B-4 (1975).

(8) Fla. Stat. [section] 196.1995 (2001).

(9) Iowa Code [section] 15.332 (1999).

(10) LSA Const. Art. VII, [section] 21(F) (1986).

(11) Miss. Code Ann. [section] 27-31-101 (1972).

(12) Ind. Code [section] 6-1.1-12.1-3.

(13) 1985 Mich. Pub. Acts No. 224.

(14) 1996 Mich. Pub. Acts No. 376.

(15) Act 170 (S.B. 523) Laws 2000.

(16) See Mississippi Attorney General Opinion No. 2001-0468, August 3, 2001.

(17) See Governor's News Release, "Holden to Lead Delegation to Meet with Ford Executives in Detroit to Discuss Hazelwood Plant," January 24, 2002; (http://www.gov.state.mo.us/press/press012402.htm); "Council Gets Grant to develop Ford Plant Plan," St. Louis Business Journal, May 8, 2002.

(18) See Cuno v. DaimlerChrysler, Inc., U. S. District Court, Northern District of Ohio, Western Division, No. 3:00 CV 7247, August 1, 2001.

(19) For an excellent article outlining negotiation strategies for obtaining all types of tax and financial incentives in the context of corporate restructurings, see Shale, Kahn & O'Neill, "How Smart Companies Can Accomplish Smart Incentive Policy in Today's Economy," Journal of Multistate Taxation and Incentives, January 2002.

(20) See Ariz. Rev. Stat. [subsection] 42-12001-12011.

(21) See Ariz. Rev. Stat. [section] 42-15001-15011.

(22) See 35 Ill. Comp. Stat. 200/9-145 (2000).

(23) Conn. Gen. Stat. [section] 12-81.

(24) Iowa Code [section] 427 (1999).

(25) TAP 7-225 (but please note that some local jurisdictions can subject the manufacturing equipment to local taxes).

(26) R.I. Gen Laws [section] 44-3-3.

(27) See Ago Construction Co., Franklin Circuit Court, Division I, No. 99-CHI-00626, April 26, 2001.

(28) See G. Edgar Harr Sons' Corp. v. State Department of Assessments and Taxation, (Maryland Tax Court, TP-C No. 804), June 22, 1995. Maryland, TAP 7-225(a); Perdue, Inc. v. State Department of Assessments and Taxation, 264 Md. 228, 232 (1972).

(29) Ch. 3066 (H.B. 2431, Laws 2001);

(30) See Commerce Holding Corp. v. Board of Assessors of the Town of Babylon, 88 N.Y. 2d 724, 649 N.Y.S.2d 932 (1996).

(31) Monroe County Board of Assessment Appeals v. Miller, 131 Pa. Cmwlth. 538, 570 A.2d 1386 (1990).

(32) See State Tax Review, Vol. 61, No. 24, at 22-22 (June 12, 2000).

(33) [subsection] 100-200, Mo. Rev. State (2000).

(34) Tenn. Code Ann. [section] 7-53-305.

(35) For instance, the Colorado Supreme Court recently struck down a statutory exemption for leases of government-owned property, because the Court held that only the Constitution could provide exemptions, and that Colorado did tax possessory interests in real estate. See Eagle County Bd. Of County Commissioners v. Vail Associates Inc., No. 98SC869 (Colorado February 26, 2001).

(36) [subsection] 99.800-99.865, Mo. Rev. State (2000).

(37) [section] 5709.4, recently amended by H.B. 405 (Laws 2001).

(38) This was authorized by Public Act 248 (June 2000).

(39) If a property tax benefit is a matter of entitlement, such as a preferential assessment percentage, the business may be "entitled" to claim the benefit, regardless of whether the preferential assessment percentage actually induced the business to relocate in that jurisdiction. Often, however, property tax abatements must actually be an inducement for the expansion to take place in order to pass a state's constitutional or statutory provisions.

(40) One example of this occurred when one of the author's clients was able to negotiate a property tax abatement of approximately 65 percent per year over a 20-year period for a $200,000,000+ expansion (resulting in millions of dollars of saved property tax expense). This extremely high abatement percentage resulted because the client was actively and simultaneously involved in heated negotiations with two different counties for the site location for a large industrial plant.

(41) For instance, Florida's statutes actually require the Board of County Commissioners or other municipal governing body to call a referendum prior to awarding economic development-related property tax exemptions. See FS [section] 196.1995.

(42) See, e.g., Wilmington City School District Board of Education v. Board of County Commissioners of Clinton County et al., Ohio Court of Appeals, Clinton County, 12th Appellate District, No. CA99-12-037 (May 5, 2000).

(43) Alabama's 100-percent property tax abatements for new industrial property or research and development-related property specifically exclude school taxes. See Ala. Code [subsection] 40-9B-4 (a) and (e).

(44) Mississippi provides for at least three major tax abatement programs for new and expanded businesses, but these programs specifically exclude school-related and certain other taxes. See MCA [subsection] 27-31-101 and 27-31-105; Mississippi Constitution, Article 7, [section] 182 and S.B. No. 202, [subsection] 34-39.

(45) See Allen, "Bats Could Hinder Plan for Cement Plant; Endangered Species Has Been Found on Proposed Site; Animal Has Halted other Projects," St. Louis Post-Dispatch (September 9, 2001) and Bell, "Cement Plant Could Be Threat to Fish, Expert Says; Pallid Sturgeon is Endangered Species," St. Louis Post-Dispatch (November 16, 2001).

(46) See note 6 supra.

(47) See Revenue Ruling No. 00-012 (July 9, 2001).

(48) See Revenue Ruling No. 01-002 (May 29, 2001)

(49) See Ind. Code 6-1.1-12.22.

(50) See N.J. Stat. Ann. 54:4-3.142, 144.

(51) Bush Industries, Inc., Ohio Board of Tax Appeals, No. 98-S396 (June 9, 2000).

(52) See Dobbs v. The Shelby County Economic and Industrial Development Authority, et al.; Pate and Williams v. The Industrial Development Board of the City of Trussville, et al.; 749 So.2d 425 (Ala. 1999).

(53) See State Tax Commission v. Gales, 222 Md. 543, 161 (1960).

(54) See Pelican Chapter, Associated Builders & Contractors, Inc. v. Edwards, 128 F.3d 910 (5th Cir. 1997).

JANETTE M. LOHMAN is a partner with Blackwell Sanders Peper Martin LLP in St. Louis, Missouri, and currently teaches State and Local Taxation at the Saint Louis University Law School. She served as Director of the Missouri Department of Revenue from 1993 to 1997 and, before that, Director of Tax Planning and Assistant General Counsel for the former McDonnell Douglas Corporation. Ms. Lohman holds an LL.M. degree in Taxation from the Washington University School of Law, a J.D. degree from the Saint Louis University School of Law, a B.A. degree from the Saint Louis University School of Business and Administration, and a B.A. degree from William Jewell College. A licensed CPA, she is Missouri correspondent for State Tax Notes, an editor for taxation cases for the Missouri Bar's Courts and CLE Bulletin, and serves on the editorial boards of the American Bar Association's ABA Property Tax Desk Book and the Journal of Multistate Taxation and Incentives.

FRED H. MONTGOMERY is the Director of State and Local Tax for Sara Lee Corporation in Chicago, Illinois. Previously, he served as Manager of State Taxes for Coopers & Lybrand, Special Counsel for the Illinois Department of Revenue, and an Assistant Attorney General in Illinois. Mr. Montgomery received his B.A. degree from Swarthmore College, M.A. degree from Stanford University, and LL.B. degree from DePaul University School of Law. He is a member of TEI's Chicago Chapter, and a Vice Chair of TEI's State and Local Tax Committee. He is also a member of the Board of Trustees of the Illinois State Chamber of Commerce, the Taxpayer's Federation of Illinois, and the Civic Federation of Chicago.