September 17, 2012

Tax Breaks And Paybacks: TIFs Cost Towns, Yet They Embrace Long-Term Values

Magmotor Technologies' TIF agreement with Worcester is helping the company expand and make its manufacturing equipment more efficient, the company says.
Michael Widmer of the Massachusetts Taxpayers Foundation says TIF projects can be controversial given the loss of tax revenue.

Tax increment finance (TIF) agreements are used in most U.S. states to encourage companies to expand and invest in capital improvements, in turn creating jobs and adding to the tax bases.

It's a good deal for companies because they earn graduated, annual real estate and property tax breaks for the life of the TIF—usually several years. And cities and towns, which vote on the projects, are enticed by proposals that promise a long-term impact to the local economy. If a company doesn't meet goals outlined in its project, the community can revoke the deal.

These projects can be controversial, as individual taxpayers sometimes decry the lost tax revenue generated by multi-year TIFs, which may last as many as 20 years. Michael Widmer, president of the Massachusetts Taxpayers Foundation, thinks cities and towns have generally awarded TIFs to worthwhile projects, but he said the projects raise an important question.

"What are we getting — we the city — by doing this?" Widmer said.

There are 10 active TIF projects in Central Massachusetts, according to the state Executive Office of Housing and Economic Development. The following describes the potential impact, and progress, on four of them.

Magmotor Technologies Inc., Worcester

TIF Value: $514,553 over 12 years

Estimated Tax Value Add: $1.65 million (Source: Worcester Economic Development office)

Abas Goodarzi purchased Magmotor Technologies, Inc. in 2008, at a time when the Satcon Technology Corp. division was losing money, he said. Goodarzi, who is also president of the California-based US Hybrid, said he turned the electro-mechanical motion control systems manufacturing company around by introducing new technology and a new management team, though he kept the existing workforce. Now, Goodarzi said Magmotor must increase its market share to stay competitive. To accomplish this, the company plans to produce new products to serve its vehicle and machinery manufacturing clients—which include Intel and NASA. These products will result in cost savings because Magmotor systems will make machines more efficient, Goodarzi said.

The plan, Goodarzi said, is to move manufacturing operations in West Boylston to the company's new Coppage Drive facility in Worcester. Armed with a city-approved TIF and incentive tax credits from the state, Goodarzi plans to expand the company's 45,000-square-foot Worcester facility to accommodate new product production, adding 30,000 square feet, while investing in automated manufacturing equipment. The investment will cost $4.37 million. The expansion is planned for the first quarter of 2013.

Goodarzi said the company appreciates the TIF, but it would have moved forward with the expansion even without it, because the company has no choice but to grow.

The quality of the manufacturing workforce in the Worcester area has actually been a larger driver for the Magmotor Worcester expansion than tax incentives. "The labor pool in that neck of the woods has impressed me much more," Goodarzi said.

Warren Pumps LLC, Warren TIF Value: $2.16 million over 5 years

Estimated Tax Value Add: $165,000 (Source: Warren assessors' office)

Warren Pumps, owned by Maryland-based Colfax Corp., is a company with a long history in the sleepy town of Warren. Many residents have ties to the company — either as current or former employees, or through relatives. So when company officials applied for a $2.16 million TIF from the town, its overwhelming approval at a special town meeting last year came as no surprise, said Robert Souza, chairman of the Warren Board of Selectmen.

"It's a very entrenched company in the town of Warren," Souza said.

Though Colfax officials declined to discuss the progress of the project since the town approved the TIF, the company has already begun hiring for the expansion, Souza said. It proposed moving its valve product manufacturing operations in South Portland, Maine, to Warren, adding 35 jobs on top the 96 existing jobs. The move requires $5.75 million in technological upgrades to the Warren facility's equipment for producing fluid-handling manufactured products.

The addition of jobs was the driving factor in the project's popularity, according to Souza. And, he said, the town has a vested interest in the success of Warren Pumps, which has operated in town for 125 years. "They're a good company and we want to keep them here," Souza said.

Georgia-Pacific Dixie cutlery facility, Leominster

TIF Value: $3.2 million over 10 years

Estimated Tax Value Add: $200,000 (Source: Leominster Economic Development office)

Georgia-Pacific is considering expanding its cutlery manufacturing location, the Georgia-based company's only Massachusetts facility, which now employs 213. The Leominster City Council approved a $3.2-million TIF deal in 2011, but the project has yet to launch, said Kelly Ferguson, director of public affairs at the company.

As proposed, the expansion includes investing in new equipment and technology to allow for the production of cutlery designed for Dixie cutlery dispensers used in restaurants — an investment that could total up to $20 million. Twenty-five new jobs would be created.

"We continue to have this project as one of our options to expand production of our cutlery manufacturing," Ferguson said. "However, economic uncertainty continues to impact our point of view on expansion, and we are being careful to make the right economic decision for the long-term."

Though an estimated increase of $200,000 in real estate valuation is small, Leominster Economic Development Coordinator Lisa Vallee said cementing the company in Leominster and encouraging job creation and retention are worth the TIF deal.

Ferguson noted the restaurant industry is particularly shaky in the current economy, so creating a new product to serve it could be risky. But he said the effort still has potential.

If there is no progress by 2013, there is a clawback provision that would allow the city to recoup any tax breaks the company received, according to City Assessor Walter Poirier. Vallee said city officials have met with representatives from the company in recent months and the project is expected to move forward.

IPG Photonics, Oxford

TIF Value: $431,000 over 7 years

Estimated Tax Value Add: $6.3 million (Source: Oxford Town Manager's office)

IPG Photonics already has bragging rights as the world's largest fiber laser maker. But with plans to expand its 261,000-square-foot facility by approximately 101,000 square feet, and to add equipment to accommodate greater production of diodes in its semiconductor plant, the company is poised to reach new heights.

IPG has created 62 new manufacturing jobs since the beginning of the year, said Paolo Sinni, vice president, treasurer and controller of U.S. operations — a good jump on the 175 jobs the company pledged to create through the project. Sinni said jobs in research and development, sales, and marketing will also be added when the larger building is complete, sometime early next year.

Approved in November 2011, the IPG TIF, along with $1.74 million in state investment tax credits, made expanding at the existing Oxford headquarters more palatable, Sinni said.

"We had choices of either staying here or investing in other parts of the world, but we decided to stay here, through these incentives," Sinni said.

The latest TIF is actually an extension that added seven years to a 20-year TIF granted in 1999. Under the first project, IPG Photonics agreed to create 250 jobs — a figure it has more than doubled with years to spare. Today, the company employs 686 people, Sinni said.

For the town, the added property value is the real incentive, according to Oxford Town Manager Joseph Zeneski, though job creation is an important plus. The other benefit is the improvement to water and sewer infrastructure the company has helped pay for to accommodate expansion. Zeneski hopes it will encourage more industry to locate in Oxford.

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