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January 21, 2019 Focus on commercial real estate

Paying for growth: Tax breaks central to Central Mass. economic development

Photo/Matt Wright Bruce Platzman, AIS president, CEO and co-founder

When Bruce Platzman was looking for new space to consolidate operations for his Hudson furniture-making company, AIS, he looked everywhere.

Not just around Massachusetts, Platzman – the company's president, CEO and cofounder – talked to officials in Mississippi and Texas, where labor and real estate costs would be far cheaper.

“They were very interested in luring us there,” Platzman said.

One thing kept AIS in the area: tax breaks. Leominster offered a 13-year tax break in return for AIS moving into the city with 320 jobs and creating 40 as part of a $13-million investment.

The company moved into a sprawling, vacant 537,000-square-foot facility on Tucker Drive.

“It's the only reason we're here, because my board wanted me to pursue other options,” Platzman said.

AIS is not alone in getting a tax break to help expand and stay in Central Massachusetts. Over the last 20 years, Central Massachusetts communities have often used tax agreements to help manufacturers, offices, hotels, retailers and others in what municipal leaders say is the most important tool they can use in economic development planning, especially when labor and utility costs are higher than in other states or overseas.

These municipal tax breaks typically take the form of tax-increment financing agreements, or TIFs, where companies receive a percentage discount off the increased taxable value of their property.

For example, if a company receives 50-percent TIF to move into a vacant building where the taxes were previously $1,000 annually and the company's investment increases the value to the point where the undiscounted taxes are $10,000 annually, the company will end up paying $5,500 in taxes.

Through public records requests made of 19 Central Massachusetts communities picked for their size and location, Worcester Business Journal reviewed 148 TIFs offered by 16 of those communities from 1998 to 2018. (Auburn, Millbury and Southborough said they offered none.)

The analysis found 88 percent were successful in meeting their stated job creation and private investment goals, although not all companies were forced to commit to specific targets. However, a sizeable portion of those tax breaks went to large corporations with significant profits, and critics argue cities and towns are sacrificing potential revenue when the benefitting companies would have made the investments regardless.

Still, municipal leaders turn to tax breaks in a bid to keep companies growing in the community or to draw them from elsewhere.

For AIS, a tax break helped the company grow to 700 workers and stay close to where it was founded. Other manufacturers attracting tax breaks include Rocheleau Tool & Die Co., a third-generation family-owned maker of molding machinery in Fitchburg; and F&D Plastics, a family-run Leominster plastics maker founded more than 40 years ago.

Communities are often in a battle against one another – and with others outside the region or even outside the country – to keep or attract new companies, said Dean Mazzarella, the Leominster mayor. They often turn to tax breaks.

"A lot of these companies were being courted," said Mazzarella, who's overseen 21 tax breaks in the last two decades. 

The Amazon question

Business tax breaks have come under more public criticism lately, thanks in large part to online retailer Amazon.

When Amazon announced in 2017 it was looking to open a second headquarters, unlikely landing spots and large cities alike pitched the company on major tax breaks. Worcester offered $500 million, and Leominster $405 million.

Larger areas offered far more. Maryland offered $8.5 billion, and New Jersey $7 billion.

In the end, New York City and Arlington, Va., split the Amazon expansion. It was not without major incentives for one of the world's largest companies, though far less than what the company could have gotten elsewhere. New York gave $2.8 billion in tax breaks and grants, and Virginia $573 million.

Those funding agreements were criticized, as New York's projected return on investment didn't consider additional costs of having Amazon in the city, including for police and fire protection, among other services. Critics questioned whether the tax breaks even played a role in Amazon's decision. After all, the company could have gotten billions more by simply locating on the other side of Washington, D.C., in Maryland instead of in Virginia.

“When politicians talk about the benefits of incentives, such as 'We gave $1 million to attract 1,000 jobs,' they are assuming that incentive was pivotal in bringing the investment,” said Nathan Jensen, a professor at the University of Texas who researches government economic development strategies.

“There is at least a 75-percent chance they were coming anyway,” Jensen said. He said a minimum of three-fourths of incentives go to companies who were already settled on making the investments they promise in tax breaks.

Big corporation tax breaks

Amazon isn't the first major corporation to receive heaping subsidies, of course. Tesla and Foxconn each received billions to open facilities in Nevada and Wisconsin, respectively.

Massachusetts has given its share of tax breaks to huge companies, too.

The most widely known, and hotly debated, might be the $150 million deal the state and Boston gave to attract multinational conglomerate General Electric from Connecticut in 2016. Wayfair, the online retail giant based in Boston, was given $31 million from the state in December for its latest expansion. The state gave Amazon $20 million early last year to add jobs in Boston.

In Central Massachusetts, plenty of other corporations with deep pockets have gotten tax breaks, too.

In 2012, retailer TJX Cos. was looking for space to grow in MetroWest from its longtime headquarters in Framingham, where it had long leased its sprawling offices. That May, Framingham and Marlborough offered tax incentives to the company, which owns retailers like T.J. Maxx and Marshalls.

Marlborough gave TJX a 20-year tax break on its new office complex in town, relieving TJX from having to pay any more than 50 percent of the new value on its property taxes until 2029. Framingham gave a 20-year tax break, too, under which TJX would save more than 50 percent on the new value on its property tax bills until 2026.

Calculating the dollar amounts of how much companies save in tax breaks is an inexact science involving estimating property values and tax rates decades into the future. In some cases reviewed by WBJ, tax break documents estimated how much a tax bill will be reduced, but most tax break agreements didn't include dollar amounts.

TJX's tax break savings were a relative drop in the bucket for company that reported $1.5 billion in profits the year it received the incentives, but both Framingham and Marlborough faced budget restrictions that year.

Just months before Framingham approved the tax break, city officials raised the median single-family property tax bill by $577, or 11 percent, as the city jumped 18 spots on the state's most-taxed residents list. A month after Marlborough signed its tax break, the Marlborough School Committee put a temporary freeze on hiring ahead of a forecasted million-dollar budget deficit, among other budgetary worries that year among city officials.

Such is the game of tax-increment financing, where communities are often eager to give leeway to businesses to move into town or expand there.

“I don't blame any city for getting into a bidding war for something they think is going to benefit them,” said Rob Baumann, an economics professor at the College of the Holy Cross in Worcester.

Baumann is a critic of tax breaks, saying federal legislation may be the only way to bar cities or states from competing against one another and in the process giving up revenue to wealthy companies. But for many municipalities, he added, tax breaks are a much more effective short-term way to compete for companies, rather than more strategic methods like improving its population's workforce skills or enhancing infrastructure.

“There's really no other way to compete in the short run,” Baumann said.

In Framingham's case, the city didn't want to see one of its major corporations leave. For Marlborough, it was anxious to see a growing corporation added to its roster and to help replace vacant office space left from when financial firm Fidelity Investments closed a 1,100-worker office there in 2011.

Six months after the deal to bring in TJX, Marlborough signed a 15-year tax break with clinical laboratory Quest Diagnostics, to fill another empty office building down the street, where the tech firm Digital Equipment Corp. once filled a sprawling building on Forest Street. Another tax break, with GE Healthcare Life Sciences, would follow for the old Digital building two years later.

“Two huge buildings next to each other that were completely vacant,” Marlborough Mayor Arthur Vigeant said in explaining why the city was aggressive in reaching deals to attract new companies.

Tax breaks go to some of the largest companies in the Central Massachusetts: from Marlborough attracting medical device manufacturer Boston Scientific, to Worcester giving a break to longtime city employer Hanover Insurance Group for an expansion, to Milford helping medical software company Waters Corp. expand.

Boston Scientific got a tax break from Marlborough in 2012, during a year when it reported profits of $441 million. Laser manufacturer IPG Photonics Corp. got a tax break from Oxford last year when its net income was $348 million.

Playing the flawed game

It's not always clear whether companies move or expand because of a tax break, said Michael Goodman, the executive director of the Public Policy Center at UMass Dartmouth and a member of the state's Economic Assistance Coordinating Council, which reviews tax breaks.

Goodman said the talent of the local workforce is often a major deciding factor when firms chose where to locate.

Tax breaks are “a tool in the toolkit,” Goodman said of tax breaks. “It's not the only tool.”

Tax break agreements are meant to benefit both communities and businesses. A company typically agrees to hire a certain number of workers or invest a certain amount of money in a facility, or often both. In return, a city or town lets a business pay less in property taxes than they would have otherwise by giving a discount on the additional value they brought to the tax base. These deals keep companies from having to pay much of the additional tax payments they'd otherwise have to give to the city or town where they're located.

Tax breaks are a flawed method of supporting the economy, Jensen said. Public money sacrificed for tax breaks would instead be better spent on investments in education, broader tax cuts or more targeted programs like workforce development.

“Even if the company was swung by the incentive, many studies find that these programs lose money,” Jensen said, criticizing tax breaks in particular for retail uses.

Those uses, he said, don't really create new economic activity in an area, instead simply causing people to spend at one shop instead of another.

David Merriman, a professor of public administration at the University of Illinois Chicago who has closely studied tax policy, criticized tax deals for another reason: They often simply result in moving jobs from one area to another.

A key question to ask for tax breaks, Merriman said, is what would happen to a particular site if tax breaks weren't used to bring jobs or new development. Often, he said, tax deals are given for properties already in prime locations.

“Cities are typically in a weak position when they're negotiating these deals,” Merriman said.

That's because cities are likely competing with their neighbors, he said, and municipal leaders are eager to get headlines for bringing a new business to town.

“If you don't play that game,” Merriman said, “you're letting your constituents down.”

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