Tax Abatement 101

Tax Abatement 101

By Dan Botich, Senior Economic Development Professional, SEH of Indiana, LLC

At its foundation, economic development is based upon understanding: (i) a community’s or region’s assets, its strengths, weaknesses, opportunities, and threats; (ii) its economic development capacity; and (ii) the incentive capacity and parameters, including the support of local elected officials to consider and approve financial incentivization packages. Local economic development organizations (LEDOs) must be accomplished and knowledgeable in each area to stimulate sustained long-term growth and development.

It is critical to develop, identify, and determine the financial incentivization of a prospective project for discussion and presentation to elected officials and ultimately for negotiations with prospects to close the deal. Without this basic understanding, success is limited.

This article will focus on one financial incentive resource – Economic Revitalization Area (ERA) Assessed Valuation Deductions, or commonly referred to as “Tax Abatement.” The intent of this article is to provide the basic and necessary information for an economic development professional to apply the correct terminology of Tax Abatement.


Top 5 Tax Abatement Uses:

Building Improvements. Any new structure, building addition, or other improvement that increases the assessed value of your facility.

New Manufacturing Equipment. Any new equipment that is used in the direct production, manufacturing, fabrication, assembly, etc. of your company’s product. Used equipment can be eligible for abatement too.

New Logistical Distribution Equipment. Any equipment that is used for the storage or distribution of goods, services, or information.

New Information Technology Equipment. Any equipment, including software, that’s used in information processing, office automation, telecommunication, etc.

Research and Development Equipment. Any equipment used in experimental or laboratory research and development of new products, new uses of existing products, or improving or testing existing products.

Source: Wells County, IN


Authority

The Deduction for Rehabilitation or Redevelopment of Real Property in Economic Revitalization Areas statute for the State of Indiana may be found under the following Indiana Code citation: I.C. 6-1.1-12.1 (“the Act”). This should be required reading for each LEDO staff member responsible for economic development. In fact, it is recommended that as a LEDO professional you have a dedicated binder which includes tabs for the Act, Indiana Administrative Code 50 IAC 10 tilted “Economic Revitalization Area Deductions,” and for each type of additional form required by the Indiana Department of Local Government Finance (DLGF). This should become your Tax Abatement “Book of Knowledge”.

Application to Economic Development and LEDOs

Tax Abatement by statute is intended to apply only to industrial and manufacturing facilities, which includes research and development, logistics distribution, and information technology facilities and their personal property, UNLESS:

  • Specifically identified under Section 3(e)(10) of the Act “Any facility the primary purpose of which is retail food and beverage service, automobile sales or service, or other retail” located in an Economic Development Target Area (EDTA), established pursuant to Section 7 of the Act;
  • Residential property that is: (i) a multi-family facility that contains at least 20% of the units for low- and moderate-income individuals; (ii) located within an EDTA; or (iii) located within a Residentially Distressed Area (RDA).

Purposes of an ERA Assessed Valuation Deduction (Tax Abatement)

The purposes of Tax Abatement is to achieve certain economic development growth goals for a region or community, such as:

  • Retaining or attracting employment positions for a specific company or industry;
  • Directing private investment for the revitalization of distressed local economies or areas of a community as part of redevelopment or economic development programming;
  • Increasing the long-term assessed valuation for a taxing unit; and
  • Addressing locational cost disadvantages or gap-financing.

Tax Abatement is an Assessed Valuation Deduction First

A misconception of Tax Abatement is that this financial incentive is a tax savings. Tax Abatement is an annual percentage deduction of assessed valuation as the result of new investment. For the property owner, this deduction may be quantified as an annual realized tax savings, which over an entire abatement period, may be estimated to provide gap-financing or incentive to locate in designated ERAs, EDTAs, or RDAs of a community, as well as to retain and/or create employment positions in a community, including other promises of an applicant to perform certain actions related to the Tax Abatement.

Conclusion

Tax Abatement of qualified, tangible property is a useful economic development financial incentivization tool for any county, city, and town municipal government. Becoming knowledgeable in its application and understanding the basics of Tax Abatement is critical to implementing each LEDO’s economic development strategy for sustained long-term development.

 

 


Tax Abatement Terminology

Tax Abatement. “A reduction in tax revenues that results from an agreement between one or more governments and an individual or entity in which (a) one or more governments promise to forgo tax revenues to which they are otherwise entitled and (b) the individual or entity promises to take a specific action after the agreement has been entered into that contributes to economic development or otherwise benefits the governments or the citizens of those governments.” Source: Financial Accounting Foundation. Statement No. 77 of the Governmental Accounting Standards Board (GASB).

Deduction Applicant. The owner of tangible property as a new investment who completes and submits a Deduction Application for Tax Abatement to a Designating Body or consideration.

Economic Development Revitalization Area (ERA). An area within a county, city or town, which has become undesirable for, or impossible of normal development and occupancy because of lack of development, cessation of growth, deterioration of improvements or character or occupancy, age, obsolescence, substandard buildings or other factors that prevent development or use of a property as designated by a Designating Body.

Designating Body. The fiscal body of a county, city or town, typically a County Council, City or Town Common Council.

Designation Application. Application provided by the City, Town or County to an Applicant that is completed and filed with a Designating Body to assist in making a decision and determination about whether a particular investment should be considered for Tax Abatement.

Deduction Application. A certified (signed) application (Statement of Benefits or FORM SB-1) filed by a property owner who desires to obtain an assessed valuation deduction under the Act: Section 3 (Real Property), Section 4.5 (Personal Property) and Section 4.8 (Eligible Vacant Buildings).

Real Property. A building or structure, but does not include land for ERA Deduction purposes.

Personal Property, includes: new manufacturing equipment; new research and development equipment; new logistical distribution equipment; new information technology equipment; new utility distributable equipment (generating, railroads).

Eligible Vacant Building, a building that is: (i) zoned for commercial or industrial purposes; (ii) is unoccupied for at least one year before the owner of the building or tenant occupies the building, as evidenced by: a valid certificate of occupancy; paid utility bill; executed lease agreement with the owner of the building; other evidence of occupation as may be required by the Department of Local Government Finance (DLGF).

Economic Development Target Area (EDTA), under Section 7 of the Act. A geographic area limited to 15% of a unit’s jurisdiction as identified and recommended by an economic development commission to the Designating Body of a city or town that will allow for an assessed valuation deduction under Section 3(e)(10) of “Any facility the primary purpose of which is retail food and beverage service, automobile sales or service, or other retail,” that: (i) meets the criteria of an ERA or (ii) has been designated as a “Registered Historic District or encompasses buildings, structures or sites on the National Register of Historic Places, listed on or eligible for the Indiana Register for Historic Sites and Historic Structures as prepared by the Historic Landmarks Foundation of Indiana.

Residentially Distressed Area (RDA), under Section 2 of the Act. A geographic area as designated by the Designating Body that meets the same criteria as an ERA including the additional findings generally that: (i) the area is comprised of parcels that are unimproved; or (ii) contain 1 or 2 family dwellings or multi-family designed for up to 4 families, which will allow for a property owner to submit a FORM SB-1 under Section 3(e)(11).