Published Online: March 12, 1997


Schools' Taxes Bartered Away To Garner Jobs

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First of two parts

The Ralston Purina Co. recently shocked St. Louis officials with the news that it is considering leaving Checkerboard Square, the company's home for the past century, for greener pastures elsewhere.

Top city and state officials responded swiftly late last month: A small arsenal of financial incentives hit the table before the company, with its 2,000 employees, could hear pitches for richer deals sure to arrive from other states. Closed-doors negotiations are expected to last through the end of this month.

Landing or retaining a company like Purina is cause for huge celebration. It brings corporate involvement, prestige, and, above all, jobs. The victory, however, is not always so sweet for schools.

The corporate tax incentives used as a lure for companies are costing school districts across the country hundreds of millions of dollars each year.

In an era when corporate executives routinely point out schools' problems and chide educators for not getting better results, critics of these incentives say companies left and right avoid doing their part: paying a fair share of the local property taxes that are the backbone of school budgets.

Governors and other state leaders are judged by their success in heated competitions for corporate expansions, relocations, and new jobs. Typically, the first bargaining chip is a perk often worth millions--reduced property taxes or a complete abatement. On top of that, states offer reduced state taxes and money for training--again shrinking the funding available for schools and other state services.

Tallying the Costs

An analysis of the property-tax discounts granted to businesses illustrates how much schools are losing:

  • Minnesota lawmakers estimate that tax incentives diverted $112 million from schools there last year.
  • A Louisiana tax group reported that tax deals cost schools $141 million in 1994.
  • The Texas comptroller's office calculated that between 1985 and 1995, tax abatements cut school revenue by $480 million.
  • In West Virginia, a handful of business-tax exemptions cost the state $87 million in 1994.
  • In Cleveland, more than $9 million in potential school revenue was lost in 1995. That same year, the school district's debt climbed to $143 million.
  • And officials in St. Louis say their schools lose $17 million each year because of property-tax abatements.

With few reporting requirements, no one knows the national total.

But interviews with politicians, school officials, corporate spokesmen, and economists make clear that corporate tax breaks--respites that homeowners, small businesses, and farmers seldom get--are an understood cost of modern economic development. And they are becoming more popular.

"We don't view property taxes as an indication of our support for schools," said Kelly Stratmore, a spokeswoman for the AT&T Corp. in New York City. While the company negotiates property-tax breaks, it promotes its own "comprehensive education program," the AT&T Learning Network, a five-year, $150 million initiative to help connect school computers to phone lines.

Robert B. Reich, until recently the U.S. secretary of labor, argues that corporate philanthropy is hardly a substitute for paying taxes that support the basic operation of schools: "Companies that know full well that the education system is the pipeline for their most important productive assets are pressing states and localities for financial benefits that risk blocking the pipeline."

'Way Too Much'

If the well-known maker of Dog Chow and Eveready batteries leaves St. Louis, Purina's 40-acre St. Louis facility will likely sit empty, and the budget for the city schools will take an $880,000-a-year hit. An existing tax deal already saves the company a good portion of its property-tax bill, and any new breaks to keep the company in the city could further whittle down its contribution to schools.

Because many of St. Louis' most prominent businesses pay no property taxes at all, city officials consider Ralston Purina one of the city's leading corporate citizens.

"Checkerboard Square has been synonymous with St. Louis for as long as I can remember," said William Purdy, a school board member and former high school principal. "And they've had a good partnership with schools. If they move, it will be a big loss."

At the same time, more and more educators nationwide say they are waking up to the problems tax incentives pose to schools.

"Our schools are in deplorable condition, while downtown basks in the new buildings to the tune of $1.5 billion, virtually all abated," said Meryl T. Johnson, a teacher at Charles W. Eliot Middle School in Cleveland. "The last straw came last March, when Cleveland gave tax abatements and anything else the National Football League wanted at the same time the roof of the A.J. Rickoff Elementary School collapsed," she said, recalling the city's all-out but unsuccessful bid to keep the Cleveland Browns football team last year.

Tax incentives are a problem for schools in new communities, too. Rio Rancho, N.M., is an oft-cited example of the trade-offs that communities make to court big business.

Three years ago, the Intel Corp. announced a $1 billion expansion of its computer-chip plant in the Albuquerque suburb after state officials offered an incentive package that included a 30-year exemption from taxes on real estate and equipment. Not paying property taxes will save the company, which reported 1995 sales of $16.2 billion, an estimated $440 million over the term. Other deal sweeteners amounted to another $125 million in state tax breaks over five years and $2 million the state will pay to train workers.

Property-tax breaks have also welcomed other companies to Rio Rancho. As a result, school enrollments quickly outpaced the tax base, and local schools began to burst at the seams. School officials estimate that roughly 15 percent of the Rio Rancho district's 2,400 students have a parent working at Intel.

A year after the deal, the school board and 100 local students visited the state legislature wearing yellow ribbons that read: "We're desperate." As an accommodation, Intel agreed to pay $30 million to build a new high school--slated to open in the fall. But critics say Intel got off easy, especially considering its impressive earnings.

"If you look at it objectively, they built a $30 million high school to get the $400 million or so in tax abatement," said Eric Schmieder, a consultant to the Southwest Organizing Project, a tax watchdog group in Albuquerque. "It's just way too much."

And even with the Intel donation, Rio Rancho residents raised their own property taxes to pay for a $22 million school bond. The proceeds will pay for sports facilities at the new school, other construction, and, perhaps ironically, computers.

School officials are careful not to bite the hand that feeds them.

"It was win-win for both," Rio Rancho Superintendent Sue Cleveland said. "They got a good deal and we got a good deal. We needed a high school."

Enterprise Zones

In Ohio, the state's enterprise-zone program allows local agencies to offer businesses up to 100 percent exemptions on real- and personal-property taxes. Designed as a way to give poor areas a competitive edge in seeking jobs, the program now includes more than 1,000 Ohio communities.

According to state records, $2.1 billion in property was left off the books last year, causing school officials to wonder when economic-development agencies are going to stop trading away their potential--and often sorely needed--school revenues.

"They're giving away our biggest source of income," said Alan Hutchinson, the treasurer for the South-Western City School District in Columbus, Ohio, where the biggest beneficiary recently is Spiegel Inc.'s distribution center. "It's gotten out of hand."

As in Rio Rancho, the people in Columbus who stay on the tax rolls are paying the price. In 1994, the same year Spiegel arrived, voters raised the property-tax rate by 8.9 mills to deal with growth. That meant an extra $266 a year for the owner of a $100,000 house, raising the hypothetical homeowner's tax bill to $1,100 a year. Meanwhile, Wal-Mart Stores Inc., the Consolidated Stores Corp., and the White-Westinghouse Co.--all big businesses in the district--pay the same as Spiegel: nothing.

Ed Hurley, a school finance analyst for the National Education Association, said that employers' efforts to skirt local taxes is a "contrary trend" to the growing need for skilled workers.

But even the nation's largest teachers' union is not paying its share: The NEA's headquarters in downtown Washington benefits from a federal charter that exempts the group from property taxes.

Last year, the union offered to make an annual contribution to the beleaguered District of Columbia schools in lieu of the estimated $1 million a year the union would pay if it were charged property taxes. But according to NEA lawyer Maurice Joseph, the city has yet to establish a formal program for such a payment. Instead, Mr. Joseph said, the union gave the city of Washington $100,000, "no strings attached."

Competition Abounds

Literally thousands of state, county, and city development agencies across the country offer an array of tax breaks to all kinds of new and expanding businesses.

At their most blatant, some deals allow businesses to avoid being in a school district at all. Decades ago, when thriving businesses like the Monsanto Co. and the Aluminum Ore Co. moved to East St. Louis, Ill., they technically existed in their own specially incorporated townships. The deals allowed them to avoid paying property taxes despite the needs in one of the nation's poorest cities. Monsanto was one of several companies operating in a "town" called Sauget.

The companies are gone now. And the East St. Louis school district is under state control because of its financial problems and mismanagement.

Schools in Tarrytown, N.Y., are waiting to see what will happen as a result of General Motors' closing a 100-year-old car plant in 1996. Under a longstanding agreement with the village and school district, the plant got tax-exempt status and made $2 million yearly payments to Union Free Schools of the Tarrytowns in lieu of taxes--a sum estimated to be about half its full property taxes.

The 2,100-student district, which has a $28 million annual budget, will receive a payment from General Motors through next year. But then the money stops.

School treasurer Andrew LaBella is looking for the "least painful" ways to make do without the company's money, but says he fears higher taxes for homeowners.

"It's a very unfair thing," Mr. LaBella said of the tax breaks that helped GM for much of its stay in Tarrytown. "I know what GM is making. I read the paper. Kids get hurt and stockholders get rich."

The competition for new jobs is immense. Tarrytown's loss was a gain for Arlington, Texas. And in the same way that cities duke it out to land a company, states and regions fight each other. The competition just makes the deals more enticing.

"Clearly, this is a serious problem," said William J. Hunter, an economics professor at Marquette University in Milwaukee. "It's become a new sort of civil war."

Taxes that should help pay for schools, training, and infrastructure--factors that would help build up localities--are given away, Mr. Hunter said. "The competition should be based on the quality of the educational opportunity, on the skills of the workforce."

The scramble for jobs becomes a battle of "public goods versus private goods," according to Melvin L. Burstein, the general counsel for the Federal Reserve Bank of Minneapolis. Mr. Burstein and the bank's director of research, Art Rolnick, have done extensive studies on what they've dubbed "the economic war among the states" and its effect on public treasuries.

"Competition through preferential taxes is bad for public goods," Mr. Burstein argued. The use of incentives, he said, leaves the average community with reduced tax revenue for schools, libraries, police, and infrastructure and with worse economic prospects in the long run.

Economic-development officials and business leaders who profit from tax breaks argue that everybody wins.

Not a 'Giveaway'

The incentives create jobs, the reasoning goes. Jobs bring other businesses, and ultimately, supporters say, taking into account taxes on income, sales, and other sources, overall tax revenue increases.

Tax incentives "aren't a giveaway," said Donald Jakeway, the president of the National Association of State Development Agencies in Washington. "They are tools. We invest taxpayer dollars and get a measurable return on the investment."

Michele M. Hoyman, an associate professor of political science at the University of Missouri in St. Louis, has written about rural areas that have become the home to major auto manufacturing plants. As a result of the new presence, she found that school curricula have been upgraded and higher payrolls and spinoff companies have given many schools a boost.

But the critics counter that tax abatements distort the marketplace, chip away at needed public funds, and shift tax burdens unfairly to homeowners and consumers.

The detractors also point a finger at executives who fault public education for being inadequate while negotiating their companies' way out of paying property taxes.

"Corporate leaders can't have it both ways--bemoaning the real-enough defects of the education system while siphoning off the resources required to fix them; arguing that market pressures prevent them from shouldering some of the burden of preserving a civilized society while seeking special tax breaks and subsidies to shield them from the same market pressures," Mr. Reich argued.

Alabama posts some of the lowest student-achievement scores in the nation, and lawmakers there are under court order to fix an unconstitutional school finance system.

The state is also home to one of the newest and most modern factories in the country: the Mercedes-Benz plant nestled in the once-sleepy town of Vance. The plant will begin producing Mercedes' new luxury sport-utility vehicles next fall.

The state set something of a record in 1993 when it granted more than $300 million in tax breaks and other inducements to outbid 30 other states for the plant and its promise of 1,500 jobs.

Schools have yet to see themselves as winners in the latest deal.

"The Mercedes deal cost education a lot more than it should have," said Joe Cottle, the director of government relations for the Alabama Education Association.

Because Alabama schools get most of their money from the state, "any funding given away at the state level is one less teacher, one less textbook, or one less computer," he said. "Schools have taken a direct hit."

Healthy, prosperous companies should not get subsidies and tax breaks at a time when politicians and business leaders alike argue that major work is needed to build a first-rate public school system and a skilled labor pool, according to Jeffrey A. Finkel, the executive director of the National Council for Urban Economic Development.

The chief executives of AT&T, the International Business Machines Corp., the Boeing Co., the Eastman Kodak Co., and the Procter & Gamble Co.--all captains of American industry--are leading the call for more productivity from schools. They sit on the governing board for a national organization working with states to raise school standards.

But even as they pound the lectern for education reform--reform that requires money to implement--their companies seek tax incentives that deplete school funds.

In Warren County, Ohio, for example, Procter & Gamble negotiated a 50 percent property-tax abatement for its $280 million health-care research center. In Westchester County, N.Y., state and local officials offered IBM tax incentives and a $75 million low-interest loan in 1995 after the company contemplated leaving its headquarters there.

Stabs at Reform

Nationally, the property taxes paid by homeowners, businesses, and farmers account for about 45 percent of elementary and secondary school budgets. State taxes provide about half of the money. The remaining sliver comes from Washington.

Tax incentives were initially intended to encourage businesses to take a chance on blighted areas by allowing companies to plow what would have been tax money back into a project.

While the tool is immensely useful to rejuvenate decaying properties, experts say that current tax incentives go far beyond helping erase poverty.

Schools in a number of places are asking their states to take another look at the incentives. In Texas, an influential lawmaker is pushing to get rid of tax abatements that take money from school districts.

Roy Bennett, the superintendent of Nebraska's Bellevue school district, said that his 8,900-student system loses $200,000 a year because of four tax deals struck in the past three years--enough money to pay for five new teachers.

In addition to the revenue loss, he objects to not having a say in the process. A Bellevue City Council member added: "The floodgate is open and there is no way to stop it."

The $6.9 million that Nebraska districts lost to tax deals last year is complicated by the fact that the state recently imposed a cap on property taxes. That means local districts are limited in how much they can ask local property owners to pitch in to make up for the breaks businesses have negotiated.

"I don't think the average person realizes their impact," Mr. Bennett said. "But if you ask, 'Are you willing to pay $50 or $100 a year in taxes so business can be here?' they see it differently."

A bill backed by the Missouri School Boards Association would require cost-benefit analyses of projects before deals could be made. The bill would also require local officials and companies to sign an affidavit saying that the project hinged on the tax break.

The Missouri bill would tighten the state's definition of blight, and it would add two more people to the commissions that approve the tax deals. Brent Ghan, the spokesman for the school boards' group, would like to see one of those seats reserved for a school official.

"It seems like an issue whose time has come, and we should get some action," Mr. Ghan said.

Hard To Buck Trend

But reversing the trend of generous tax deals is not likely to be easy now that they are so commonplace.

In a survey by the Lexington, Ky.-based Council of State Governments, 47 states responded that their business incentives will stay the same or increase in the next five years. Just three states expect to see a decline.

That's bad news for schools, say critics, who argue that no place in the United States can ever win the competition to offer the lowest wages or taxes since underdeveloped countries can go still lower.

Reformers idealistically challenge state and local governments to compete for business not on the basis of tax cuts but on the merits of their public schools, amenities, and labor pool.

Elliott D. Sclar, a professor of economics and urban planning at Columbia University, said that if workers' skills and good schools are a determining factor in how the nation performs in the global economy, making sure schools are not shortchanged is "a no-brainer."

"My advice is for state and local governments to stick with what they do best and invest public dollars in education and infrastructure. If I were the mayor of New York City, I would do nothing but focus on making its schools the best," he said. "It's the one sure thing that the government can do to attract business."

But Mr. Burstein of the Federal Reserve Bank said it is unrealistic to fault companies for asking for incentives or taking them.

After all, it is government officials who are giving tax money away.

"Business leaders can't be blamed for looking after their bottom line," he said. "If tax abatements are available, they would be foolish not to take them."

Next week: How school officials struggle for a voice in negotiations over corporate property tax breaks.

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