What are tax abatements?
Tax abatements are a type of financial mechanism used by counties across Indiana to encourage (1) new investment, (2) the redevelopment of under-utilized areas, or (3) the rehabilitation of outdated structures. While abatements often lead to the creation of jobs in local communities, the process and mechanisms of tax abatement are often misunderstood and misinterpreted.
The main criticism behind tax abatements is that the county is giving up all tax revenue generated by the property for a certain amount of time to finance programs to revitalize the local community. However, this is a misunderstanding. Instead, the county is actually offering to forego a portion of the increased tax revenue, which arises from the improvements to the property, for a fixed amount of time.
How does a company secure a tax abatement?
For example, Company Co. wants to build a new $50 million factory and hire over 100 new employees to operate the factory. One of the potential factory sites is currently bare ground in Shelby County, located adjacent to other existing industrial sites. Before Company Co. commits to spending $50 million in Shelby County, it will ask the county for a tax abatement to help offset the cost of the project. In Shelby County, the tax abatement process is handled by the County Council.
To ask for the abatement, Company Co. would file a Statement of Benefits (via an SB-1 form) and additional documentation with the Council. Company Co.’s Statement of Benefits will provide details of the applicant, the location of the factory, a description of the improvements to be built on the land, employment opportunities created by the factory, and the total estimated cost and value of the project. The Council will review the Statement of Benefits at a normally scheduled meeting, without special notice, to determine if the benefits warrant tax abatement or reduction.
If Shelby County determines that a tax abatement is appropriate for Company Co., the Council will establish an abatement schedule, including the abatement amount and a period of time for the abatement. The abatement schedule will be based upon the following factors: (1) the total amount of the investment in the factory; (2) the number of new full-time equivalent jobs created; (3) the average wage of the new employees compared to the state minimum wage; and (4) the infrastructure requirements for the factory.
How are tax abatements beneficial?
Another common misunderstanding about Indiana tax abatements is that Company Co. will not pay any taxes during their abatement period. In reality, Company Co. will continue to pay the tax amount assessed on the property before construction of its factory. However, it will not pay for any increases in taxes throughout the abatement period. By capping the tax amount, Company Co. will be able to invest more into the construction of the factory and creation of jobs, and Shelby County will still earn the tax revenue that it would have received prior to Company Co.’s construction. After the abatement period ends, the factory will be fully operational, dozens of new jobs will have been created, and Company Co. will pay an increased amount of taxes to Shelby County based upon the full value of the factory and underlying land. As a result, both Company Co. and Shelby County benefit from the tax abatement.
Indiana tax abatements can be complex, but the experienced attorneys at McNeelyLaw LLP can help guide you through the process – give us a call today to discuss 317-825-5110.
This McNeelyLaw LLP publication should not be construed as legal advice or legal opinion of any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.