Tax Lean

Want a subsidy for your corporate expansion? Local governments are ready with millions in property-tax abatements -- and very little oversight.

Joan Harmon, the assistant controller at Lamons Metal Gasket Company, takes a moment to reflect on the $8.5 million tax exemption that both the city and county approved for the company to stay in Houston and build a new factory.

"That's a nice chunk of change not to have to pay," she says. But Lamons would have invested in a new facility here even without the generosity of local governments, she adds. The company has called Houston home for more than 60 years and has established a strong customer base among the area's chemical plants and refineries.

"We definitely would have stayed in Houston. There was never any thought of leaving," Harmon says.

UH economist Craig says tax breaks for some companies provide advantages over competitors.
Deron Neblett
UH economist Craig says tax breaks for some companies provide advantages over competitors.

However, that's not how the deal was sold back in 1997, when the manufacturer of gaskets, bolts and other industrial components applied for a tax abatement to build a "state of the art" facility.

The company pitched its expansion plan to Houston leaders, signaling its intent to create jobs and invest millions in a new plant. City officials liked what they heard and, in keeping with protocol, prepared a summary to sell City Council on the plan.

To win an abatement, a business must indicate that it has shopped around for sites elsewhere and that there is a real chance that it might relocate if it doesn't get a tax break. The city's summary for the company said, "Lamons continues to explore the possibility of closing its Houston facilities and transferring those operations to a location in Louisiana or Pearland, Texas."

It noted that Lamons would retain its 260 employees and hire 25 more, and that the plant would have Houston humming to the tune of $83.7 million annually in related economic activity. "It is probable, but for the abatement, these jobs would not be retained/created," the summary said.

The prospect of a workers' exodus and the loss of an $83.7 million economic windfall was enough to persuade Council to waive more than $300,000 in taxes for the company. Councilmembers approved the tax break in December 1997, followed by their counterparts on Harris County Commissioners Court some four months later.

Harmon says company brass did look at property in Pearland, but had concerns about getting away from the refining companies that have helped it generate a hefty $75 million in annual sales. The tax breaks were "icing on the cake," she says, but they didn't make or break the decision to stay in Houston.

"There was never any thought of moving somewhere else," Harmon says.

L<1>ocal governments continue to dangle tax breaks before scores of eager businesses, even as the booming economy rains black ink on corporate ledgers. Houston and Harris County have left billions of dollars off the tax rolls in recent years to subsidize companies' growth. Among the beneficiaries are firms with notorious records regarding safety and the environment.

As part of the abatement quid pro quo, businesses commit to enhancing property and creating jobs. But local governments, particularly Harris County, have done little to ensure compliance. A lengthy document review by the Houston Press reveals erratic oversight, failure to enforce contracts and atrocious record-keeping.

Proponents of abatements argue that these tax incentives generate employment, add infrastructure and, ultimately, expand the tax base. In the mind of City Councilmember Bruce Tatro, the question becomes, "Is [a tax break] needed to incentivize, or is it just a giveaway on something that is going to happen anyway?"

Critics see abatements as a classic case of robbing Peter to pay Paul. At a time when area homeowners are watching their property taxes soar, economists like Steven Craig of the University of Houston remain unconvinced that tax breaks for deluxe new office towers or lucrative manufacturing plants do anything more than shift the tax burden from select companies to other taxpayers. Abatements create an unlevel playing field for the companies' competitors that pay full taxes, he notes.

"In some sense we'd all be well served if [tax abatements] were illegal," he says. "Everybody should have to pay [equal] taxes."

While abatements are down in Harris County from five years ago, they are on the rise in Houston. The city's abatements are on pace to more than double totals for 1995, when about $170 million in valuation was excluded from the rolls. Preliminary figures for this year show $392 million in exemptions, for a loss of $2.6 million in tax revenues.

Records indicate that last year $924 million was kept off county tax rolls, amounting to nearly $6 million in uncollected revenues. In 1995, more than $2.5 billion in assessed value went untaxed.

County officials claim the shrinking value of abatements indicates they have become more discriminating. County Judge Robert Eckels says the county has gotten tougher about recapturing taxes from delinquent companies and has added clean-environment standards as a criterion for receiving a tax break.

Last fall the county created a new division to administer incentives such as abatements and to act as a watchdog. Eckels points to the office of economic development as a sign that the county is serious about running a tight ship.

But such late-hour measures reflect a scrambling to make amends for years of merely taking companies' word that they are in compliance with the abatement terms, even as they have enjoyed a free ride on the taxpayers' dime.

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