Tax Lean

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

</1>I<1>n contrast to the breathless game of catch-up the county is playing to rein in its abatement program, the city runs a crisp, efficient operation. Bill Calderon, a scrappy man with an executive's edge, has been overseeing tax breaks for the better part of ten years.

"Nobody tracks [compliance] better in the state," he none-too-subtly inserts into a conversation at his spacious downtown office.

Despite his crowing, Calderon gives employment numbers for several companies that do not match documents on file with the appraisal district. For example, his office shows Dynegy Inc. to have 1,186 employees as of January 1; HCAD information reflects just 903 workers. For Van Leer Flexibles, the city has a January 1 employment figure of 198; HCAD records show only 12.

Calderon trumpets the audits his people regularly conduct on location and proudly proffers one data-rich document after the other. His expansiveness has its limits, however. He makes no attempt to mask his displeasure when a reporter peruses his abatement files for what he feels is too long.

Calderon is a man who clearly agrees with the Greater Houston Partnership that what is good for businesses is good for Houston. He speaks like a triumphant athlete in a postgame interview when he talks about a deal the city cut with Continental Airlines to relocate downtown.

"We were very aggressive," he says. The words "State Enterprise Act," "franchise tax reduction" and "sales tax rebates" roll off his tongue like a jazz riff.

If the county's abatement office suffers from chronic disorganization, Calderon's ship may be freighting an overly charitable heart. Records show that at least four companies -- Dreyer's Grand Ice Cream, PCS PrimeCo, Telxon Corporation and Apollo Paper Company -- continued to get abatements after failing to meet employment and/or property-value requirements.

The city appears to have looked past the job shortfalls of Telxon Corporation, a Delaware-based computer business. City records show the company committed to employing 325, but had only 199 workers as of January 1. Nevertheless, Houston has indicated to HCAD it will approve this year's abatement.

The city also has forgiven Houston-based Apollo Paper Company, which failed to meet its job-creation target of 85 full-time employees by nine positions.

Calderon speaks of giving companies "the benefit of the doubt." In the city's treatment of BMC Software, he appears to have stayed true to his word. In 1991 Houston and the county granted $45 million in abatements to the high-tech firm to construct corporate headquarters on City West Boulevard. In 1997 the surging company nabbed a $27.5 million break to construct another office building adjacent to the first facility. City records show that, with the addition of these two facilities, the company's employment in Houston jumped from 346 in 1991 to 2,191 in 2000.

By last year, the software maker was soaring. It wanted to add five new office buildings on what was fast becoming a campus of sorts. BMC sought a two-phase abatement deal -- first to construct a six-story building and a 20-story building with a combined value of $100 million, then to add three 16-story towers valued at $150 million. As a result of the combined abatements, both the county and city would forgo more than $9 million in taxes.

The company estimated that 4,750 jobs would be created by the latest projects, with an annual payroll of $380 million.

City Council approved the deal, but commissioners court balked.

"They literally were moving across the street from where they are currently located," Turkel explains. "That didn't bother the city, but it did bother folks in the county."

</1>T<1>he prevailing dynamic in tax negotiations between businesses and local government is fear, with the companies holding the far bigger stick, says Steven Craig, the University of Houston economist.

Companies play the threat of setting up shop elsewhere with maximum effectiveness -- often pitting one local community against another -- to secure a sweet deal from a given jurisdiction.

"It's a game of chicken between the company and the locality," Craig says. "Companies have the advantage because they know what they're going to do."

For advocates of abatements, the issue comes down to jobs, capital investment and increasing the tax base. Pam Lovett and Kent Fuller of the Greater Houston Partnership are two of the staunchest proponents of such incentives. They play an advocacy role for companies trying to sell their development plans to local governments. The way they see it, businesses are competing not just locally but globally, and area governments can lure them with tax breaks that shave start-up costs. Sure, tax revenues are lost for a few years, they say, but in the long run the area could have a new chemical plant or corporate headquarters that provides jobs and contributes millions in local taxes for decades.

"We're looking at every tool we have to make it possible for companies to make the decision to grow, to expand, to commit to Houston," Lovett says.

Texas, one of the few states without an income tax, taxes property at a higher rate than many other parts of the country, Fuller says. Without a way to offset those costs, an oil company might just as soon set up shop in Louisiana or New Jersey. Besides, Fuller argues, under most abatements the company is 100 percent exempt from paying taxes on improvements for only the first three years, and gradually pays increasing amounts over the rest of the ten years. Under that schedule, 56 percent of the taxes on improvements are abated overall during the period of the agreement.

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