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.
Councilman Tatro believes Houston approves abatements for companies that would relocate to the city regardless.
Councilman Tatro believes Houston approves abatements for companies that would relocate to the city regardless.

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.

The city, by contrast, has a more sophisticated abatement program. But it is far from trouble-free in administration and record-keeping. Houston is less likely than the county to penalize companies that don't meet the terms of their agreements.

"We try to give companies the benefit of the doubt where we can, and work with them through technical problems," says Bill Calderon, the city's assistant director of planning and development.

David Turkel, the county's administrator for economic development, is a former colleague of Calderon's in Houston's finance office. The county hired him to oversee its abatements and other incentive programs.

Before the creation of Turkel's division, the county judge's office administered abatements. Under the standard agreement, a company receives tax breaks on the value of improvements it makes to a property. A business commits to raising the value of a property by a certain amount and to creating or retaining a fixed number of jobs. Current county and city guidelines require a company to increase a property's value by a minimum of $1 million and create -- or prevent the loss of -- 25 full-time employees. Typically abatement contracts run ten years.

Abatements have been available in Texas since 1981, when the legislature first gave cities and other taxing jurisdictions the power to grant such tax breaks on buildings and equipment. County Judge Eckels says little was done by his predecessor, Jon Lindsay, to track companies with abatements.

"My office started looking at [abatements] and saw there were problems early on. We had no way of knowing [if companies were complying]," he says. "If we found they weren't creating the jobs, there was no way to get our money back or sanction them. There was nothing in the abatement that provided for that, so we started putting that in [agreements] and eventually set up a full-time office."

But Eckels, who came into office in 1995, apparently was in no hurry to cure those defects.

The task of bringing order to the abatement program now falls largely on the shoulders of Turkel, a large affable man with ruddy cheeks, thinning gray hair and a mustache. He readily concedes that his staff and information systems are only just coming together. He tries to be helpful by compiling information on the county's abatements, but the data is so riddled with errors, inconsistencies and omissions that it raises serious questions as to how -- or even whether -- the county has been monitoring abatements all these years.

For 19 of the 133 abatements, Turkel's office lists 1999 values that are different from those of the Harris County Appraisal District. HCAD does the tax-roll valuations. Some of the differences can be chalked up to simple data-entry errors, a point Turkel makes several times.

But he finds other instances harder to explain. In one case, the county shows Ellwood Texas Forge, a steel manufacturer, as having an exemption value of $4.3 million for 1999. HCAD, on the other hand, lists the value at only $550,000. At first, Turkel disputes any discrepancy, saying that he got his number straight from the appraisal district. Then he logs on to HCAD's mainframe and sees his figure is faulty.

"This is weird. I see what you're looking at," he says to a reporter, before directing his suspicions at the appraisal district. "We're no better than the information we get from HCAD. That's what we pay them for. I'm not saying they're wrong. I'm saying we may be misinterpreting something."

HCAD's property appraisals are, along with employment numbers, an essential element in determining whether a company is abiding by an abatement agreement. These property values determine how much a firm will have to pay in taxes. The Ellwood case is not too serious, Turkel says, because the abatement is relatively new. During the first three years of an abatement, a company is 100 percent exempt from taxes on improvements. Therefore, Ellwood would not receive an erroneous tax bill as a result of the mistake.

But Turkel admits that if his data was incorrect for one company, the same could be true of others.

"It certainly gives pause to wonder if there are other instances where it might have made a difference," he says. His spirits sag further when he realizes there is another, similar mistake on his list. He complains that it would fall upon him to contact companies on the basis of flawed information.

"I would be the one winding up sending them a threatening letter, or the one who thinks everything is fine when they're in default," he says with a groan. "It's disturbing that HCAD may be giving us faulty information."

Turkel says he would never base final decisions about compliance on a single sheet of data, but rather on an extensive review of a company's file and frequent communication with HCAD personnel and officials from the companies themselves. "I believe we probably are collecting the correct amount of taxes," he says.

Even though Turkel and his staff oversee abatements, they still do not independently check to determine if companies are complying with the job-creation provisions in their abatement contracts. Companies merely report their own employment totals to his office. And unlike the city, the county does not conduct audits.

The county follows up on the companies' self-reporting only if there appears to be an anomaly, like if the numbers don't jibe with news reports of layoffs. "Unless we suspect there's a problem, we would accept that at face value," Turkel says. With self-reporting, he says, "You'd be surprised how honest people are…."

The city of Dallas was surprised, unpleasantly so, when officials, who long relied on companies to self-report jobs, completed a review of 90 abatement agreements there. Their study found that 22 companies had not complied with job-creation or property-improvement provisions in their contracts.

"The way we measured compliance was by essentially depending on recipients of tax abatements to tell us whether or not they were in compliance simply by filling out a form and mailing it in," says Alan Walne, a Dallas city councilman. "We will [do audits] from this point forward."

Houston's planning and development department conducted audits of some 25 companies with abatements over the past five years and found five companies in violation of their contracts.

Turkel, however, dismisses the need for audits. The county, he says, is doing just fine monitoring company performance without them, by reviewing the figures sent in by companies and tracking property values through the appraisal district. Turkel boasts that his office often catches glitches before the city does.

He offers the example of PCS PrimeCo, a communications company with abatement agreements with both the city and the county. The agreement called for the construction of a mobile switch station to serve Houston-area customers. The company committed to property improvements worth $13 million, and 150 full-time jobs.

By 1999, however, the company had only 122 full-time employees and had increased property value by just under $4 million.

"They never hit their total [for either jobs or improvements] back in 1999. We knew that and didn't give them an abatement," Turkel says. "The city waited and did an audit and only now, a year later, are they coming to the same conclusion." Calderon says Houston will terminate its agreement with PCS PrimeCo and recapture the taxes.

Turkel similarly boasts that it was the county, not the city, that last year denied an abatement to Dreyer's Grand Ice Cream for falling short of its job-creation goals by about 20 employees. But records furnished by Turkel indicate the county did offer abatements last year to PCS PrimeCo and Dreyer's.

He attributes the discrepancy to a data-entry error by his assistant.

"This is very embarrassing. We put this together for you overnight," he says, apologetically.

I<1>n 1997 the county added another supposed safeguard designed to send a strong signal to companies not to fudge their employee numbers. Officials added language to abatement contracts that requires companies to certify the number of jobs created as a result of the abated improvements, as well as the employee totals in other facilities operated by the companies in the county.

The information must be submitted annually in the form of a notarized letter to HCAD and the county judge's office. In the contract's ominous wording, the county warns that "Owner's failure to submit this information will render Owner ineligible to receive an abatement for that year."

It sounds strict enough. But a review of files shows that the requirement gets largely ignored by the appraisal district, the county and the companies.

Abatements are administered by the appraisal district once any of the dozens of towns, community colleges, utility districts and other taxing jurisdictions in Harris County approve the agreements. HCAD receives all documents that companies must submit annually and maintains the files.

"All the documents that are required should be there, period," says Phillip Craigen, one of three Texas state comptroller employees who reviewed HCAD's procedures in December.

And yet there is almost universal disregard for the notarized-letter provision. Companies failing to submit the required document include recipients of some of the largest abatements, companies such as Phillips Petroleum, Continental Airlines and Compaq Computers.

Eckels asserts that a signed, notarized statement would make it easier for the county to enforce contracts should compliance disputes arise and lawsuits be necessary.

Walt Gregory, HCAD's special projects director and the man who maintains the abatement files, says he doesn't seek the notarized letters because companies already report their employee figures on another form.

"In cases where we do not get a certifying letter, I don't pursue that," Gregory says. Reacquainting himself with the language of the contract, Gregory acknowledges, "[The letter] should be there."

Eckels maintains that the lack of the designated document is less important than whether or not companies are actually creating the jobs they say they will.

"If we're not getting the notarized letter, what I'd give them is an opportunity to cure that defect," he says. "I'm not looking to put 'I gotcha's' into the contract. If they're substantively conforming with our contract and creating the jobs, the fact that they've left off a notary's stamp does not offend me particularly other than it was a technical defect. But they should be complying with the contract."

County Commissioner Jim Fonteno takes a blunter stand. "They should be made to comply. If they're not doing it, they should. I think we ought to put them on notice and say we'll take them to court if they don't. There's no use having the language in there if you're not going to enforce it," he says.

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."

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.

Fuller urges people to not be lulled into a false sense of comfort by today's thriving economy. He vividly recalls the lean recession years of the 1980s when Houston lost some 220,000 jobs, by his estimate. County Judge Eckels echoes this line of thought in his own cautious support for abatements.

"You would never do an abatement based upon a short-term impact," he says. "But in the long term it leads to the kind of stable economic growth, stable infrastructure, the industrial development … in Harris County that sees us through the ups and downs of the national economy."

The county judge decries the way companies pit local governmental entities against each other to try to score a tax break, especially when a company's economic impact will spill over to a wider area than any single municipality. Competition between communities is fierce and can lead to surreal results.

T<1>he case involved an Englishman named Richard John Lawrence, who arrived in this patch of paradise to make a pitch for a Japanese electronics giant -- he never would say which. The company would create thousands of jobs, Lawrence told officials from the Greater Houston Partnership and their counterparts in Fort Bend and Tomball. All it wanted in return was a healthy tax break. Anyone interested?

The Partnership certainly was. It prevailed upon Harris County to offer an abatement. The Greater Fort Bend Economic Development Council went so far as to submit a contract to buy land in Rosenberg, with the aim of selling it to the unnamed company for a plant site.

Two local businessmen were so impressed by Lawrence they put him on their payrolls and supplied him with a car.

But all the jostling and hype turned out to be squandered on an empty lie.

There was no giant Japanese electronics firm, investigators said. Lawrence was allegedly just a shameless huckster playing on business boosters' eagerness to bring prosperity to their cities. He was charged with theft last September, accused of bamboozling the two entrepreneurs who hired him.

Eckels says he would like leaders from outlying counties to agree not to give abatements to companies that are scouting out turf in this region alone. "If you're going to be in this market area, the abatement should not be an issue on the table," he says.

"If none of us offered abatements, they'd still move here for transportation or schools or distribution centers or whatever amenities the developer is offering, but the taxpayers wouldn't be subsidizing that move, at least for the first few years."

Eckels believes tax abatements are not something that should be used all the time, but rather are "just one more tool in the toolbox of economic development." His ambivalent attitude is typical among leaders who view tax breaks the way a farmer would see potent, but not particularly healthy, fertilizers or pesticides. You've got to use them if you want your fields to produce a viable crop and compete for market share with other planters.

But Bernard Weinstein, director of the Center for Economic Development at the University of North Texas, would like to root out abatements altogether.

"Local tax incentives are a zero-sum gain and a dead-weight loss. They mostly go to large profitable companies which surely are not making investment decisions on paying a couple of hundred thousand dollars of local and state taxes," Weinstein says. "If Texas had never gotten into tax incentives, we'd have just as many jobs, our economic growth rate would be just as fast, and the pattern of industrial location would be just the same."

Critics like Weinstein and Craig hold that abatements have little or no impact on whether a company chooses to locate in an area, and pale beside other factors such as quality of the labor force, schools, location, infrastructure and proximity to suppliers. Weinstein says tax abatements are an offense to the concept of treating taxpayers uniformly.

Craig says that giving tax breaks to some companies gives them an edge over their competitors. "Your disadvantaged guys who are good citizens will get pummeled," he says.

In general, abatements get rubber-stamp approval by City Council and commissioners court. But when a proposed abatement does generate opposition, it's frequently prompted by protests from existing businesses. Such was the case when Albertson's sought an abatement to establish a warehouse. Commissioners voted it down. That was the one time Eckels can remember the court opposing an abatement.

Tatro, the one city councilmember who votes against abatements with any regularity, has rejected them on the basis of the potential harm to local companies. He criticizes his colleagues for approving abatements for firms he believes would have located in Houston anyway.

"We need to be a little more prudent with exactly who comes to the table in the first place," he says.

I<1>n January 1998 Robert Eckels's office requested information from the county pollution control department about the environmental record of Phillips Petroleum Company. The oil giant was seeking a $25 million tax abatement from the county to construct a K-Resin plant at its chemical complex in Pasadena. Eckels's office was doing routine information-gathering before the issue went to commissioners court for a vote.

The response to the query may have been more than the judge had bargained for. Rob Barrett, the pollution control director, unearthed 23 violations in the county and more than $1 million in fines levied by the state against Phillips for air and water infractions. All in all, the information compiled by Barrett made for a sizable stack of documents.

Eckels's office probed the records to determine whether there were any pending enforcement actions against the company. The previous year, the county had been in the awkward position of receiving an abatement request from a chemical company that was being sued by residents for air pollution infractions. Commissioners denied that application.

But track records apparently didn't matter. Phillips, despite all the past violations, seemed to be free from pending fines or litigation. Commissioners approved the tax break, exempting the company from paying hundreds of thousands of dollars in taxes for the next ten years. For its part, the company pledged to add 33 full-time positions to its sprawling Pasadena operation and an estimated $50 million in improvements.

Optimistic forecasts came crashing down, however, in March. An explosion ripped through the plant, killing one and injuring more than 70. It was the second fatal blast there within a year.

The facility remains closed while OSHA continues an investigation.

In June 1998 commissioners court amended its abatement criteria to include environmental qualifications.

"Tax incentives should not be used to attract those industries that have demonstrated a lack of commitment to protecting our environment, but should be used to encourage projects designed to protect our environment," the revised guidelines read. The document goes on to say that consideration will be given to compliance with all federal and state laws designed to protect human health, welfare and the environment.

Eckels says the changes were by no means aimed at Phillips specifically. But, he says, the company would "not likely get an abatement today."

Phillips now finds itself in a situation similar to that of 1989, the year a horrific blast at its polyethylene facility killed 23 and halted production. In the aftermath, the company sought -- and Harris County approved -- abatements for two new polyethylene plants.

Ralph Schelburne, a regional manager for Phillips, says he cannot confirm whether the company will seek another abatement from Harris County to rebuild the K-Resin plant. But he wants to be clear on a particular point: "Safety and environmental regulation are two of the biggest priorities at Phillips Petroleum regardless of tax abatements."

The company's avowed embrace of safety and the environment echo the county's newfound consideration of such issues for granting abatements. But it is possible officials may be looking for more than just words now when they consider tax breaks.

Commissioner Fonteno, whose district includes Pasadena, says a Phillips representative approached one of his staffers about another abatement. When Fonteno learned of the conversation, he says, he stopped the idea in its tracks.

"I told him I wouldn't recommend it [to commissioners court], so that was the end of it," he says. "They never did formally apply for it."

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