As one of its most effective economic development tools, the Tyler Economic Development Council (TEDC) has used tax abatements to encourage new investment in the Tyler area. A persistent myth regarding the use of tax abatements is that they REMOVE taxes from the tax rolls. In fact, all tax abatement projects continue to generate the same amount, if not more, of taxes as they did prior to being approved for the abatement. The taxes that are abated apply only to NEW capital investment in real and personal property and can never be applied toward the purchase of land or on existing plant and equipment. This is very attractive to new and existing companies that want to expand in our area. Most tax abatements have averaged 5 years, but can extend up to a maximum of 10 years. After the abatement period has expired, all the new investment becomes taxed at the current assessed tax rate.
Tax abatements are primarily considered for manufacturing or distribution facilities, corporate offices, research parks, major tourism attractions, or similar facilities if it can be demonstrated their development would create substantial capital improvements or jobs. The minimum project requirements are:
Capital cost (new plant and/or equipment) to be $1 million (real and personal property are eligible; land is excluded)
New annual payroll of $400,000
Minimum of 25 new full-time jobs to be created
A project must have at least ONE of these minimum requirements. The maximum allowable term for an abatement is 10 years, although most projects, based on real investment and job creation, average 4-5 years.
The following reviews must occur in order to assess the eligibility, amount, and term of an abatement project.
A prospect's eligibility is determined by economic development staff.
A review committee appointed by affected taxing entities considers the request for tax abatement and makes a recommendation to the affected taxing entities.
An abatement contract is negotiated with the company by the Chief Executive Officer of the taxing entity initiating the project and a representative of the TEDC.
After an abatement project is approved, the company must report their annual investment and job growth progress for each year of their abatement. If the company fails to meet the abatement contract terms regarding job creation, the abatement may be terminated or reduced relative to the company's job creation progress. For example, if a company only created 80% of the total jobs they were expected to create, they may only receive 80% of the abatement and would have to pay taxes on the remaining 20%.
As you can see, Tyler has a tool that can benefit many capital-intensive companies moving to Tyler or already operating in Tyler, without removing the benefits of the current tax income. This provides area companies a competitive advantage and creates new jobs and wealth. Although we have demonstrated the direct benefits to the company and local taxing jurisdictions with the example above, this project would have a multiplier effect with indirect benefits. These new jobs would provide higher wages and benefits to existing and new residents, who could spend their new salaries to improve or buy a new home, purchase nice clothes, and improve their overall quality of life. Their activity would generate even more property and sales taxes that are indirectly induced by this project. Perhaps the project brings several new families to the area. This would require more doctors, firefighters, teachers, etc. and provide more job opportunities in Tyler. As more jobs and wealth are created, retailers open in Tyler to provide new services to the growing population. As more retailers arrive, competition increases and drives prices down, benefiting all who live in or visit Tyler.
As simple a tool as it may seem, tax abatement has a tremendous impact on our economy!
The Texas Municipal League has assumed editing and publication of the Economic Development Handbook. The publication, originally prepared by the Texas attorney general’s office, had become out-of-date. League staff, as well as several recognized legal experts, have updated the handbook and posted it online. It will be updated following each session of the Texas Legislature.