There are several problems with tax abatements. First, many elected officials aren’t really saavy about taxation impacts. Second, flat rate abatements put more money in the pockets of businesses no matter how successful they are. Third, it only takes a little logic to realize that if government doesn’t lower spending commensurate with the money they aren’t collecting, someone (read all other taxpayers) picks up the tab.
Taxation Impacts
I’ve written before about elected officials strutting around telling citizens how much revenue some development will generate. I’ve complained that these same elected officials never provide an estimate of the government services costs associated with that same development. Do we taxpayers ever get to see an income to expense report? Ask for one and you’ll get your answer.
I did one in Denville Township when I was in office. It wasn’t hard to calculate the cost of municipal services per capita. That included municipal expenditures and school expenses (Denville has 2 school systems: K-8 and a regional high school system). Using census data, it wasn’t hard to figure these numbers. It also wasn’t hard to find the total annual tax revenue. It was a line item in our budget, as was the annual collection rate (not everyone pays their taxes on time).
We also used a term which I’ve never heard in Texas: ratable. A “ratable” was a development that generated more in taxes than it cost in services. Isn’t that what they should be seeking? If they have no idea what a development will cost (police, fire, public works, administration, etc), how can they begin to think that just because it generates revenue, it’s a good thing for the government (taxpayers) bottom line?
Most of us balance budgets ourselves comparing income to expenses. It’s time governments be required to do so for every new development of a certain size. Without that, they can’t justify one dollar in abatement.
The Abatement Drain
Let’s use the abatement Bastrop County gave to the EdgeConneX data center as an example. It abates 75% of property taxes for 10 years. Why?
Data centers are basically racks and racks of computers. Is the EdgeConneX a carrier neutral data center (meaning multiple customers use the data center)? Or will it be a single customer data center (for example, serving only one business)?
In either case, why a 75% property tax abatement if the data center is, for example, 50% full? That makes no sense.
What does make sense is an abatement based on occupancy as a proxy for income. If a carrier neutral data center is only 20% full year one, then a 75% abatement makes sense that year. If that carrier neutral data center is 50% full in year two, then a 50% abatement makes sense that year. And, on and on. Consider this possibility:
0 to 20% rack occupancy: 75% abatement
21% to 40% rack occupancy: 60% abatement
41% to 60% rack occupancy: 40% abatement
60% to 80% rack occupancy: 20% abatement
Over 80% rack occupancy: no abatement
This makes far more sense than a flat 75% for 10 years. If only one customer is leasing data center rack space, the abatement could be 75%, 50%, 25%, 0%, dependent on functional rack space.
Lower Government Spending
A data center will require enhanced and potentially specialized public services like police and fire. Specialized equipment, chemicals, lighting, electrical connections, specialized fire fighting apparatus and more will be required.
Who will pay? Texas doesn’t have an off-site improvement law requiring developers to pay for off-site improvements needed as a result of their development. There is no law requiring impact fees. Impact fees cover things like additional schools or classrooms required as a result of housing developments.
Even if it did, because counties have no land use regulatory authority, it is likely that developments in unincorporated areas wouldn’t garner the benefits of either of these.
Again, who will pay? Logic says it should be the developer by paying the full freight of their property tax levy. But a 10-year abatement changes all that. Some improvements, like power infrastructure, water and sewer lines, need to be built within that 10-year abatement, which means other taxpayers (residential, commercial & industrial) will pay higher bills to cover those costs. A good example is the million dollar right turn lane paid by City of Bastrop taxpayers instead of the developer who caused it to be needed in the first place.
Solution
I submit that our elected officials stop giving away flat rate abatements. Personally, I’d like to see them stop all abatements. But, if they must because that’s the only way they can put some controls on a development as the county commissioners claim, they should tie an abatement to business success.
If a business makes more money, the tax abatement is reduced accordingly. Data centers fit this model perfectly and our county commissioners should start using common sense. Stop saddling current property taxpayers with a bill the business should be paying.