by Charlie Wise, Senior Vice President, and David Tiggett, Managing Director, Keybanc Public Finance
Economic development agreements—such as Tax Increment Financing (TIF), tax abatements, and Community Reinvestment Areas (CRA)—are designed to attract investment and stimulate growth. However, these incentives often come with positive and negative consequences for Ohio’s school districts.
The Pros of Tax Incentives
1. Economic Growth and Development
One of the primary advantages of tax incentives is their ability to attract new businesses and stimulate economic growth. By offering tax breaks, municipalities can encourage companies to set up operations in their area, leading to job creation and increased business activity. This economic growth can, in turn, benefit school districts by expanding the local tax base and potentially increasing future revenues.
2. Increased Future Revenue
Although tax incentives may initially reduce the amount of property tax revenue collected by school districts, they can lead to higher property values and more commercial and industrial development in the long run. Once the abatement or TIF period ends, the school district stands to gain from the increased tax base. For example, a downtown redevelopment project that initially receives a tax abatement will eventually contribute fully to the district's tax revenues.
3. Infrastructure Improvements
Many tax incentive deals are tied to public infrastructure improvements, such as roads, utilities, and sewer lines. These improvements benefit not only the new development but also the broader community, including the school district. Enhanced infrastructure can make the area more attractive, potentially leading to increased enrollment and a more stable local funding base.
4. Collaborative Relationships
By participating in the negotiation process, school districts can ensure their interests are represented. This collaboration can lead to revenue-sharing agreements and other partnerships that benefit the district and protect its financial health.
5. Community Attractiveness and Enrollment
Growth in business and population within a district can boost enrollment, helping to maintain economies of scale and provide more stable local funding. Additionally, incentive agreements can support industry partnerships, benefiting the district's students.
The Cons of Tax Incentives
1. Reduced Tax Revenues
When a business or developer receives a tax incentive, the school district often receives less property tax revenue or fewer incremental tax dollars than it otherwise would have. This reduction in expected funds can limit what the district can spend on operations, programs, maintenance, and staffing.
2. Financial Instability
Incentive agreements often rely on assumptions about future tax base growth, stable millage rates, or stable property valuations. If these assumptions fail, the district can face revenue shortfalls. This unpredictability makes budgeting harder for the district, as forecasting becomes riskier.
3. Compromised Bargaining Power
School districts may not have as much direct input when incentives are negotiated by municipalities, counties, or developers. This reduces the ability of a school board to assess whether the incentive is truly beneficial relative to the cost. If the district lacks sufficient ability to negotiate terms, it may face risks without adequate protections.
Taking a Strategic Approach
1. Engage Early and Build Relationships
Proactive engagement with municipalities, counties, and developers ensures schools have a voice in shaping terms. Form alliances with chambers of commerce and regional planning agencies to stay informed about upcoming projects and incentive frameworks.
2. Understand the Legal Framework and Notice Requirements
- 45 business days for TIF exemptions requiring school board approval.
- 14 calendar days if approval is not required.
3. Consider Compensation Agreements
Ohio law requires compensation agreements in certain cases. For example, if abatements exceed 75% or last longer than 10 years, approval is needed unless the district is “made whole” through Payments in Lieu of Taxes (PILOT). Districts should seek to offset any property tax loss.
4. Establish Internal Policies
Districts should consider policies for reviewing and approving abatements and establish processes for compliance monitoring and reporting.
In conclusion, while tax incentives can attract new businesses and development, districts should approach economic development agreements strategically and systematically to protect educational funding while supporting community growth.