To Abate Or Not To Abate? That Is The Question.

Should tax incentives be offered to induce economic development? This is a frequently debated question in New Rochelle, especially during political campaigns, when “30-year abatements” can serve as a convenient target for just about every discontent:

Want to attract new businesses? End the 30-year abatements.

How can we cut taxes? End the 30-year abatements.

Need to fix a pothole? End the 30-year abatements.

Looking for relief from aches and pains? You guessed it … end the 30-year abatements.

I am exaggerating, but only a little.

Now, to be clear, I am not dismissing or disparaging the genuine emotion that can surround this subject. For lots of folks, the mere mention of giving a break to developers stimulates a viscerally negative reaction. I get it: why should big corporations receive tax breaks, especially at a time when so many residents are working harder than ever to afford their family’s growing tax bill?

But if we let politics and emotion rule the day without putting some facts and common sense on the table, then taxpayers and our economy as a whole will lose. And there’s an awful lot that’s wrong about the “30-year abatement” argument.

For starters it paints an entirely distorted picture of New Rochelle’s development record and strategy. The critics are taking a single unique and never-repeated deal structure (for Avalon) and then wrongly extrapolating it to the entire downtown, as though the same terms applied to every other project. It just ain’t so.

In fact, most of New Rochelle’s major projects are currently paying full taxes, and, even after accounting for abatements, subsidies and service costs, the net fiscal impact of New Rochelle’s major developments is strongly positive — taxpayers are benefiting by about $7.5 million annually. That’s a conservative estimate. You can see some of the details in the charts at the top of this post and a more complete spreadsheet here.

Second, this argument is divorced from relevant historical context. Starting shortly after World War II, New Rochelle went on a long and painful economic slide, an experience common to similar inner-ring “first suburbs” around the country. While investment flowed to communities to our north and east, New Rochelle’s commercial center slowly hollowed-out. By the early 1990s, we hit rock-bottom: vacant lots surrounded the train station, an abandoned mall filled a downtown super-block, and an incinerator dump greeted motorists off I-95. When the patient is flat-lining, dramatic intervention may be needed – and it was at this moment that the Avalon project was conceived.

Built in conjunction with Library Green and with the launching of the Downtown Business Improvement District, Avalon became a catalyst for improvements in its immediately surrounding area. New Rochelle’s fortunes began steadily improving, with significant new investment enhancing our central business district and expanding our tax base. Tax incentives weren’t the only factor in the city’s turnaround, but they played an important role. (Other factors were: zoning and land use policies, investments in infrastructure, broader acceptance of urban scale and density within the downtown area, a favorable national economic climate, and some plain luck.)

There’s no doubt that New Rochelle still has a long way to go. Our commercial sector still lags well behind its potential. Many portions of our downtown remain distressed. We still lack a sufficient retail base. We need additional class A office space. And we’ve also had our share of setbacks during the past decade. I am keenly aware of the unfinished work ahead. My point is only that the trend line has turned positive, and that is good news. Many of the folks most loudly decrying “30-year abatements” during the current campaign literally weren’t in New Rochelle back in the 1990s, and may have difficulty perceiving those trend lines.

One final point before moving on. Whether or not you think the Avalon abatement was justified at the time it was granted, the fact is that the deal is now a decade-and-a-half old, and no comparable agreement has been offered since. Kids born when Avalon was inked are now in high school. End the 30-year abatements? They have been ended, for nearly a generation. Are residents entitled to look back and evaluate the wisdom of past actions? Sure. But making this project the focal point of a local political campaign in 2011 is like running for President with a fresh strategy for the War in Vietnam. It’s over. So when I hear candidates take up the “30-year abatement” refrain, the message I receive is that they are (1) oblivious to the facts; and/or (2) have absolutely nothing to say about the future.

Glad to get that off my chest.

So now let’s look forward. Because there is a legitimate and constructive discussion to be had about whether incentives should be used today and in the years to come. In considering a tax incentive for a particular project, I think the test must always be whether it serves the public interest. And to determine that, you need to pose four questions in sequence.

Question One: Does the project make good planning sense?

In other words, will the development improve the overall character of our community, from the perspective of economic vitality, physical appearance, infrastructure, environmental sustainability, creation of public amenities, expansion of job opportunities, provision of goods and services, or consistency with major land use objectives. Keep in mind that these benefits do not necessarily manifest in the government’s bottom line: things like a new park or increased demand for local restaurants are not necessarily associated with tax revenue, but those benefits are still quite real. Another way to phrase this same question is: will New Rochelle be a healthier community with a particular development than without it? If the answer is no, then your choice is easy — dump the project. If the answer is yes, then we need to move on to question two . . .

Question Two: Does the project’s viability truly depend on a tax incentive?

Remember, builders don’t put shovels in the ground because of charitable impulses. They decide to invest because of anticipated rates of return. Sometimes those rates of return can be achieved without any tax incentive and sometimes not. It depends on location, density, market conditions, and the myriad other factors that make each individual project distinct. To the extent that the City demands public goods, such as open space, high-end design features, public art or public parking, the cost of a project may increase and its profit margin may be squeezed. It must be the job of the City to rigorously test claims and assumptions, analyze developer projections, and make an independent judgment about what level of incentive, if any, is truly necessary to make a deal happen, and then drive the best possible bargain for taxpayers. Ideally, no tax incentive or subsidy is required, but if a tax incentive or subsidy is shown to be necessary, then we move on to question three . . .

Question Three: Will the project produce a net gain or a net loss for taxpayers?

Answering this question requires a broad and thorough analysis, encompassing all forms of revenue, including property taxes, sales taxes, mortgage taxes, permit fees, parking fees, contributions to the BID, etc. It must also honestly tabulate all service costs, such as the expense of educating students in the public schools, delivering basic municipal services, and so forth. Generally speaking, large projects are required to lay out these numbers in great detail prior to City approval, and while there is always some uncertainty in predicting future revenue streams, one can usually say with reasonable confidence that a project is either a net fiscal winner or a net fiscal loser. If the project will be a net fiscal winner, then approving the requisite incentive can be an easy call. If not, we need to move to the last question …

Question Four: Do the project’s planning and economic benefits (from question one) outweigh any fiscal cost (from question three)?

Let’s be honest: this often comes down to a judgment call, because some project costs and benefits are subjective, and others are hard to quantify. It is especially difficult to measure indirect spin-off effects, but these shouldn’t be ignored — sometimes they are the whole point of a project. For example, everyone seems to love the recent improvements on Division and Lawton Streets (If you don’t know what I mean, make a point of visiting: those two blocks are really shaping up with restaurants, fresh facade treatments, galleries, etc. and are models of what all of downtown New Rochelle could become over time.) Well, it’s unlikely that these positive changes would have occurred without the endlessly-criticized Avalon as an economic anchor for the area. For that matter, various full-tax projects, such as Davenport Lofts and 543 Main Street, would never have been built without Avalon first establishing a private investment “beachhead” in New Rochelle. Can I prove this? No. Can I quantify it? Only partially and roughly. But I think common sense and real-world experience strongly support these conclusions, and they need to be part of our overall judgment of a project’s worth.

Reasonable people can disagree about the bottom line. My only suggestion, especially in the overheated rhetorical climate of an election campaign, is that you be skeptical of anyone who views these complex questions in dogmatic or simplistic terms. There’s no white and black here, but rather a different shade of gray for each specific project. Those who argue against all abatements have probably never put together a development deal in the real world. And those who blame abatements for New Rochelle’s current fiscal challenges have never studied the numbers or are willfully ignorant about the economic circumstances confronting every city in America.

Despite some setbacks, New Rochelle’s overall economic development strategy has proven sound and has borne fruit. But achieving our community’s economic potential is not the work of a year or even a decade; it is the work of a generation, and we need to keep at it.

(Note: For the purpose of this post, I have used the terms abatement, incentive and subsidy interchangeably. In fact, there are several different mechanisms that municipalities and industrial development agencies can use to attract development. Some are consistent with the popular conception of a tax break, that is a reduction in ordinary tax obligations of some defined scale and duration. Others may be more limited, such as relief from sales taxes paid on the materials used in building construction. Finally, development may be aided by direct public investment in project-related infrastructure, like the City paying for a parking garage. I have found that when this subject is debated, such nuances are usually lost, with all of these tools lumped together into the word “abatement.” And that’s probably OK, because the principle of utilizing public resources to stimulate private investment is the same in each case.)

View this spreadsheet in a new window or tab.