Although they don’t always garner the headlines that federal and state incentives do, local incentives are a critical item in the economic development toolbox, and can often be difference makers in real estate transactions and development projects. Understanding these local tools is important for both private and public sector entities. For developers and investors, real property tax exemptions, tax increment financing (TIF) and other local incentives can carry significant value, and can often help determine where development occurs. For local political subdivisions, the development of competitive incentive programs can help grow the local tax base and attract and retain jobs in the community. Some of the most significant local tools in Ohio are described below. Although this article focuses on Ohio, similar local incentives are available in other states.
Real Property Tax Exemptions
Real property tax exemptions are popular for investments in real property. In Ohio, there are two main programs that offer real property tax exemptions: the community reinvestment area (CRA) program and the enterprise zone (EZ) program. Both CRAs and EZs can provide for an exemption of up to 15 years, 100% on certain increases in real property value as a result of a project. For EZs, all increases in assessed value, including inflationary increases in real property value and nonstructural improvements (e.g., parking lots, greenspace) may be exempted. CRA exemptions, however, are limited to the assessed value of new construction or remodeling of structures. In order to obtain the maximum exemption percentage and term, it is necessary for the affected local school district to approve the EZ or CRA exemption, which often requires the recipient to make compensation payments to the school district. For that reason, it is important to involve school districts early in the negotiation process.
TIF is a tool that diverts the real property taxes associated with increases in the assessed value of real property into a special local fund to be used to finance public infrastructure improvements and, in limited circumstances, private improvements. TIFs may be established by cities, counties and townships, and TIF funds may be used to reimburse developers or local governmental entities for public infrastructure improvement costs over time, or for debt service on public debt issued to finance public infrastructure improvements. Although TIF is a governmental tool, it is often used as a critical financing piece for private development. Developers like using TIF because it is flexible, and it is essentially a reinvestment of property tax dollars back into a project. Local governments like using TIF because it can provide a “pay as you grow” source of critical public infrastructure funding. The maximum TIF exemption available in Ohio is 30 years, 100%, which, as with CRAs and EZs, requires approval from, and usually compensation to, the affected local school district.
Joint Economic Development Districts (JEDDs)
A JEDD is a contractual arrangement between one or more cities and one or more townships that allows for a municipal income tax to be levied on employee withholdings and net business profits generated within a township. The income tax rate is typically equal to the highest rate levied by a contracting municipality. JEDDs are often established at the request of or with the consent of property owners in return for a portion of the JEDD income tax being used to support project costs. In addition, JEDD income tax revenues can be used to pay for services within the JEDD (e.g., fire/police/EMS, water, sewer) and to compensate school districts and other taxing units. JEDDs can be critical local economic development tools, particularly for townships, which lack some of the statutory economic tools that are available to cities.
New Community Authorities (NCAs)
NCAs are formed by the filing of a petition by a private developer, with the approval of certain local governmental entities (typically the county commissioners and the most populous city of the county in which the NCA is located). Once an NCA is established, the NCA may levy a community development charge on the assessed value of real property, the income of residents of the NCA, the profits of businesses within the NCA, a uniform fee on each parcel, or any combination of the foregoing. The community development charge revenue is used to carry out a community development program, including land development and the construction, operation and maintenance of community facilities. Charge revenues may also be used for debt service on NCA-issued revenue bonds. NCAs are often important components to local development, either by themselves or in combination with other local tools.
Municipal Job Creation Incentives
Ohio cities have the ability to offer municipal job creation tax credits (JCTCs) or cash grants based on job creation to attract investment. Municipal JCTCs may either be refundable or nonrefundable, and are equal to a percentage of new income tax revenues generated from new employees for a term of up to 15 years. A taxpayer does not need to receive an Ohio JCTC in order to receive a municipal JCTC. Municipal cash incentive programs are similar to JCTCs, but are provided as a cash grant equal to a percentage of the municipal income taxes generated as a result of job creation. There are no statutory term limits on the terms of these cash incentive programs because they are typically established using the city’s home rule powers. Both municipal JCTCs and cash grants are powerful tools available to municipalities to attract local development.
Local incentive programs serve an increasingly significant role in the financing and attraction of capital investment in Ohio and throughout the country. Effective understanding and use of the above-described local tools can be the key to a successful development and a true win-win for all parties.