Franklin company worked for six months to install and inspect a new piece of equipment before employees could be hired to start making new parts — and money.
A tax break that allowed taxes to be phased in over 10 years was key to making that project financially feasible due to the amount of time that passed between the company’s investment and any profit, Electro-Spec owner Jeff Smith said.
Electro-Spec was buying more than $2 million in machinery, which would add more than 20 jobs for people who would run the new lines. But the purchase, inspections, training and hiring all take time, and during that period the company isn’t making any money from the investment, Smith said. The property tax break helps smooth out the sticker shock of buying the new machines and hiring workers, he said.
Tax breaks allow companies to phase-in property taxes on equipment, land or a building over a period of time. For example, a company with a 10-year tax break will pay 10 percent of the property taxes on a certain piece of equipment after the first year, 20 percent after the second year and 90 percent after the ninth year. The breaks allow companies to spend money buying equipment and hiring staff, instead of on taxes.
For the city, that means losing about half of the taxes it would normally collect over the course of the agreement if it didn’t give a tax break. But collecting 50 percent of taxes over 10 years is better than getting nothing if a company moves elsewhere or adds a new product line to a factory in a different state, Franklin Mayor Joe McGuinness said. The tax breaks are one of the main incentives the city can offer to get a new company to open a factory in Franklin or entice an existing factory to grow.
In exchange for sacrificing a portion of taxes for up to 10 years, Franklin requires companies to meet goals for hiring new workers and investing in equipment or new buildings. For example, Electro-Spec promised to spend $2.2 million on the new equipment and create 22 jobs in Franklin in order to get its 10-year tax break.
Right now, 25 Franklin companies get tax breaks from the city. Those companies planned to spend about $263 million total on new machinery or new buildings, retain more than 1,000 workers and hire hundreds more employees.
Ten companies weren’t meeting their promised job totals this year, but most were missing the mark by just one or two jobs. Two companies are still in the process of hiring after a recent expansion, and their agreements said they would hire a certain number of people per year for three or four years.
‘Good residual effects’
The city council gets the final say in whether to approve tax breaks. If it does, it will get annual reports on the companies’ progress toward hiring workers and installing equipment. If a company hasn’t hired the workers they promised or didn’t buy the equipment, the council can cancel the tax break and the company would have to pay full taxes. But the council will ask a business why it is struggling before yanking the tax break.
In some cases, plans change. Cooper Tire originally promised to have 60 full-time workers at its warehouse near Interstate 65 but has about 25 people on staff. Instead, the company had been using about 90 to 100 temporary workers who were working 40 hours per week and making $12 per hour, manager Kevin Pharr said. Even though that staffing isn’t technically what was promised, the city has continued the tax break because the company has employed new workers.
Sometimes companies spend less than promised because the equipment doesn’t cost as much. That was the case with Mitsubishi Heavy Industries Climate Control projects in 2012 and 2013.
The city hasn’t canceled a tax break for a company in recent years, McGuinness said. But being able to negotiate those agreements with manufacturers and warehousing companies helps the city encourage firms to expand and hire new people. New jobs provide income for more residents who then spend it locally, he said.
“If they live in Franklin, their income is probably spent somewhere in Franklin,” McGuinness said. “They’re out going to dinner with their families or buying a house. There are some good residual effects that come from those tax breaks. It doesn’t mean you’re not getting those funds back in another form.”
Before any company gets a tax break, the city’s economic development commission reviews everything the business is promising, including what the project is, how much it’s going to spend, how many people will be hired and how much each employee will be paid. Commission members also try to balance the size of a project versus the tax impact it has on the area.
That is because the taxes those companies pay support not only Franklin, but also the county government, school district and county library, said economic development commission and city council member Ken Austin.
‘Adding a broader scope’
Commission members also decide on the number of years for the tax breaks and sometimes recommend a five-year tax break for a company. Buildings will stand for decades and are more likely to get longer breaks compared with equipment because machinery depreciates and gets replaced over time, so the city collects less in taxes if it’s still in use in 10 years, Austin said.
For example, Mitsubishi Heavy Industries Climate Control got a 10-year break in 2013 for a project to add about $2 million in machinery, expand its building and add three jobs. In 2012, Overton Industries promised to add two jobs but was investing $320,000, so the city approved a five-year break.
“If you’re going to hire two people and you bought a $1 million piece of equipment, does it justify a 10-year abatement? And the answer to that is probably not. The Mitsubishi situation where you’re hiring multiple people and adding on to the building and you’re bringing in equipment which is adding to the tax base, that’s adding a broader scope,” Austin said.
The city set up additional guidelines in recent years to help determine what projects qualify for longer tax breaks, since city officials felt too many companies were getting the full 10 years. Franklin also always ties a tax break to new jobs, so council members have a way to gauge how the company is growing. That’s a lesson city officials learned after a local manufacturer closed its plant but is still paying reduced taxes.
The city approved a 10-year abatement for a developer who built a new spec building that was purchased by lumber company Trussway. But Trussway closed the plant in July 2009, and the city has allowed the tax break to continue because technically the company is meeting the terms of the agreement even though no one is working at the building. Now, the city always requires a company to create at least one job in order to be considered, Austin said.
The city council then reviews annual reports, which is when council members can ask questions about why a company isn’t meeting its goals. For example, in 2011 and 2012 some Japanese companies, such as Premium Composite Tech, fell behind on their projects,
McGuinness said. The companies explained that their expansions and production were slowed down because of the tsunami that hit Japan, which disrupted supply chains and drastically cut orders, McGuinness said.
The city is willing to take a loss on taxes now because most of the companies will still be up and running in Franklin for many years after the tax break is over, he said. For example, KYB Americas Corp. has been in Franklin for 25 years, more than doubled its original plant size and now employs more than 700 people, he said.
‘Beyond success stories’
Companies also consider incentives when looking to grow their company. Mitsubishi’s recent expansion added a new division of the global company that is making turbochargers, and having a good relationship with the city and getting incentives can help persuade decision-makers in Japan to pick Franklin, general manager Bob Francis said.
“We now have another Mitsubishi company here, and (incentives) may have some impact on that,” Francis said.
Companies often make a conservative estimate of how many employees will be hired and end up adding several more, McGuinness said.
“We’ve had some of those that are beyond success stories where they were supposed to create 30 jobs and they created 40,” McGuinness said.
Electro-Spec was one of those companies, when in 2008 it promised to keep its 43 employees and hire seven new people. In the five years since, Electro-Spec hired 32 people as the company kept adding customers and getting new orders.
Having the city commit to a tax break makes it easier to justify buying new equipment and hiring people. The money Electro-Spec didn’t have to spend on taxes was put toward hiring workers, Smith said. Once those workers are trained, they can start producing components, which allows the company to more quickly generate new income that allows it to pay the annual taxes and continue hiring, he said.
“In every situation it has been really instrumental to our ability to not just expand, but to secure business with new or existing customers,” Smith said. “It’s been a great resource for us, and the city of Franklin has been supportive and aggressive in supporting our business.”