Rich Woller: Making tax breaks work for towns
LENOX >> Tax abatements or incentives for businesses — really corporate welfare by another name — have been in the news in the national arena for many years and have now come to rest in the tiny village of Lenox. It's a fairly simple issue once you strip away all the financial, government and private sector technicalities.
Companies promise to build, expand or relocate their businesses in a particular town or city with promises of employment and other benefits, if the city or town provides a tax incentive for the company, usually over an extended period of time.
Economists have long studied these transactions. Perhaps the best known is the sports franchise promising prestige, employment, tax revenue and numerous other benefits (even a winning team) if the proposed franchise city helps pay for the new stadium through tax incentives.
Of course, we all know that the taxpayer foots the bill for these transactions for the privilege of paying $300 and up for a ticket to see a football game. Most economic studies find these transactions to heavily favor the sports franchise while the municipality gets little in return other than low-wage jobs, parking fees and perhaps a few other benefits. In other words, it's taxpayers who end up enriching the franchise owners and players while taxpayers get to dine on $15 hotdogs and soft drinks in overpriced seats.
I don't think offering a business a tax incentive to build a hotel in Lenox is necessarily a bad idea. But let's be honest as to what's really happening here.
Essentially, I, the taxpayer am being asked to make an investment in a private company by giving up tax receipts that would normally accrue to my town. With that in mind, my town and I are essentially being asked to assume some risk of opening a new business along with the owner. And in order to take on risk, I need to calculate what my return on investment could be to temper the amount of risk I'm willing to take.
Thus, the terms of this transaction have to consider the risks involved and return on equity much more than a promise to bring jobs (not necessarily for Lenox residents), visitors and tax revenue to town. Lenox is going to receive these benefits regardless of the investment and the new business is going to receive plenty of services from town such as fire and police protection, plowed roads, and a beautiful village that keeps visitors coming. I want a return on my investment for taking on risk.
What I would like to see is the town of Lenox negotiate an equity position in the new business for Lenox's investment. This means that the town and Lenox taxpayer gets a share of the profits every year and when the business is sold, hopefully, reaps a hefty reward.
This is a much fairer deal. The taxpayer is assuming risk in the marketplace and should be well compensated for it.
This hotel might fail as the owner has already stated that the marketplace has recently undergone an unfavorable change. The promise of jobs and visitors is the nature of the business — the owner is not giving up anything. I don't want to lend anyone $835,000 unless I know I'm going to get a return on equity for the life of the investment. No freebies.
How Lenox can lead
Towns and cities need to begin thinking more entrepreneurially with regard to corporate welfare through tax incentives. Banks, shareholders and private investors lend monies for businesses to expand and develop new businesses. Lenox leaders should be able to analyze and evaluate these transactions from a profit standpoint or hire someone who can.
In fact, Lenox should take the lead. Let our tiny village show America how it should be done. We'd love to have your business in our town and we're happy to lend you town monies in the way of tax abatements for an equity stake if it makes sense. Otherwise, we really don't have to have another hotel in town — we have plenty already running at less than 50 percent occupancy on a year round basis. Let's make a better deal.
Rich Woller is a local entrepreneur in the travel and tourism industry.
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