By Stacy Brown | PA Independent
HARRISBURG — They came with their hats in hand.
Several mayors and other municipal leaders from around Pennsylvania visited the Capitol this month seeking remedies for the financial crisis facing them.
But, a chance at a much larger windfall may have eluded municipal leaders.
The state's Keystone Opportunity Zones, or KOZs, were supposed to provide that relief by creating jobs and other benefits.
KOZs are specific commercial or industrial areas with no tax burden for property owners, residents and businesses throughout the state.
The state has spent at least $176 million — or $19 million annually — on the program since its inception in 1998, according to Good Jobs First, a Washington, D.C.-based nonprofit, nonpartisan resource center that promotes government and corporate accountability in economic development.
Additionally, on the state and local levels, millions in tax breaks have continued to be issued for those participating in the program, rendering KOZs a failure in the eyes of those who track KOZs.
"The main problem with KOZs, along with a lot of similar economic development tools, is the unseen impacts of picking winners and losers," said Nathan Benefield, director of policy analysis for the Commonwealth Foundation, an independent conservative think tank here.
"Politicians rarely consider what would happen without the incentive, but see a project moving in, and assume it was caused by their (legislative action). In contrast, the reports (and) economists find no net economic growth resulting from KOZs or other tax abatements," Benefield said.
Still, proponents argued that KOZs have met their original goal.
Are KOZs a good thing?
"Where would we be without KOZs?" asked Scranton Mayor Chris Doherty, whose city faced an $8.1 million budget deficit this year.
"When I was on Scranton City Council (10 years ago), most of the properties here were abandoned, and people didn't pay their taxes," said Doherty, who attended the meeting with the legislators. "At the time, KOZs were needed, and it has been a big success for us, because, if we did nothing, our downtown would be empty. Also, we wouldn't have been able to get businesses to come here."
Benefield, however, argued that any new revenue would have occurred regardless of the KOZ.
"Instead of tax abatements for a few projects, that revenue could have been used to lower taxes for all businesses or residents, which would have a much greater economic impact," he said.
Of the 1,708 businesses approved for KOZs last year, 38,502 jobs were created. Those businesses invested $3.7 billion in improving structures that were once dilapidated, said Scott Dunkleberger, director for the Center of Business Financing for the state Department of Community and Economic Development, or DCED.
"If the KOZ program wasn't in place, the investments wouldn't have taken place,'' Dunkleberger said. "While cities can't get anything from KOZs now, as the properties go on the tax rolls, they will have a tremendous impact on taxes."
Tax breaks
DCED, which oversees the program, could not provide figures to show what effect properties exiting the program may have on potential increases in property tax income once they begin paying taxes.
On the state level, KOZs exempt:
- Corporate net Income tax, capital stock and foreign franchise tax;
- Personal income tax, sales and use tax, mutual thrift institution tax;
- Insurance premiums tax and bank and trust company shares tax.
Locally, KOZs exempt:
- Earned income tax, net profits tax, business gross receipts tax;
- Sales and use tax;
- Property tax.
Only sales and use taxes must be paid by KOZ participants.
Businesses that move into a KOZ zone are required:
- To increase full-time employment by at least 20 percent in the first full year of operation;
- To make a capital investment in the property equal to 10 percent of the gross revenue of the business in the preceding fiscal year.
A residential owner in a KOZ is required to invest up to 25 percent of all real property taxes if the property is deteriorated.
Someone living in a KOZ for at least 184 consecutive days is exempt from state personal income and local earned income taxes.
Meanwhile, some of those same cities are asking to increase local sales taxes to pay for financial deficits.
Bad report
The annual cost to the state for KOZs is at least $19 million, according to a report released last week by Good Jobs First.
DCED officials said there is no financial or property loss to municipalities because, without the KOZs, cities, boroughs and townships would be left with undeveloped property.
The national report concluded that the state is wasting millions of dollars each year on corporate tax credits, cash grants and other economic development subsidies that lack wage and benefit standards for workers at subsidized companies.
“This national study confirms the Keystone Research Center’s 2010 study, which found that nine major Pennsylvania business subsidy programs had low or no job quality standards,” said Stephen Herzenberg, economist and executive director of the center, a nonprofit, nonpartisan research organization here that promotes a more prosperous and equitable Pennsylvania economy.
State Rep. Eddie Day Pashinski, D-Wilkes-Barre, told the Wilkes-Barre Times-Leader on Thursday that the KOZ program is too lax in its requirements.
The program exempts companies from property taxes for typically a decade in hopes of enticing development, he said.
“The KOZ tax credits in many instances have been misused,” Pashinski said. “Not all of them, but some that have been granted have not developed a property or created one job.”
Robert Finlay, president of Humford Equities & Realty, a real estate development and management company in Wilkes-Barre, said about $8 million in renovations were completed by his company at its KOZ site at the city's Public Square.
"It allowed us to use the taxes that were not paid to improve the property and improve (the) Public Square itself,” Finlay said.
Despite the substantial cost of the KOZs, the state fails to track whether the program is successful in creating jobs, Greg LeRoy, executive director of Good Jobs First, said in a statement.
KOZ requirements
The KOZ program was expected to attract commercial and development where little or no activity had existed.
Those developing KOZ-designated land also can build residential units, which allows individuals to buy property and also have their taxes abated for 10 years.
The state has 12 designated KOZ regions in 61 counties containing 46,500 acres of undeveloped land.
Usually, a KOZ designation can be extended beyond 10 years, if the DCED grants it to the landowner.
DCED's rules for extension are not clearly defined, but one requirement is for the creation of at least one new job in a fiscal year.
"When businesses come here, they say, 'Show us your KOZs,'" Dunkleberger said. "We think the world of the program, and we believe it's been successful."
