Tax Abatement – A Win-Win Economic Development Option for Local Government

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Economic development and encouraging the growth of industry is always a top priority for state and local governments.  While the state has well-know economic development tools that are available through the Arkansas Economic Development Commission, the Arkansas Development Finance Authority, and other state agencies and programs, local entities such as cities and counties also have an important economic development tool in their toolbox – property tax abatement.

Property tax abatement is a form of economic development that cities and counties can use to attract or maintain business and industry by reducing a business’ property tax bill.  The business agrees with the local governmental entity to invest money in facilities, property and/or equipment, and the local government agrees to accept tax payments that are less than what it would otherwise be entitled to receive.  The local government is willing to enter this arrangement because the ripple effects of expanded or new industry will compensate for any costs to the governmental entity on the front end and over time increase the overall ad valorem tax revenue for the governmental entity.

Tax abatement can be granted for up to 65% of the property tax value of the project (the business must pay at least 35% of the property tax that would otherwise be due), and the tax abatement can last for up to 30 years.  

The terms of the tax abatement are negotiable between the governmental entity and the business and are documented in an agreement known as a payment in lieu of taxes agreement (or PILOT agreement).

The key requirement in the tax abatement process is that the property for which tax abatement is granted must be owned by the local governmental entity granting the abatement.  To accomplish this, if the business is purchasing real estate as part of the project, the business will deed the real estate to the local governmental entity, and if the project involves equipment, the business will transfer title to the equipment to the local governmental entity by a bill of sale.  Typically, a lease agreement will be put in place to allow the business to retain possession and use of the property and to require the business to pay rental payments.

Because of the unique nature of Arkansas law, tax abatement is achieved through the use of bonds, typically referred to as “Act 9 bonds.”  Act 9 bond projects are more simplified than typical governmental bond issuances and involve minimal on-going compliance and involvement with the governmental entity.  The bonds, though issued by the governmental entity, are limited obligations and are payable solely from lease payments made by the business under the project lease agreement.  

In a typical transaction, the business and the local governmental entity negotiate the terms of abatement in exchange for an agreement by the business to develop the new project.  After a public hearing is held, the local government legislature approves the issuance of the Act 9 bonds.  Once the project is constructed, the property title transfers, lease agreement, and PILOT agreement are executed in connection with the issuance of the Act 9 bonds and the abatement becomes effective.

Upon completion of the required abatement steps, the local governmental entity has a new (or enhanced) business in its jurisdiction, generating economic growth and more property tax revenue than would have otherwise been payable to the governmental entity without the project.  For the business, it has a new (or enhanced) business operation that is completed more economically than would have been possible without the tax abatement.  The result is a win-win for all parties involved.  

Attorney John Bryant practices municipal finance law at Mitchell, Williams, Selig, Gates & Woodyard, P.L.L.C. He represents bond issuers across the State including municipalities, counties, state agencies and other entities in capital improvement and related transactions.