Taking tax breaks away from a company that didn’t create all the jobs it promised can be a messy business.
The Erie County Industrial Development Agency is learning that firsthand. The economic development agency, with prodding from Erie County Executive Mark Poloncarz, has been the most aggressive IDA in the state in yanking tax breaks from companies that didn’t keep their promises.
It’s yanked tax breaks from three companies over the past year and compromised to allow another company with strong regional job growth keep its subsidies at a site that had fallen short. But its recent disagreement on how aggressive it should be in penalizing a fifth company that has been hurt by the collapse of the nation’s oil and natural gas drilling market shows that there is a divide among the IDA’s directors over how zealous the agency should be in clawing back tax breaks.
To Poloncarz, it’s fairly straightforward: Companies that get IDA tax breaks make a deal that requires them to create jobs and make certain investments. If they don’t live up to the end of their bargain, then they should lose their tax breaks. To him, it’s no different than a company borrowing money from a bank, and then not repaying the loan. The bank isn’t going to look the other way.
It’s going to foreclose. He doesn’t think the IDA should be any different.
“We are enforcing a term that is in a contract,” Poloncarz said.
“When you give a sales tax incentive, you are actually taking money out of the pocket of every municipality and school district in Erie County,” he said. “It’s important that we enforce that contract and act on it in a way that works for all.”
But as the list of companies that are falling short of their job creation targets gets longer, the IDA is finding that clawbacks aren’t always clear cut.
There’s a growing school of thought that blindly pulling tax breaks from companies whose markets are slumping isn’t the same as yanking them from businesses that knowingly overpromise to create jobs. There are mounting worries that companies are deciding that the risk of clawbacks – and the bad publicity that accompanies it – isn’t worth the tax savings they’d get by going through the IDA.
Those concerns, plus recent IDA policies that mandate equal pay for men and women at companies receiving incentives and subject them to random audits, have some IDA directors wondering if that’s why the agency handled just 13 new projects last year – its fewest in at least 10 years.
“To me, there’s a clear connection,” said Dottie Gallagher-Cohen, an IDA director and the president of the Buffalo Niagara Partnership.
It’s one thing to demand that a company like Seneca Mortgage repay $219,000 in tax breaks it received three years ago to expand its mortgage servicing business in the old Motorola plant in Elma.
After selling the company last summer and never telling the IDA about it – agency officials learned of the sale through a newspaper article – the new owner refused to assume the job creation target that Seneca Mortgage had accepted when it received the tax breaks in 2014.
It was an easy decision for angry IDA directors to yank the tax breaks from Seneca Mortgage, which now only has five employees, nowhere near the 270 jobs it pledged to retain and the 165 jobs it promised to create.
“If there’s any case that says we should support a full recapture, this is the one,” Poloncarz said. If the IDA hadn’t pulled the sales tax break, “we’re sending the message that you can get a tax break and do anything you want.”
But it isn’t always so cut-and-dried.
It’s something different when it’s a company like Niagara Blower, whose business has been battered by the slump in its key energy markets, or FedEx Trade Networks, which has created plenty of new jobs in the Buffalo Niagara region, just not as many as it promised at one site that received tax breaks.
The IDA already has pulled tax breaks from two other companies, both heavily dependent on customers in the steeply slumping oil and natural gas drilling business. The IDA last year rescinded tax breaks granted to API Heat Transfer in Cheektowaga, while Derrick Corp. walked away from a previously approved package of incentives.
Niagara Blower also is in jeopardy of losing its tax breaks because its fortunes have turned downward since the company received $42,100 in sales tax breaks in 2013 for a $1 million renovation project that was expected to create 17 new jobs and retain 100 existing positions at Niagara Blower’s Sawyer Avenue factory.
Instead, the weak energy markets led to a slump in sales of its liquid cooling and vapor condensing products for the oil and gas drilling industry. The company now has just 80 employees in the Town of Tonawanda.
After months of discussion with IDA officials, Niagara Blower President Patrick Curtin was willing to accept a compromise settlement that would have seen the company repay about $16,000 of the sales tax savings it received. Since the company’s employment fell 38 percent short of its promise, Niagara Blower would repay 38 percent of its tax break.
“This is one of those examples where you have to analyze things on a case-by-case basis,” Poloncarz said. “It’s not one-size-fits-all.
Gallagher-Cohen, however, thought that was too harsh for a company that made a good-faith promise to create jobs, only to see its business plans shattered by a global slump in its key market.
“To me, this looks like you’re kicking a company when it’s down,” said Louis Panzica, the CEO of Buffalo manufacturer Power Drives and an IDA director.
IDA director Paul Vukelic suggested giving Niagara Blower more time.
“I worry about the message that this sends to business,” said Vukelic, the president of Lancaster beverage distributor Try-It Distributing. “If we continue down this path, we’re going to have less and less business.”
Gallagher-Cohen wanted the IDA to forget about clawbacks altogether, since no one believed the company acted in bad faith. Gallagher-Cohen also rejected a suggestion that the IDA give the company more time before acting – a move that she said was akin to placing the business on a “naughty list” that would harm its image.
Poloncarz, angry at the challenge, said he would agree to give the company more time, but only if Niagara Blower provided monthly employment reports to the agency’s board, essentially a public update to the “naughty list” that Gallagher-Cohen wanted to avoid.
In the end, both Poloncarz and Gallagher-Cohen backed down and agreed to give IDA officials another month to try to come up with a compromise that will be broadly accepted.
But it also puts the IDA in a tough spot: If they give Niagara Blower a break, shouldn’t it have done the same with API Heat Transfer and Derrick?
The IDA also agreed to look the other way when the board learned that FedEx Trade Networks had created only 207 of the 238 jobs it promised when developer TM Montante received $420,000 in sales and mortgage tax breaks in 2013 to build a new facility for the company in its Riverview Solar Park. But because FedEx also has added about 81 jobs across the entire region, the board agreed to take the broader view and forego clawbacks, since the company could avoid them by simply moving workers from another location to the Riverview site.
“This is where common sense must prevail,” Gallagher-Cohen said.
Three different companies. Three very different ways of interpreting the same policy.
Common sense and consistency can mean vastly different things.
Story topics: sunday biz column