Widewaters Revisited:
Public Subsidies for Private Commerce
Columbia County’s recent ruling to deny large tax breaks to the developer of a 565,000-square-foot shopping center is a commendable decision, but it was made for the wrong reasons and it highlights the complexities of offering taxpayer subsidies to promote private commerce in our towns.
The county’s Industrial Development Agency (IDA), in its April vote to reject the Widewaters Group’s request for substantial tax relief, cited various deficiencies in the developer’s application, including the lack of signed leases with specific retail chains and scant evidence that the tax benefits would be passed on to those retailers in the form of lower rents. But the IDA board members, appointed to boost the county’s economy by granting tax incentives and other subsidies, failed to make use of the most basic financial tool that any businessman or government official would be expected to rely on: a “cost-benefit analysis” to quantify the dollar amount of requested tax relief and to analyze the financial benefits that the developer claims his shopping center will produce.
With the IDA offering to reconsider subsidies for Widewaters once leases are signed, and with the developer and the Wal-Mart Corporation likely to seek other tax incentives for the project, it seems timely to offer our own analysis as guidance for officials evaluating public subsidies, for residents who could benefit from thoughtful incentive programs and for local business owners who could suffer unfair competition if the incentives are not carefully crafted.
Estimating the cost of Widewaters’ requested tax relief is fairly straightforward, despite the lack of sufficient data in the developer’s filings with the IDA. Based on our research and discussions with Widewaters, the proposed tax savings—a combination reduced property taxes, elimination of the county mortgage recording tax and a waiver on sales tax for construction materials used in the build-out—would amount to around $3 million over five years.
The county and the Hudson Central School District would each shoulder about $1 million of the subsidies, while the Town of Greenport would give up tax revenues of about $750,000.
Estimating the fiscal benefits of the giant retail project is more difficult, but they are unlikely to be anywhere near as large as the developer has suggested. In filings with the IDA, Widewaters claims the completed shopping complex will generate $185 million of additional sales each year. Excluding the Wal-Mart superstore, which was not part of the IDA application as Wal-Mart itself will construct and own the building, the sales estimated by Widewaters for the center come to $130 million.
The evidence from big-box retail developments in rural areas, however, indicates that 85-90% of sales at the center will cannibalize business from existing retailers now operating in and around the county. In other words, net new sales would account for only $20 million, excluding Wal-Mart, yielding the county and its municipalities no more than $800,000 in additional annual sales tax proceeds, compared to the $3 million in tax subsidies requested over five years.
Widewaters believes that 85-90% of the center’s revenues, including Wal-Mart’s, will be new sales, implying that the retailers will generate some $160 million in new spending and purchases that shoppers now make in other nearby counties. Such a large addition to Columbia’s total sales tax base of $500 million seems a stretch, and it would require every household in the county to find an additional $6,500 per year to spend at the Widewaters plaza,
The developer’s claim that its tenants will “create” over 950 full-time jobs is also inconsistent with retail industry trends. The vast majority of new jobs in regions like Columbia with low unemployment rates are typically filled by workers from existing businesses.
“That was the issue that bothered me most,” said County Board of Supervisors Chairman Art Baer, who opposed granting the Widewaters tax package. “If they had a national hardware store chain as a tenant, they may be replacing the job of a guy who is making $16 an hour plus benefits at a local hardware store with a job paying $10 an hour with no benefits at the big chain store. Then he can’t afford to live where he’s living and the local store loses the sales.”
Complementing the cost-benefit comparison of tax incentives– the $3 million subsidy vs. $800,000 in new annual county sales tax proceeds—is the analysis of other potential costs and benefits of such huge project. As Widewaters’ representatives have stressed, the completed plaza, even after incentives, will generate substantially more property tax revenues than the now vacant site on Fairview Avenue. However, numerous studies have concluded that the costs of providing basic police, fire, and highway services to a big-box center like Widewaters’ far outstrip the additional tax revenues the shopping plazas typically generate.
In our testimony last year to the Greenport Town Planning Board—which approved Widewaters’ development without retaining any experts to analyze its fiscal impacts—we concluded that the costs of meeting the center’s needs would exceed additional town tax revenues by some $350,000, or 20% of the town’s 2007 property tax levy.
The county IDA has signaled a willingness to reconsider tax breaks for Widewaters as leasing activity progresses. Wal-Mart and Widewaters are both likely to apply for property tax abatements under a separate state program that encourages counties, towns and school districts to subsidize commercial expansion. Before reviewing any of these applications, officials authorized to fund the incentives with taxpayer money would be wise to bone up on the basics of cost-benefit analysis.
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