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Today's Growth on Tomorrow's Taxes

Today's Growth on Tomorrow's Taxes
June 14, 2010

In a state known for horse racing, it's fair to say lawmakers have pressed the University of Louisville to gallop into a brighter research future. That encouragement began more than a decade ago, when Kentucky's "bucks for brains" program started matching private dollars given to universities in support of research and faculty recruitment.

By 2007, Louisville had already taken in about $100 million in matching "bucks for brains" funds. While the support helped hire faculty, it fell short of establishing the university as a true economic engine fueled by research, officials told then-Gov. Ernie Fletcher. A generous proposal emerged from those conversations. Lawmakers encouraged the university to pursue a $2.3 billion downtown research park and an expansion of its health sciences campus, promising that a substantial portion of the tax revenues generated in the area would be steered toward the project.

The agreement between Louisville and the state resembles tax incentive programs employed throughout the country, but supporters say it also suggests a creative way for universities to embark on major growth projects during difficult economic times. Theoretically, the state gets something it wants -- jobs -- and the university gets a research park to help commercialize faculty inventions, while also bringing in new revenues to fund the growth of its schools of medicine, dentistry, public health and nursing on the health sciences campus.

Photo: Nucleus

The University of Louisville is pursuing a $2.3 billion research park and expansion of its health sciences campus in the 210 acre swath of land seen here. As the tax base grows in the "TIF Development Area," a portion of the revenues will be steered back toward the university. The university can spend local funds to build up public infrastructure throughout the development area, but state funds can only be spent in the "TIF Footprint Area."

For the university, the deal required an initial investment of at least $150 million in the research park to qualify for “tax increment financing.” Commonly abbreviated as TIF, tax increment financing provides a future share of tax revenues to the developer, which in this instance would be the Louisville Medical Center Development Corporation – a nonprofit affiliate of the university’s foundation. In exchange for ponying up the $150 million, the corporation would receive 80 cents of every new dollar paid to the state in personal, corporate and income taxes within the “TIF District” – a 210-acre swath of land upon which the research park and expansions for the university’s health science campus will be built. Additionally, the corporation gets half of every new dollar in payroll taxes the city receives from the district.

There is a ceiling, however, on what the medical center corporation can expect to collect. In the best-case scenario – where successful and sustainable companies come to the park and expand the tax base – the TIF dollars would be capped at $601.6 million; that's far short of what will be spent in borrowing costs alone. There are also strings attached to the money, which can only be used to pay interest on bonds and to build public infrastructure, such as streetscapes, parking lots or water and sewer lines.

Vickie Yates Brown, president and chief executive officer of the medical center corporation, said the creation of the TIF program was an acknowledgment that the legislature needed to put money behind its stated priorities.

“When we went up to talk to the governor about the state mandate for the University of Louisville to become an economic development engine, the governor agreed. ‘We’ve put this onus on you and it was almost like an unfunded mandate,’ ” Brown said. “There was no money for that [mandate] and they realized that.”

It didn’t hurt that James Ramsey, Louisville’s president, had previously served as Kentucky’s senior policy adviser and state budget director, in which position he became intimately familiar with other existing TIF-financing programs. Ramsey quickly saw an opportunity to push forward on the state and the university’s goals by creating a TIF program that would encourage major investment.

Because the medical center corporation will receive a share of future tax revenues, the university has a clear incentive to recruit new start-up companies and other employers into the research park. Enter “Nucleus,” a for-profit company owned by the university’s foundation. Nucleus is charged with recruiting new start-up companies and commercializing faculty’s research breakthroughs.

“Our goal is to bring new high-paying jobs to downtown Louisville,” said Brown, who is also president and CEO of Nucleus.

Given its relationship to the university foundation, Nucleus can leverage its buying power to help lure companies to Louisville, Brown explained. For instance, Nucleus can lower health care costs for the employees of recruited companies by providing them with the same group rate offered to the university, she said. The TIF program, which promises a return on the taxes the companies pay, also allows the park to charge below-market rental rates.

“I am incentivized to bring their rent down, because I’m saying to them in the long run I’m getting 80 cents of everything you bring in income taxes,” Brown said.

The university foundation and its affiliates are the primary funders of the TIF development, but Louisville’s academic medical hospital and another downtown hospital also contributed.

Some Question TIF Programs

For all the promises of growth they bring, TIF programs have their skeptics nationally. Those who question tax increment financing often point out that it’s difficult to discern whether a development would have happened even without the TIF in place as an incentive. And there are other important unknowns, according to Joan Youngman, senior fellow at the Lincoln Institute of Land Policy, a group influenced by the philosophy of Henry George, a 19th century economist who argued a single land tax could reduce or eliminate the need for other taxes.

“One possibly unrealistic assumption is the idea that future tax growth must be a result – that the tax base would not grow without this,” Youngman said.

The city and state, however, have taken steps aimed at accurately accounting for the growth attributable to the university’s investment. That started with a series of exhaustive surveys, which will establish a “baseline” for the tax base that existed in the area in 2006, a year before the TIF financing was approved. The university won’t get credit for the tax base that existed before 2006. Moreover, the “usual and customary” employment growth of 2 percent in the area will not be attributed to the development.

When the state promises a developer future tax revenues, however, it essentially gets in the business of picking "winners and losers," Youngman said. Rather than let market forces determine which businesses will thrive in an area, the state stakes a particular horse – and who’s to say they’ve picked a winner?

Russ Kashian, an associate professor in the University of Wisconsin at Whitewater’s Department of Economics, said TIF-supported projects are often placed in areas that would have attracted private businesses regardless.

“TIFs are notorious for picking off the best available real estate,” he said. “They rig the game.”

Kashian, who has researched TIF programs in his state and elsewhere, was also skeptical of giving a tax-exempt university “an extra tax advantage.” Louisville’s arrangement is a bit more complicated than that, however. While Nucleus is owned by the University of Louisville Foundation, it’s a for-profit company that will pay taxes if it makes money, said Michael Curtin, the university’s vice president for finance.

Bruce Traughber, director of economic development for the City of Louisville, said the TIF program creates a pro-growth environment that simply wouldn’t otherwise exist.

“It’s exciting to see the university really dig in and try to grow,” he said. “It’s very difficult for private sector interests, or even quasi-private sector interests like the University of Louisville Foundation, to make investments that allow this kind of quantum leap in growth to occur.”

 

 

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