Corporate tax breaks not always a break for city

Mar 9, 2010 — The Indianapolis Star

Ted Evanoff

Mar. 8, 2010 (McClatchy-Tribune Regional News delivered by Newstex) -- When the economy boomed, Indianapolis handed Navistar International (NYSE:NAV) $18 million in tax breaks for new machinery. But the recession has soured the tax deal for the city.

After the massive Eastside diesel plant closed, idling nearly 1,000 workers last year, Indianapolis demanded that Navistar return the cash, saying the deal ended when the jobs fell away.

When Navistar refused to repay the money, the city faced a long dispute in court. Rather than run up a big legal bill, Mayor Greg Ballard's administration agreed the city would accept $5 million from the company.

Navistar kept $13 million, a relatively small amount for an engine- and truck-maker with 2009 profits of $320 million on $11.5 billion in sales. Meanwhile, the Illinois-based manufacturer continues to rely on other government aid to help boost profits in the recession.

The dispute between Navistar and the city shows how decisions made in good times by a previous administration can haunt taxpayers now. Currently, the city is reviewing tax breaks given to 160 companies to determine whether they have downsized and should be required to refund government coffers.

In the case of Navistar, a "clawback" clause in the tax-break agreement entitled the city to a refund when the plant closed, said Nick Weber, Ballard's deputy mayor.

"We thought we could recoup it all," Weber said.

Navistar spokesman Roy Wiley declined to discuss the dispute. "We basically closed that plant because Ford took the business away," Wiley said.

After the diesel plant closed -- the foundry next door is winding down and slated to shut in late April -- it became clear that the clawback provision never had been tested in state courts.

Deciding the matter in court could have taken five years, said Jon Mayes, the city's chief litigator.

Ballard decided to accept the $5 million and devote it to economic development.

About 160 businesses receiving tax breaks are being surveyed by the city. And if they can demonstrate a good intention to remain in operation despite temporary layoffs in the recession, the city won't seek refunds, Weber said.

City officials expect clawback negotiations in progress with about half a dozen companies will recover an estimated $500,000 later this year. The money will be devoted to economic development projects, Weber said.

By that measure, the $5 million Navistar clawback is the biggest yet negotiated.

City officials assailed Navistar for its stance but weren't surprised.

"We took them to task for it," Weber said. "At the same time we had to recognize the city's position in all this and what was realistic."

What was realistic was walking away from a scrap with a company that has proved to be much more adversarial than the Navistar that Indianapolis long has known.

Until late in the 20th century, Navistar was named International Harvester, a fixture on the Eastside that employed 200,000 worldwide.

In 1982, Ford Motor (NYSE:F PRS) (NYSE:F PRA) (NYSE:F) chose Harvester's beefy diesels as optional engines. A severe recession on the heels of a long strike soon wrenched Harvester into bankruptcy. Shrunken into the much smaller Navistar, the company shed factories and more than 150,000 workers in the 1980s and 1990s but clung to Ford's lucrative business.

The timing was excellent. Just as America's love affair with trucks bloomed, Navistar dedicated the Indianapolis complex in 1983 largely to making the Powerstroke diesel.

Ford sold 700,000 to 900,000 F-series pickups each year for most of the past 25 years. No other car or truck model by any maker matched those volumes.

Every few years, the diesel was improved. This in turn brought new production machinery into the plant. Navistar filed for property tax abatement on the new machines.

By 2009, the abatement totaled $18 million per year. Property taxes are abated generally for 10 years. In the first year, the full tax goes unpaid, then the tax break declines each year as the machinery loses value.

Indianapolis' decision to accept the $5 million also will result in Navistar owing taxes. The tax bill will total at least $3 million over the next four years, Weber said.

Navistar was not alone in seeking abatement. Each year, taxes are eased on more than $150 million worth of property, according to an analysis several years ago by The Star.

Tax breaks on routine factory upgrades such as Navistar's have proliferated throughout the state since 1983. That's when Fort Wayne tried to save an 11,000-employee Harvester truck assembly plant. Although the plant closed, Fort Wayne's innovative and unspent package of incentives soon was modeled by other cities threatened by the loss of industrial jobs.

Since then, Indiana and its communities have granted about $2 billion worth of economic incentives, according to analysts. Most have paid off in jobs.

For Navistar, walking away from the tax deal with the city reflects part of a new entrepreneurial culture.

In one sign of that, Navistar has looked overseas. One venture in India will make trucks with industrial giant Mahindra.

And it's attracting federal business. That's helped the stock price stay steady at about $40 per share in recent months after dropping to about $15 per share in 2008.

"There's no doubt that military contracts are cushioning earnings," said market analyst Walter Liptak at Barrington Research Associates in Chicago.

Defense contracts for military trucks now surpass $2 billion per year in sales for Navistar, including a bomb-resistant Humvee replacement called the MRAP.

At the same time, Navistar has looked for government inducements to move 900 jobs to the Chicago area, including most of the work in its Fort Wayne engineering center.

The U.S. Energy Department also has fronted $39.2 million for making electric delivery trucks in Wakarusa.

But that's little solace to laid-off Navistar workers in Indianapolis.

"This place has been here for 70 years," said Danny Ernstes, a former Navistar worker now coordinating retraining at United Auto Workers Local 98's old union hall. "It's been like a security blanket. Now it's all gone. We're finding you can't just step out and find jobs anymore."

Newstex ID: KRTB-0095-42719496