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Ten-Mile Move, $25 Million in Tax Breaks: A Cleveland Story

Feb. 24, 2020, 9:46 AM

In an all-out blitz to keep Bendix Commercial Vehicle Systems LLC and its 550 employees from leaving town, residents of the Cleveland suburb of Elyria made signs, a local breakfast joint renamed food after the firm, and the local Dairy Queen offered Bendix employees buy-one-get-one-free Blizzard ice creams.

But in the end, abundant tax incentives, and easier access to Cleveland’s young professionals, spoke louder.

On Monday, the City Council of neighboring Avon will vote to approve more than $25 million in estimated tax incentives, the latest step in Bendix’s plan to move roughly 10 miles to a new home. It’s a situation that Avon Mayor Bryan Jensen said he felt excited but conflicted over.

“My feelings are twofold,” he said in a phone interview. “It’s a great opportunity for Avon, and it’s moving from a community that’s close by, and the negative push from that is always something you struggle with. I’m not trying to steal them from another community, but I’m happy they’re staying in Lorain County.”

Giants like Amazon and Foxconn have made headlines with unprecedented quasi-public bidding wars for tens of thousands of jobs, but less-heralded struggles for firms and the tax dollars they bring churn constantly at the local level. Cities, counties and states compete for firms employing hundreds or fewer employees, in areas where winning or losing will bring large impacts on local tax revenue.

The Bendix move highlights the tensions that result from conflicts between regional and local tax-incentive strategies, Evan Mast, economist with the UpJohn Institute said in a phone interview.

“From the Cleveland region’s perspective it doesn’t make much sense,” Mast said, because the incentives are offered to let a factory “shuffle around in Greater Cleveland.”

Move Coming Since 2015

Bendix, a subsidiary of the German commercial auto-parts giant Knorr-Bremse AG, didn’t respond to requests for comment. But records show a move was coming for roughly five years.

A July 2015 Ohio Development Services Agency tax credit document says the firm’s Elyria headquarters was “outdated and the company is struggling to attract and retain the required workforce.” The firm considered moving to Illinois, so the state approved a job-creation tax credit estimated at $362,878 if Bendix chose to stay in Ohio and create 45 new jobs.

A quasi-private development body, JobsOhio, threw in a sweetener: a $500,000 economic development grant should the company choose to stay in the Buckeye State and follow-through with its expansion plans.

Bendix then sought to negotiate with local governments over where it should take its $55 million in proposed infrastructure development and $55 million in payroll. Jensen said that at first Bendix approached Avon and asked the city to match incentives offered by Elyria. Jensen declined, not wanting to play his city off another in the same county.

But Bendix said it was moving from Elyria regardless, and it was considering a move to another Ohio county or to Illinois. The move to Avon made sense to Jensen. The city had a development site that could give Bendix room to expand and result in easier access to Cleveland’s young professional workforce, which was growing in the post-Great Recession era.

Race Between Localities

The Avon City Council is set to give the company a 14-year 90% real estate tax break, and a cash incentive equal to 0.25% of the firm’s in-city payroll for seven years.

Meanwhile, the City of Elyria stands to lose nearly $1.6 million annually, 4.76% of its total income tax revenue. The mayor of Elyria, Frank Whitfield, declined to comment beyond social media posts he’s made indicating that he was proud of his community for its attempts to keep the company.

While Cleveland and suburbs like Elyria have shrunk in population over several decades, the region remains one of the most economically productive in the country. The gross domestic product of Cuyahoga County, which includes Cleveland, sits at $88.7 billion, higher than the GDP of at least a dozen states, demonstrating the region’s ability to retain large businesses.

Team NEO, a regional business and economic development organization serving Northeast Ohio, declined to discuss specifics of the Bendix site-selection process.

“All we can really say is that we’re glad the company didn’t leave the area,” Nina Holliday, spokeswoman for Team NEO, said. “It would have been terrible if they had left Ohio.”

Mast says that his modeling on incentives, conducted for research in the American Economic Journal, shows that if tax incentives were completely eliminated, up to 85% of firms would still end up in the sites they eventually select.

“That doesn’t mean that companies don’t care about tax breaks,” he said. “What it means is that when you let the whole system play out and the system run, the tax-break offers tend to work in a way that doesn’t change where a company would go.”

That’s because when a company is offered tax breaks in one place, it can ask for those to be matched in its preferred location, and it often gets them, Mast said.

In order to be that preferred location, cities must try to anticipate the needs of companies, such as expanding and maintaining infrastructure, creating a great community and having good development sites available, Jensen said. Beyond that, there’s not much a locality can do.

“It’s a battle for all of us,” he said.

To contact the reporter on this story: Alex Ebert in Columbus, Ohio at aebert@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; David Jolly at djolly@bloombergtax.com

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