City manager on tax incentives: We had to keep Domtar in Kingsport

Local

KINGSPORT, Tenn. (WJHL) – If keeping Domtar in Kingsport was an option, city leaders were ready to do practically whatever it took — including a tax incentive deal that could save Domtar up to $15,533,037 over a multi-year period.

In the case of local incentives, Kingsport and Sullivan County each will forego up to $7.75 million in property taxes between 2024 and 2038.

That deal was struck in exchange for Domtar’s agreement to invest hundreds of millions of dollars to repurpose its Kingsport operation over the next two-and-a-half years, then hire around 140 people when the plant ramps back up in early 2023.

In the interim, Domtar will convert the facility into a recycled linerboard operation.

Domtar will idle its 100 Clinchfield St. plant in October, permanently laying off about 300 workers.

Securing a $250 million investment and the return of 140 jobs was worth the tradeoff, Kingsport City Manager Chris McCartt said Tuesday. He also pointed out that the factory’s retooling for the new line will create a secondary economic impact of up to $28 million per year, mostly in 2021 and 2022.

“The other outcome of this could have been much worse,” Kingsport Alderman James Phillips
said during the BMA meeting on Tuesday. “Hopefully this is such a booming business in the future that they’ll be able to expand.”

The likely alternative to the deal would be a huge, idled manufacturing operation with no retained jobs and no manufacturing equipment generating tax revenue. And it’s Domtar’s equipment, (“personal property”) more than its land and buildings (“real property”) that puts tax revenue in local government coffers.

This year, for instance, Domtar’s personal property was appraised at more than $140 million compared to just $15.8 million for the real estate at 100 Clinchfield.

As a result, personal property will account for more than 85 percent of the $2.5 million-plus in taxes due this fall to Kingsport and Sullivan County combined.

An empty building appraised at $15.8 million would bring in just $292,616 annually.

McCartt said the city has also protected itself by including a number of “clawback” provisions in the event Domtar doesn’t deliver on its commitments. Those include employing at least 140 people by the end of 2024, investing at least $250 million into the project and exchanging some parcels of land with the city.

“It’s very important to us that Domtar invests the dollars that they stated they were going to invest,” McCartt said. “That’s a clawback the state of Tennessee also has.”

What’s a PILOT, exactly?

Kingsport’s Board of Mayor and Alderman (BMA) recommended a payment in lieu of tax (PILOT) agreement with Domtar Tuesday and the city’s Industrial Development Board (IDB) approved it the same day.

Under the agreement, Domtar’s land, building and personal property (primarily manufacturing equipment) will convey to the IDB — thus allowing the tax incentive — and be owned by the IDB until 2038 or until Domtar has reached its maximum $15.5 million incentive.

Because property tax abatements to private companies aren’t permitted in Tennessee, PILOTs are a standard work-around when those companies are seeking local incentives.

When a company transfers property ownership to an industrial development board, the property is no longer taxable. Then, depending on the length and terms of the PILOT agreement, the company pays an amount “in lieu of” part of the taxes it would have paid if the property remained in its name.

The property reverts to the company’s ownership — though for all intents and purposes it was always controlled by the company — at the end of the PILOT.

PILOT: Behind the numbers

  • Maximum annual PILOT amount Domtar will pay: $2,500,000
  • Normal annual tax break percentage for Domtar: 25%
  • Tax break and percentage in 2024 if $200 million in personal property, $60 million in real property: $1,389,200, 36%
  • Requirements for Domtar: 140 jobs created, $250 million investment

When it begins in earnest (2024), the PILOT will be 75 percent of what Domtar would have owed otherwise. And the company’s payment in any single year won’t exceed $2.5 million.

Interestingly, the deal also splits the PILOT revenues 50-50 between Sullivan County and Kingsport. Kingsport’s tax rate is $2.06 per $100 of assessed value while Sullivan County’s is $2.57, so Sullivan County is giving up something in the deal.

If the deal lasts the entire 15 years to 2038 and Domtar receives $15.5 million in tax breaks, Kingsport and Sullivan County each will forego an average of $517,000 a year for that period. McCartt said it’s a worthwhile tradeoff.

“So are you able to weather a small storm in order to get a big return? And that’s what we felt like we were able to do.”

The next several years will give the city time to figure out how to handle the temporary revenue loss — which, again, should pale in comparison to the much smaller amount that would come in from an empty building.

“We minimize those impacts, and so there’s not an impact to schools, there’s not an impact to fire and other city operations,” McCartt said.

A not-so-hypothetical example

Using Domtar’s own projections, the tax break could easily be more than $1 million a year early in the 2024-2038 period.

If Domtar’s personal property appraises at $200 million and its real property at $60 million that first year — and if the property tax rates in Kingsport and Sullivan County haven’t changed — the normal tax due would be $3,889,200.

Under the PILOT agreement, Domtar would pay $2.5 million, and $1,389,200 of the maximum $15,533,037 tax break would be used.

At that rate, the $15.5 million cap would be reached in less than 15 years. But Domtar will almost certainly depreciate the personal property, so the annual PILOT amount will likely decrease as the years progress.

How important a revenue source is Domtar?

From 2021 through 2023 while it completes its project, Domtar will continue paying the same amount of property tax it would without a PILOT.

According to records at the Sullivan County Property Assessor’s office, Domtar’s “personal property” was appraised at $139.6 million in January. Its real estate (land and building) at 100 Clinchfield was appraised at $15.8 million.

Those values yield total property taxes of $2,231,892 due this fall: $1,238,869 to Sullivan County and $993,023 to Kingsport.

Kingsport’s 2019 fiscal audit lists Domtar as holding the city’s second-highest amount of taxable assessed value — 3.3 percent of the city’s overall taxable value. That total, $62.7 million, includes additional properties beyond the 100 Clinchfield location and would yield an even higher amount of local property tax: $2.9 million.

It’s likely that as Domtar removes its no-longer-needed equipment this fall, the 2021 taxable amount will be much lower, since personal property accounted for 87 percent of the total tax assessment.

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