Check out one of the big developments in the Lehigh Valley, and it’s likely the project has received some sort of tax benefit.

Recently, however, tax benefits for two upcoming projects have come under scrutiny from elected officials who must vote to award them.

Skyline Investment Group, which is turning the former Dixie Cup factory in Wilson to a mixed-use building, has applied for Tax Increment Financing for the $26.4 million project, while Eli Lilly & Co. is seeking to use the Local Economic Revitalization Tax Assistance Act to build a $3.5 billion pharmaceutical plant in Upper Macungie Township.

Last month, Northampton County Council voted again to deny the TIF for Dixie Cup, while Parkland School Board members tabled a vote on a LERTA agreement for Lilly. In both cases, members questioned the need for tax breaks for what they said were wealthy developers.

The Dixie Cup’s developer, however, said such tax breaks are essential to project like his.

“It’s a matter of the construction cost, inflation, interest rates, meaning our mortgages are so high,” said Brian Bartee, managing partner of Skyline Investment Group. “You need these programs to offset these costs.”

Bartee said there is a misconception that a TIF or LERTA are cash handouts to developers. They don’t cost the taxpayers more money, he said; on the contrary, they help bring in tax revenue, as areas with no industry or housing are turned into properties with additional value or more taxpaying residents.

However, opponents of such programs insist that they still mean fewer funds going into local government coffers. During a debate last month on the Dixie Cup factory TIF at Northampton County Council, Commissioner Thomas Giovanni said it would divert millions from schools, roads and emergency services.

“This project for me is of the rich, by the rich, and for the rich,” Giovanni said before joining a 6-3 majority in voting it down.

These programs have been used for years to attract development to municipalities across the state. Some critics call them tax giveaways. Loren Keim, CEO of Century 21 Keim Realtors and a professor of real estate and the program manager for the Goodman Center for Real Estate at Lehigh University, said it’s not quite that simple.

“The short version is that these tools are often discussed as if they are all simply ‘tax breaks,’ but they are actually very different economic development mechanisms,” Keim told The Morning Call. “They affect different taxes, benefit different parties, and are useful in different types of projects.

“Some reduce the tax burden on a property owner,” he said. “Some redirect future tax growth to pay for public improvements. Some provide investor-side federal tax benefits. And the Allentown NIZ is somewhat unique because it captures a much broader stream of state and local tax revenues generated within the zone and uses those revenues to support redevelopment financing.”

What are they?

A TIF is a financing tool that allows a municipality or redevelopment authority to use future increases in tax revenue from a defined area to help pay for improvements today.

Keim said the basic concept is that a base level of tax revenue is established when the district is created. As development occurs and property values increase, the additional tax revenue generated by that increased value is the “increment.” That increment can be used to repay bonds or otherwise fund improvements related to the redevelopment.

A LERTA allows local taxing bodies to provide a temporary exemption from real estate taxes on the increased assessed value created by improvements to a property.

In simpler terms, if a property owner constructs or substantially improves a building in a designated LERTA area, the owner may receive a temporary tax abatement on the new value created by those improvements, Keim said. The owner would still pay taxes on the original value of the property, but the added assessment from the improvements may be partially or fully exempted for a period of time, depending on the local ordinance.

Each taxing authority over the property — school district, municipality and county — decides whether to approve it.

There are a variety of other tax programs, including Allentown’s Neighborhood Improvement Zone; the similar but less encompassing City Revitalization & Improvement Zone, and federal Opportunity Zones.

The NIZ, the unique tax zone created by legislation 15 years ago, focuses solely on the downtown of the Lehigh Valley’s largest city.

“From a real estate perspective, the NIZ is less like a traditional tax abatement and more like an economic engine,” Keim said. “It does not merely reduce the cost of development; it helps create a financing mechanism around the economic activity generated by the development.”

A number of the apartment buildings and attractions in downtown Allentown that have gone up in the last decade have come thanks to benefits from the NIZ.

An Opportunity Zone is a federal tax incentive designed to encourage long-term investment in designated low-income census tracts. Keim said the benefit primarily goes to investors who have capital gains. Those investors can place eligible gains into a Qualified Opportunity Fund, which then invests in qualified property or businesses in an Opportunity Zone.

Potential benefits can include deferral of capital gains taxes and, if the investment is held long enough and satisfies the rules, potential exclusion of appreciation on the Opportunity Zone investment itself.

‘Bargain-basement Wilson’

Wilson and Wilson Area School District have both approved the TIF for the Dixie Cup site, but it has failed twice to get past Northampton County Council. The latest attempt to secure an agreement was May 7 and came after nearly an hour of public comments.

Proponents, including Wilson Mayor Donald Barrett Jr. and borough council members, argued the site has been blighted for more than 40 years and this was a “once-in-a-lifetime” chance for redevelopment.

“I’m tired of being bargain-basement Wilson,” Barrett said. “You want to keep all the luxury in Easton and push all the affordable to Wilson? Is that what we’re doing?”

“After 43 years of an empty building, I have to admit, I’m amazed at the emotional power of a giant cup,” he said.

Opponents, especially those advocating for affordable housing, were skeptical that a market-rate project was a proper use for a TIF.

“We cannot allow private developers to make us believe that we must soften the risk of their capitalistic ventures without meaningful benefit for working people.” Luke Gumbrecht of Easton said.

“To look around at the affordability crisis we’re facing and say, ‘You know what we need? Subsidized luxury buildings,’ is incredibly tone-deaf,” Dominic Trabassi of Easton said.

Skyline’s Bartee said the taxing bodies understand that “when you have new buildings, new industries, you have new business, it really generates wealth for all of its citizens,” he said. “The way they’re presented is like the developers are just getting the cash and then they can just spend it.”

Bartee said the borough and school district could see an additional $400,000 a year in tax revenue.

“You’re taking an area that has no industry, and then you’re putting in a plan … they’re going to be receiving a huge increase,” he said.

Keim said TIFs can be controversial because future tax growth is being pledged for a period of time. That means municipalities, counties and school districts may not immediately receive the full benefit of increased tax revenues.

There is also risk if the projected development does not occur as expected. If the revenue projections are too optimistic, the TIF may not generate enough money to support the anticipated improvements or debt service.

Parkland takes its time

For the Eli Lilly project, only Upper Macungie Township has approved a LERTA for the project. At recent meetings, Parkland School Board members discussed and tabled it. Members have wondered whether the district is being asked to shoulder the burden of a tax abatement.

So far, Lilly has made two proposals — one with a more traditional LERTA in which the property owner receives a 100% tax break in year 1, decreasing by 10% each year; the second proposal would grant a 50% break each year.

At the April meeting, school board member Jon Macklin said he welcomes the project, but thinks the LERTA would be “a massive financial loss” for Parkland.

Macklin and board Vice President Chris Pirrotta have argued that the $100 million in state incentives tied to the project are more than enough to make the investment worth it for the pharmaceutical giant, and expressed deep skepticism at the idea that the school district should also provide tax incentives when it is facing a budget crunch.

Keim said the downside for a LERTA is that it does not usually create upfront money for infrastructure. It is not generally a financing mechanism in the same way a TIF can be.

It helps the owner by reducing taxes on the improvement, but it does not necessarily pay for roads, utilities, environmental cleanup or other major public improvements.

“It is also dependent on the participation of local taxing bodies, including municipalities, counties and school districts,” Keim said. “If one or more taxing bodies do not participate, the value of the incentive is reduced.”

The major benefit of a LERTA is it improves the economics of construction or rehabilitation. Early years are often the hardest years in a real estate project, Keim said, with such issues as construction debt, stabilization issues and uncertainty about how quickly the property will generate income.

“By reducing the tax burden during those early years, LERTA can make a project more feasible,” Keim said.

Keim said Bethlehem’s LERTA program is a good example of how municipalities use tax abatements to encourage reinvestment in targeted areas. The Southside LERTA II District and Affordable Housing LERTA District are designed to make rehabilitation, redevelopment or construction more financially feasible by phasing in taxes on the value created by improvements.

However, there are no guarantees.

“Incentives can make a good project better,” Keim said. “They can make a difficult project possible. But they usually cannot make a bad project good. That is the part where developers, public officials, lenders, brokers and consultants all have to resist the urge to let the spreadsheet do magic tricks.”

Morning Call reporter Evan Jones can be reached at ejones@mcall.com.