THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Friday, July 15, 1994 TAG: 9407150523
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY DAVID M. POOLE, STAFF WRITER
LENGTH: Long : 134 lines
Contractor Jay Turner's decision to move his corporate offices into a failed thrift building in downtown Roanoke last year was like the pistol shot that set off a land rush.
Before you could say ``Oklahoma,'' half a dozen other contractors were staking claims in and around downtown. They didn't want to be left behind when it came to tax breaks available in Roanoke's ``urban enterprise zone,'' one of 28 in the state.
``You should have a very good reason for not being there,'' said Doug Chittum, an economic development specialist with the city.
A similar influx is taking place in Hampton Roads and all over Virginia. But one trade group and some state officials are concerned that many contractors may be reaping benefits that were never intended when the General Assembly created the first enterprise zones a decade ago.
Some contractors complain that the zones give competitors an unfair advantage - at taxpayers' expense. In addition, there are reports that some contractors are claiming sales tax rebates for work they do not perform.
``It's become just another way of beating the system, and that's not right,'' said Patrick Dean, executive director of Associated Builders and Contractors, a trade group pushing for reforms.
The debate comes at a time when Republican Gov. George F. Allen, who has made ``Virginia is open for business again!'' the theme of his new administration, wants to double the number of enterprise zones and sweeten the tax breaks for qualifying companies.
The Democrat-controlled General Assembly delayed Allen's plan earlier this year to first examine how well existing enterprise zones are working. The Senate Finance Committee is scheduled to take its first look at the matter today.
Enterprise zone incentives cost about $1 million a year in lost revenue, a tiny speck in the $7.5 billion state budget. The costs are expected to escalate as contractors beat a path to get into the zones.
``We could have much, much larger numbers, but we just won't know for a few years,'' said Shea Hollifield, associate director of the state Department of Housing and Community Development.
The idea behind enterprise zones is to lure industrial development to inner cities beset by high unemployment and eroding tax bases. There have been success stories in which the enterprise zone incentives helped communities land new manufacturing plants. In many cases, however, the incentives simply entice
existing businesses - hardware stores, restaurants and repair shops - to move across town to take advantage of credits on state income, unemployment and sales taxes.
Robert T. Skunda, Allen's secretary of commerce, said he would support reforms to end a ``zero sum game'' in which existing companies do little more than change addresses. ``That encourages one jurisdiction stealing jobs from another,'' Skunda said.
Critics say the nature of construction work makes contractors poor candidates for urban enterprise zones. Contractors tend to set up central offices in the zone, while doing the bulk of their work at far-flung construction sites.
The result is that inner cities get few new jobs, while construction companies pocket lucrative tax breaks.
``You can easily see this is not the intent of the law,'' said Dean, of Associated Builders and Contractors.
But the director of a rival trade group supports the program and dismissed the criticism as the work of jealous competitors.
``There's always talk between competitors when they think they have a competitive disadvantage,'' said Steve Vermillion of Associated General Contractors, the state's largest buildings trade group.
``We've been surprised to lose some bids, and we've later discovered our competition'' was in an enterprise zone, said Adrien Jacob, a vice president with McDevitt Street Bovis, a Charlotte-based contractor with an office in Richmond.
John R. Lawson, president of W.M. Jordan Co. of Newport News, said his company has complied with the letter and spirit of the program since it set up a wholly owned subsidiary in Norfolk's enterprise zone two years ago.
Lawson said that W.M. Jordan - one of the largest construction companies in Hampton Roads - rehabilitated a building on 37th Street and hired about 50 unskilled people from disadvantaged neighborhoods. The new employees have been put to work on $100 million worth of projects in downtown Norfolk, ranging from the construction of Ruffner Middle School and Nauticus to expansions at Old Dominion University and Children's Hospital of The King's Daughters.
``It has worked exactly the way I thought the law was intended,'' Lawson said.
Turner, the president of J.M. Turner & Co. of Roanoke, said he had not thought his company would meet the intent of the program. But city officials, eager to shore up downtown occupancy rates, assured him that his construction company would qualify.
Turner made a significant investment in downtown Roanoke, buying and renovating the old Investors Savings Bank building on Church Street. Turner said his company is now ``more conscious'' of hiring low-income workers.
For contractors, the biggest incentive is a five-year rebate on state sales tax. The windfall is important because it offsets one of the industry's biggest expenses, building materials. For instance, a paving company that completes a $20 million job could qualify for a $350,000 tax rebate.
As a result, construction firms represent half of the 24 qualifying companies in Norfolk's enterprise zone. More than half of the 12 contractors have moved to the zone since 1992.
One of the legislature's concerns as it reviews the program is the charge that some contractors abuse the zones by claiming rebates for work done by others. Contractors get a sales tax credit for materials they buy and install themselves, but materials installed by subcontractors are excluded.
One subcontractor - who did not want his name used out of fear he could lose jobs - said a particular general contractor would hire him only if he agreed to let the general contractor claim invoices for all building supplies.
``They (the general contractor) wanted to take the tax credit for themselves,'' the subcontractor said. ``We fought it as long as we could, then they said, `If you don't, we'll get someone who will.'
``As far as I'm concerned, it's just one big scam.''
In annual audits of sales tax rebate requests, the state Tax Department has no way to know - short of construction site inspections - whether the contractors did the work themselves, according to a department spokesman.
Some contractors say competitive pressures may force them into urban enterprise zones.
``The bottom line is this: If somebody doesn't strengthen the law or, at least, monitor the program better, all contractors will be forced to open a satellite office and run their numbers through it,'' said Louis S. Haddad, president of Armada/Hoffler Construction Co. of Chesapeake. ``That will restore a level playing field, but the only losers will be the taxpayers.'' ILLUSTRATION: Color photo
CHRISTOPHER REDDICK/Staff
John R. Lawson, president of W.M. Jordan Construction Co., says the
program works as planned. Jordan, he says, rehabbed a building on
Norfolk's 37th Street and hired about 50 unskilled people from
disadvantaged areas. Those people have been put to work on $100
million worth of projects downtown.
by CNB