Arbor Update

Ann Arbor Area Community News

Pfizer to leave property near land won in Kelo case

13. November 2009 • Matt Hampel
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In 2005, the Supreme Court decided 5-4 that New London, Connecticut, could condemn and acquire 26 acres of a neighborhood to build hotels, and condos, near a Pfizer research center. The city spent nearly $80 million preparing the land.

On Thursday, Pfizer announced that 1,400 jobs would leave the city and no new development would occur. They will vacate a 750,000 square foot complex built in 2001. Their credits for 80% of the taxable value are set to expire in 2010 or 2011.

Michigan passed Proposition 4 in 2006:

A proposed constitutional amendment to prohibit government from taking private property by eminent domain for certain private purposes. The proposed constitutional amendment would:

  • Prohibit government from taking private property for transfer to another private individual or business for purposes of economic development or increasing tax revenue.
  • Provide that if an individual’s principal residence is taken by government for public use, the individual must be paid at least 125% of property’s fair market value.
  • Require government that takes a private property to demonstrate that the taking is for a public use; if taken to eliminate blight, require a higher standard of proof to demonstrate that the taking of that property is for a public use.
  • Preserve existing rights of property owners.

  1. Fyi, the land Pfizer is vacating was NOT won in the Kelo case. Pfizer had acquired the land years before the Kelo case was decided.

       —Lee Howard    Nov. 13 '09 - 11:01PM    #
  2. This has got to be one of the most outrageous things I have ever heard. A horrible disaster from start to finish.

    Now on top of them losing all of that taxpayer money; they are going to get sued up the wing wang (and rightly so).

       —Chris R    Nov. 14 '09 - 12:09AM    #
  3. Sorry for not making that distinction, Lee. I’ve changed the post.

       —Matt Hampel    Nov. 14 '09 - 12:53AM    #
  4. It’s time that local governments got out of the development business and the tax-incentive business. How many failures, nationally, and right here in Ann Arbor, will we have to live through (and pay for) before this lesson is finally learned?

       —Tom Whitaker    Nov. 14 '09 - 06:49AM    #
  5. Amen, Tom. We need to find new ways to encourage innovation and provide a nurturing environment for locally-based businesses.

       —Vivienne Armentrout    Nov. 14 '09 - 10:03PM    #
  6. Was Pfizer’s presence in Ann Arbor a failure?

    Say, just purely from the point of view of the City’s budget: was there a net gain or loss from the years Pfizer was here?

       —Bruce Fields    Nov. 14 '09 - 11:35PM    #
  7. Park Davis was bought out by Pfizer around 2000. I wonder if Pfizer had been blocked from the acquisition would things have turned out better for Ann Arbor?

       —ChuckL    Nov. 15 '09 - 12:03AM    #
  8. Parke-Davis was a long-time Ann Arbor institution (1950s)(Wikipedia reminds me that the company was founded in Detroit in the 1860s) that fell on some hard times but was purchased by Warner-Lambert in 1970. I worked there briefly in the early days of the development of Lipitor (without being involved with it in any way). There was a vital drug discovery and clinical development program. Lipitor was a great success but Warner-Lambert unfortunately contracted with Pfizer to co-market the drug. In 1999 the two companies fought when Warner-Lambert planned to merge with another company. Lipitor was Pfizer’s cash cow so it mounted a hostile takeover and bought Warner-Lambert in 2000.

    Pfizer clearly didn’t want Parke-Davis’ drug development capability – it is often more profitable to buy a tested drug than to spend resources in developing a new one. They had already grabbed the product (and some others; Neurontin/gabapentin is also a Parke-Davis drug) so it was an easy business decision for them to shut down an established Ann Arbor industry.

    It is sad that pharmaceuticals are a dying industry in Michigan – at one time we had not only Parke-Davis but also Upjohn in Kalamazoo. Parke-Davis also manufactured the drugs in Holland, Michigan. There are a number of small start-ups but they don’t employ nearly that number of people.

    Clearly the tax incentives that our city gave Pfizer played no part in their decision to close this unwanted part of their company down. I haven’t studied the history of tax incentives but I recall some lawsuits over promises made that were not kept, including for GM plants in Ypsilanti Township.

       —Vivienne Armentrout    Nov. 15 '09 - 04:00AM    #
  9. Bruce: My wife worked at Pfizer for awhile and has a good friend who was in accounting there. She recalls that the taxes went up sharply as Pfizer increased their investment. From something like $9 million to $14 million. Of course it went back down after they removed all the equipment.

    The tax abatement only gave them 50% off the new investment for 10 years but to get it all Pfizer had to hire 100’s of new people and they never did.

    They invested 100’s of millions in buildings and equipment but they didn’t meet the hiring quota so they didn’t get the full tax break.

    The city of A2 has never given out many tax breaks compared to other places but anyway, Tom should tell us exactly how the city is supposed to compete with other top cities for high tech companies when everyone else will give them a tax break. Any city in the nation would have given Pfizer a tax break or Google some parking for that matter. Any city. Not to mention the townships.

    We remember back then that those against giving a tax break said Pfizer would never leave so why do it? Well they got their answer when they left but at least Pfizer stayed for a few years and paid a whole lot of taxes and kept a lot of people employed at high paying jobs.

    Ann Arbor and Pittsfield townships were salivating over Google, unlimited parking! Cheap Rent!

    Just how does a city compete with other high quality of life cities if they won’t play the tax break (or free parking) game and the other cities do?

       —David Lewis    Nov. 16 '09 - 10:54AM    #
  10. Ha, Google has never staffed up fully (with its relatively low-paid jobs)and other than the prestige I’d like to know how the city has benefited from that gift. (I wrote a whole blog post on the subject.)

       —Vivienne Armentrout    Nov. 16 '09 - 05:29PM    #
  11. “Just how does a city compete with other high quality of life cities if they won’t play the tax break (or free parking) game and the other cities do?”

    David, your underlying assumption is that these strategies work in the long-term for communities that adopt them. Do you have any evidence that communities that rely on tax incentives and giveaways are any more successful or sustainable than communities that don’t? Politicians and business leaders love to point at the hot company or sector and say “we should be chasing those jobs by whatever means are necessary”. But there’s little evidence in support of such strategies and a lot that shows such strategies are unsustainable and fail to work over the long-term. If Ann Arbor was a one company town, giving a tax break to that company probably is a necessity. But even if Google or some other company doesn’t come to Ann Arbor, if you provide a quality business environment and good quality of life, you’ll always have companies that want to locate here. If you instead pursue a race to the bottom, you’ll erode your ability to provide the environment that attracts business.

       —John Q.    Nov. 16 '09 - 09:56PM    #
  12. what has been forgotten (or never learned) is that capital migrates to where it is treated best … in CT or in MI … or in brazil.

       —toasty    Nov. 17 '09 - 10:56AM    #
  13. toasty,

    A corollary would be that local governments should not subsidize that migration.
       —ChuckL    Nov. 17 '09 - 06:26PM    #
  14. Certainly John, Ann Arbor should not race to the bottom. If you look at other Michigan communities you see that A2 has been very judicious over the years while others have handed out a tax abatement at the slightest hint of a new job.

    Perhaps not everyone realizes that in almost all cases the major financial incentives come from the state. The local government has to commit to a tax break in order to trigger the state incentive. The state incentive is what the company is really after.

    And everyone does not seem to realize that no $$ are given up in a tax abatement unless you are absolutely certain that the company would have settled in your community without incentives and then it is only a break on there future investment and they will still be paying taxes but at a lesser rate.

    Let me present two scenarios:
    One: In order to get the major $$ in incentives offered by the State a company wants to come to Michigan. They would like to locate inside the city of A2 limits because of the high quality of life, etc. but the city will not participate to trigger the state incentives so they settle instead in Pittsfield Twp. in a sprawl development. The local government is thrilled to participate. The company gets the large incentive offered by the state and as a bonus, an Ann Arbor Address. Why would they locate inside the City?

    Two: A top tier company is considering opening a major new office in the downtown of a high-quality-of life community that has the talented professionals they need to grow and a strong university.

    They narrow it down to Raleigh Durham, Madison or Ann Arbor. Each of the states offers them a strong incentive package and Madison and Raleigh Durham enthusiastically agree to participate to trigger the state incentives.

    The Ann Arbor Govt. decides they will not participate but instead rely on their award winning quality of life, the good will of their people and the beautiful climate. Where does the company locate?

       —David Lewis    Nov. 17 '09 - 08:33PM    #
  15. David,

    You still haven’t answered my questions. I’m challenging your assumption that attracting “top tier” companies using tax incentives, even if they are minimal compared to what the company can get from the state, is a successful or sustainable practice. I’m sure you can show us examples of communities that rely on tax breaks that are successful and sustainable if that’s what you believe works.

       —John Q.    Nov. 18 '09 - 01:35AM    #
  16. Have you guys checked out Michael Shuman? He has a book, The Small-Mart Revolution, and a website. His basic thesis is that spending public money to buy jobs almost never works and is horrendously expensive per job. He spoke in May at a sustainability conference at the UM.

       —Vivienne Armentrout    Nov. 18 '09 - 04:23AM    #
  17. David – Let’s not rush (and PAY for) to invite ‘ethically challenged’ firms into Ann Arbor. It will just be a matter of time before they can eventually get around to cheating us just as they do with consumers.

    Pfizer is a spectacular example of such a firm — and how much did they have to pay recently for their illegal actions? Wasn’t it BILLIONS? And then this week there was more news about about their tampering with study results…

    A2 can do better than paying liars and crooks to come into town so we can be co-conspirators to fraud(s).

       —Rick    Nov. 18 '09 - 04:59AM    #
  18. I’ve heard that Pfizer is really a drug marketing firm and does not really believe in spending money on developing drugs; they prefer to buy proven drugs from other firms. In the long run, Ann Arbor is probably better off without a big bad corporation paying a significant part of the tax revenue. UofM does not pay anything and so has much less pull with local government than they would otherwise have. I think the best situation is when no one tax payer is paying a significant percentage of the total tax revenue collected.

       —ChuckL    Nov. 18 '09 - 08:28AM    #
  19. John Q: OK, let’s take Pfizer, a poor example you might say.

    Back in 2001 they were paying (forgive me if the numbers are off some, working from my wife’s memory) something like $9 million in taxes; 27% to the city, 11% to the county, 56% to education, etc.

    They were offered a big incentive by the state but only if they expanded. To get the incentive they had to hire 100’s of new workers. The city also had to give up something to Pfizer as a match in order to trigger the state credits. That’s how it works.

    The city agreed so Pfizer had a tax abatement. Although they never hired the 100’s of new workers they did invest $100’s of millions in new buildings and equipment. (The UM will do well with them at 10 cents on the $). Their tax payments to the local governments went up to $13 or $14 million (they later dropped back after they moved the equipment out).

    So for a period of 5 – 6 years the community saw rising tax revenue plus $2 million per year going to non-profits, United Way (By far the largest donor), UMS, A2 Symphony, etc. There were also the 2,700 high paying jobs and all the economic benefits from that money bouncing around the local economy.

    Then they left town you say… but wait, what if they had left back in 2002? The UM would surely have taken them over back then. Or, you say Pfizer would have stayed without the money. Are your sure? Some people then said why give them a tax break? Pfizer will never leave. Guess they were wrong, Pfizer left.

    But what did the city/state lose by giving them a tax break, some of which Pfizer never used?

    TAX REVENUES WENT UP! The city and the County, AATA, WCC, the Library, LOST NOTHING, they MADE $$$$$$$.

    It was tragic when Pfizer pulled out but the community had 6 years of greatly increased tax revenue and support for non-profits and all the work the Pfizer employees did in the community. Quite a few of them are still here.

    Even now the region has an incredible asset and although UM does not pay taxes, the research campus will fill up with workers over time, the jobs will be replaced and economic benefits will reverberate.

    People who know say Pfizer bought a company to get one drug, the biggest selling drug in the world. Once they had it they could have left anytime, in 2002 perhaps. But they received an incentive to stay. The city and community lost nothing, we gained 6 years of ever increasing tax revenues.

       —David Lewis    Nov. 18 '09 - 08:39AM    #
  20. We lost nothing? We lost the City’s largest employer outside of the University. We lost the tax revenue from all that property AND equipment, likely forever. We lost significant property value on homes all over town (due to the bail out relocated Pfizer employees received for selling their homes under market value).

    I’d be willing to bet we are already close to break even, if not a net loss to the City and the taxpayers on this deal. I don’t care how sweet the honeymoon was, the divorce has scarred us forever.

    I’m sorry, but bureaucrats and politicians don’t stand a chance against business professionals and private attorneys when negotiating tax incentives or public-private development deals. And the rest of us will always pay the price in the end.

       —Tom Whitaker    Nov. 18 '09 - 09:05AM    #
  21. David,

    There appears to be a strong presumption in your argument that the tax incentive did its job in keeping Pfizer here longer than they would otherwise have stayed. I believe the city could have not offered any incentive and the result would have been the same as it was. The city was going to give $40 million to a private developer to build the Lower Town project and in the end, even that was not sufficient to move ahead on the project. The city was spared the lose of the $40 million not because of wise planning on the city’s part but because the developer could not come up with the private financing.
       —ChuckL    Nov. 18 '09 - 09:07AM    #
  22. Tom: That’s right, we lost nothing less than would have been lost if they had left in 2002. The taxing authorities came out ahead on the deal. If Pfizer had left in 01 or 02 there would have been a loss. When they left in 08 it was a loss (they still paid taxes in 09) but the tax break didn’t lose money, if anything, it made money. Tax receipts went way up!

    Most of the arguments made here against tax breaks depend on the assumption a company would have stayed/come anyway. It makes your arguments work but it is a false assumption. Please see post # 14, can you answer the questions in the two scenarios?

    Please consider that JOBS are the lifeblood of the local economy for any city.

    Chuck, It is convenient for you to assume Pfizer would have stayed but again, if they were willing to pull out in 2007 they could have easily pulled out in 02. They had much less to lose, they had yet to invest anything in the site. If the city, county, library etc. lost money, how do you explain the millions more Pfizer paid after 02?

    I don’t know much about Broadway Village but I do know there were all sorts of requirements the city put in place and obviously the developer never met them or got a dime even though the Governor came down for the groundbreaking. The city would have been protected as first in line if something went wrong.

       —David Lewis    Nov. 18 '09 - 09:51AM    #
  23. David,

    If I agree with your logic, why should I limit my tax incentives to the Pfizers of the world? Why not offer tax incentives to every company that asks for one? Everyone of them contributes to the local economy through jobs and new investments (which they would have to make to qualify for a tax abatement in the first place). Everyone of them could pull up stakes and leave Ann Arbor or never have come here save for the tax incentives.

    For every Pfizer that demands a tax incentive to come or to stay, there are hundreds of companies that have never asked and never received a handout from the city of Ann Arbor. All of them contribute to the local economy without undercutting the foundation that allows the city to provide a business environment and a community that is attractive to current and prospective businesses. Why should they be subsidizing tax breaks for Pfizer that they themselves never get?

       —John Q.    Nov. 18 '09 - 06:16PM    #
  24. David,

    I have watched companies play the tax incentive game. The way it is often played is to get the State to subsidize investments that the company plans to make anyway. Take GM and the creation of Saturn in 1985; GM refused to announce where the new facilities would be located. Why? To get incentives out of the place that was most likely to get it anyway. It turns out the Spring Hill, TN location is right in the middle of the USA’s shipping center of mass (that is, shipping from TN minimizes total shipping distance.) I’ve seen similar strategies used elsewhere; the company figures if you don’t ask, you don’t get. They will hire consultants to advise them to make a credible sounding but bogus threat to move out of state.
       —ChuckL    Nov. 18 '09 - 07:43PM    #
  25. A recent study has even conservative business types taking a second look at the advisability of tax incentives. See The Center For Michigan story.

       —Vivienne Armentrout    Nov. 19 '09 - 11:42PM    #
  26. Where was Studley for the past 20 years? Part of the problem with the SBT is that it got larded up with pet-project and industry tax credits. The same thing happened with the tax abatement legislation. Both have been used and abused by both parties to reward big dollar donors and favored industries. I’m all for cutting back the abatement and incentive programs but this problem didn’t start with the film credits or the MBT.

       —John Q.    Nov. 20 '09 - 02:11AM    #
  27. At the Pam Byrnes town hall last night, the economist with the House Fiscal Agency said that tax credits and abatements (state level, I think) now greatly exceed the actual state revenues. I’ll send a link when I have time.

       —Vivienne Armentrout    Nov. 20 '09 - 02:31AM    #
  28. hmmmm, no one seems to know/remember that the collapse of pfizer in a2 as well as mi was triggered by one of pfizer;s drug trials that failed at the last level. getting to that elevation cost pfizer out of pocket, cash! up front two billion dollars ($ 2,000,000,000). risk/reward gamble … and a2 never lost that much but rather had received (over time) tons of tax money and employee spending here. .
    don;t cry, ann arbor; but don’t bitch too much either.

       —toasty    Nov. 21 '09 - 03:35PM    #
  29. There was an excellent article in the Ann Arbor Observer about that, written by Ken Garber. Unfortunately not available online. It was associated with a number of layoffs a few years before the big crash.

    Here is another source for the story of the torcetrapib failure.

       —Vivienne Armentrout    Nov. 21 '09 - 07:03PM    #
  30. related:

    [T]he $4.9 billion Atlantic Yards project in Brooklyn took a major step forward on Tuesday when … [t]he Court of Appeals ruled 6 to 1 that the state could exercise eminent domain in claiming businesses, public property and private homes for economic development projects.

    In doing so, the court backed the state’s assessment that the area in question — where some holdouts had refused to sell their property — fit the legal definition of being blighted.

    The ruling also had broader implications — reaffirming New York’s use of eminent domain even as many state legislatures seek to curb government’s power to condemn private property.

    Mr. Ratner plans to begin selling tax-free bonds next month to finance the development’s cornerstone project: an 18,000-seat basketball arena for the New Jersey Nets.

    Now, he is selling a majority stake in the Nets to a Russian billionaire and basketball enthusiast, Mikhail D. Prokhorov.

    The Nets, who are currently on a West Coast road trip, have started the season 0-13.

       —toasty    Nov. 25 '09 - 09:16PM    #