This chapter has provided a comprehensive review of the definition, types, origins, and main research questions concerning property tax abatements and other economic development tools: Why do governments offer them?
Are they effective? Even if effective, will jurisdiction or society be better off? The specific empirical literature on property tax abatements is scarce and provides mixed answers to the questions posed. However, two results deserve emphasis. One is that communities with negative characteristics (low-income, high-unemployment, high-crime) are more likely to offer abatements. This should be interpreted as a good sign given that jobs in these areas are more valued and the prospect of increasing net welfare for the community or the nation is enhanced (Bartik, 1991). The other conclusion is that it is uncertain whether PTAs are effective at inducing investment, although more recent, sophisticated studies, have provided evid- ence that property tax abatements are effective at increasing inventories or jobs (Chang, 2001; L. E. Papke, 1991, 1993), and the manufacturing property tax base in the first years of the program (Wassmer and Anderson, 2001).
These findings are not an unqualified endorsement of PTAs. For this reason, this chapter concludes with several rules to guide practitioners in the design or redesign of PTA programs.
The design of a PTA program depends on the objectives of policy makers.
Assuming that the objective is to stimulate investment and achieve net benefits to a community, net welfare increases to society, or at least mini- mize losses, several rules can be derived from the literature. First, abatement programs should strive to influence marginal decisions made by investors.
This means awarding abatements only on new investment (Stiglitz, 2003).
From the perspective of the property tax, this would exclude abatements on land, preexisting facilities, used equipment, and replacement investment. If this is not done, abatements may turn into windfall earnings for business.
Second, abatement programs should be temporary. The purpose of this suggestion is to induce investment within a desired window of time. If the possibility of receiving abatements is permanent there is no added incentive
Promoting Economic Development with Tax Incentives g 277
to invest today as opposed to investing in the future (Stiglitz, 2003). This can be achieved through sunset provisions or periodic public referenda on the renewal of programs.
Third, area targeting, specifically targeting blighted or distressed areas is recommended on several grounds: (1) additional jobs will be valued most;
(2) existing infrastructure can be used at less cost than, say, building infrastructure from scratch in a greenfield site; and (3) abatements may compensate for negative community characteristics that discourage invest- ment when real estate markets are not working efficiently (Bartik, 1991, 1994; Hansen, 1991; Wassmer and Anderson, 2001).
Fourth, firm targeting is also recommended but from different perspec- tives and without disagreement. Some have argued for offering abatements to large firms because they are more likely to be footloose, to think strategically, to have alternative location options, and to have a greater price elasticity of demand for their products and thus greater return per abate- ments offered (Ihlanfeldt, 1999; Ross, 1953; Wolkoff, 1981). Large firm tar- geting can be of the ‘‘ad hoc, one shot, bidding wars’’ type, or also of the programmatic type. A typical way of establishing large firm targeting is through threshold amounts of new investment or jobs that trigger the abatement award or its relative magnitude. Others counter that state and local governments do not have information or knowledge to maximize rates of return, and that large-firm targeting may be perceived as inequitable, expensive, or as creating an unlevel playing field (Ihlanfeldt, 1999).
Additionally, proponents of new wave policies argue that abatements to small, local firms have the greatest job creation potential (Eisinger, 1988;
Vaughan, Pollard, and Dyer, 1985). As suggested by Glaeser (2001) above, the type of firm that is targeted may depend on the objective function of the awarding body. For example, if the awarding body is interested in maxi- mizing the welfare of its citizens, then targeting labor intensive firms that supply goods consumed by the local market may be the preferred choice.
Productivity-enhancing options may include the targeting of firms that will develop synergies with existing firms (Garcia-Mila and McGuire, 2001), or the offering of abatements on research and development investment.
Fifth, industry targeting is equally recommended as an initial screen- ing process. That is, state and localities should make an assessment about their competitiveness relative to their peers by different types of industries.
The purpose is to offer abatement only in those cases in which an industry would be indifferent between locating in alternative areas. If the industry is sure to locate in a given area, offering PTAs is unnecessary. Rubin and Zorn (1985), for example, offered a methodology to determine competi- tiveness in uncontrollable factors such as transportation, energy, and labor costs. A recent discussion on firm targeting can be found in Buss (1999), Finkle (1999) and Wievel (1999).
Establishing a framework that is conducive to the achievement of posi- tive net benefits for awarding communities is also important. A first step is to provide statutory flexibility to tailor awards depending on benefits received. In this regard, discretionary award processes should be preferred over as-of-right processes, and flexibility regarding duration and amount of abatement is necessary. Empirical research on programmatic abatement programs has found that, even if flexibility is given, local bodies offer abatements to the maximum allowable degree (Wolkoff, 1983). Clearly find- ing ways of facilitating or inducing tailoring by local bodies is required.
Wolkoff (1983) recommends establishing an abatement budget, having local bodies assume the full cost of the abatement, and other rules that might induce local bodies to distinguish between high payoff projects and those that require no incentives. Another important suggestion is for states and local bodies to establish and enforce claw-back provisions. The purpose of such clauses is to collect abated taxes ex post, and even impose penalties, when a firm does not follow through with its part of the bargain under the abatement agreement.
Lastly, states should give due consideration to evaluation of PTA pro- grams. All too often evaluation is performed after program design and implementation, under data limitations and circumstances that put the vali- dity of the results in doubt. To avoid this problem, evaluation should be considered prior to program design, redesign, and implementation. In this way, the program can be designed, redesigned, and implemented in a way that maximizes the validity of the eventual impact assessment. Following these seven rules may increase program effectiveness and net benefits to the awarding community and society as a whole.
Acknowledgment
The author gratefully acknowledges support for this research from the Lincoln Institute for Land Policy.
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