Revealing the Cost of Property Tax Incentives for Business
By Andrew Wagaman Land Lines, July 2017, Lincoln Institute of Land Policy
Total business tax incentives have tripled since 1990, according to a report released in February by the W. E. Upjohn Institute for Employment Research (Bartik 2017). Author Timothy Bartik found that state and local governments spent $45 billion on total business tax incentives in 2015, including $12 billion a year on property tax abatements alone.
GOOD-GOVERNMENT ADVOCATES ACROSS THE IDEOLOGICAL SPECTRUM ARE HOPING A NEW ACCOUNTING RULE WILL SHED LIGHT on the costs of property tax incentives for business, following years of public skepticism about the purported economic benefits of these tax breaks. Known as “GASB
77,” the Government Accounting Standards Board Statement No. 77 requires an estimated 50,000
state and local governments to report the total amount of tax revenue forgone each year because of incentives intended to attract or retain businesses within their borders.
Before GASB 77 took effect in December 2015, public officials could return repeatedly to the tax incentive “cookie jar” under the radar of taxpayers, and sometimes at their expense. Tax breaks for economic development are easily the costliest job subsidies, according to the national policy resource center Good Jobs First, which tracks incentive deals and has strongly advocated for more transparency.
revenue in 2014, according to the Lincoln Institute. It’s generally less susceptible to economic downturns than sales and income tax revenue, and it’s more progressive than the sales tax (Reschovsky 2014).
The greatest challenge for public officials, however, is figuring out whether a business is actually deciding between two or more locations or looking for a cherry on top of a done deal. Kenyon and Langley have found tax breaks are much more likely to affect a firm’s location decision within a metropolitan area—not between metropolitan areas (Kenyon, Langley, and Paquin 2012).
Plenty of research indicates that incentive deals often pit two or more communities with
a shared labor market against each other, rather than targeting communities in different regions.
KANSAS CITY, MISSOURI
Business tax incentives gave rise to such corrosive competition within the Kansas City metropolitan area, which straddles the Missouri- Kansas border. Business executives were pitting local governments within the region against one another by threatening to relocate to the municipality that offered the sweeter deal. A particularly extreme economic development war between political jurisdictions on each side of the border got so bad in recent years that 17 business leaders wrote to the two states’ governors in
2011 and begged them to end the rivalry. “The states are being pitted against each other and the only real winner is the business that is ‘incentive shopping’ to reduce costs,” the letter read. “The losers are the taxpayers who must provide services to those who are not paying for them.”
Kansas City also suffers from a lack of transparency related to Tax Increment Financing (TIF). Cities promote TIF districts as an effective tool for combating blight and encouraging redevelopment in impoverished areas (Rathbone and Tuohey 2014). But in Kansas City, eight times as many TIF deals were approved in low-poverty areas than in areas with poverty rates above 30 percent (Rathbone and Tuohey 2014), according to the Show-Me Institute, [a Missouri-based] think tank.
Michigan researchers Laura Reese and Gary Sands have found that tax incentives can actually perpetuate inequality between high and low-income areas, because incentives go further in areas with higher income. The suburbs award tax breaks at a higher rate per capita than cities, promoting sprawl and making it harder for lower-income people living downtown to access the “new” jobs (Sands and Reese 2012).
In Greater Cleveland, 80 percent of deals that followed the creation of community reinvestment programs involved businesses moving out of the city into Cuyahoga County suburbs, Good Jobs
First found. “This is money that’s being taken away from social services—from the most socioeconomically deprived folks in the community—to subsidize the most profitable people and corporations in the community. How could that possibly be fair?”
IMPROVING TAX INCENTIVEPROGRAMS
Besides promoting greater transparency and more regional cooperation, communities can improve tax incentive programs by taking a few clear steps, experts say.
- Limit the length of the tax abatement. Property tax deals tend to span more than 15 years, according to Bartik—considerably longer than other types of government-sponsored incentives (Bartik 2017).
- Establish wage and employment targets in abatement deals as well as claw-back provisions if businesses fall short of such targets.
Indeed, the losers are taxpayers. If local governments are particularly reliant on property taxes, why do they willingly forego tax revenue when in is not necessary? Here is a more sustainable way to improve property tax incentive programs…
Split-Rate Property Tax
Another alternative to tax incentives through tax reform is a split-rate property tax. The property tax might be viewed as two taxes in one: a tax on land and a tax on structures. It could be fairer and less administratively costly for states and localities to simply adopt a split-rate property tax with a higher tax rate imposed on land than on buildings and other improvements. Shifting the tax burden from buildings to land reduces the disincentives for investing in new buildings, provides a more neutral tax structure …and discourages urban sprawl (Dye and England 2010).
From: Rethinking Property Tax Incentives for Business
Daphne A. Kenyon, Adam H. Langley, and Bethany P. Paquin
Policy Focus Report Series published by the Lincoln Institute of Land Policy