Rethinking
Property Tax Incentives
for Business
Policy Focus Report • Lincoln Institute of Land Policy
Daphne a. Kenyon, aDam h. LangLey, anD Bethany p. paquin
Rethinking Property Tax Incentives for Business
Daphne A. Kenyon, Adam H. Langley, and Bethany P. Paquin
Policy Focus Report Series
The policy focus report series is published by the Lincoln Institute of Land Policy to address
timely public policy issues relating to land use, land markets, and property taxation. Each report
is designed to bridge the gap between theory and practice by combining research ndings, case
studies, and contributions from scholars in a variety of academic disciplines and from profes-
sional practitioners, local ofcials, and citizens in diverse communities.
About This Report
State and local governments across the United States use several types of property tax
incentives for business, including property tax abatement programs, rm-specic property tax
incentives, tax increment nancing, enterprise zones, and industrial development bonds com-
bined with property tax exemptions. The escalating use of property tax incentives over the last
50 years has resulted in local governments spending billions of dollars with little evidence of
economic benets.
This report provides an overview of use of property tax incentives for business and offers
several recommendations. State and local governments should consider forgoing these often
wasteful incentive programs in favor of other, more cost-effective policies, such as customized
job training, labor market intermediaries, and the provision of business services. If ending
property tax incentives is not feasible, state governments should consider a range of policy
options, such as placing limits on their use, requiring approval by all affected governments,
improving transparency and accountability, and ending state reimbursement for local property
taxes forgone because of incentives. Local governments can avoid some of the pitfalls of busi-
ness property tax incentives by setting objective criteria for the types of projects eligible for
incentives, targeting incentives to mobile rms that export goods or services out of the region,
limiting total spending on incentives, opening the process for decision making on incentives,
and forging regional cooperative agreements.
Copyright © 2012 by Lincoln Institute of Land Policy
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Policy Focus Report/Code PF030
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 1
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Contents
2 Executive Summary
4 Chapter 1: Overview of Property
Tax Incentives for Business
5 Increased Use of Property
Tax Incentives
7 Economic Development Goals
10 Obstacles to Achieving Development
Goals
12 Pitfalls with Discretionary Property
Tax Incentives
13 Chapter 2: Property Taxes on Business
13 Why Businesses Pay Property Taxes
15 Policies Affecting the Property Tax
Burden on Business
19 Effective Tax Rates on Business
Property
21 Summary
22 Chapter 3: The Impact of Property
Taxes on Firm Location Decisions
22 The Site Location Process
23 The Effect of Input Cost Differences
24 Economic Theory
26 Empirical Evidence
29 Summary
30 Chapter 4: Types of Property Tax
Incentives for Business
30 Property Tax Abatement Programs
33 Firm-Specic Property Tax Incentives
34 Tax Increment Financing
38 Enterprise Zones
41 Industrial Development Bonds
Combined with Property Tax
Exemption
44 Widespread Use of Incentives
44 Summary
45 Chapter 5: Tools for Assessing
the Effectiveness of Property
Tax Incentives
46 Transparency
46 Impact of Incentives on Firm
Location Decisions
49 Benet-Cost Framework for
Evaluating Incentives
51 Economic and Fiscal Impact
Analyses
51 Summary
52 Chapter 6: Policies to Reduce
Reliance on Property Tax Incentives
52 Reduction of Interlocal Competition
53 Tax Reform
55 Nontax Alternatives
57 Summary
58 Chapter 7: Findings and
Recommendations
59 Alternatives to Incentives
59 State Options for Reforming
Tax Incentives
60 Local Options for Reforming
Tax Incentives
62 References
66 Appendix Tables
74 Appendix Notes
75 Acknowledgments
76 About the Authors
76 About the Lincoln Institute
of Land Policy
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Executive Summary
1 percent of total costs for the U.S. manu-
facturing sector. Second, tax breaks are
sometimes given to businesses that would
have chosen the same location even without
the incentives. When this happens, property
tax incentives merely deplete the tax base
without promoting economic development.
Third, widespread use of incentives within
a metropolitan area reduces their effective-
ness, because when firms can obtain similar
tax breaks in most jurisdictions, incentives
are less likely to affect business location
decisions.
This report reviews five types of property
tax incentives and examines their character-
istics, costs, and effectiveness.
T
he use of property tax incentives
for business by local governments
throughout the United States has
escalated over the last 50 years.
While there is little evidence that these
tax incentives are an effective instrument
to promote economic development, they
cost state and local governments $5 to
$10 billion each year in forgone revenue.
Three major obstacles can impede the
success of property tax incentives as an eco-
nomic development tool. First, incentives
are unlikely to have a significant impact
on a firm’s profitability since property taxes
are a small part of the total costs for most
businesses—averaging much less than
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 3
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• Thebestevidenceonpropertytaxabate-
ment programs indicates they are effective
initially for the first jurisdictions that use such
incentives, but once they proliferate across a
metropolitan area they no longer promote
economic growth.
• Evidenceontheimpactof taxincrement
finance on economic activity is more mixed,
but this mechanism may be overused and
finance less beneficial projects when one local
government is able to divert revenue from
another local government without its approv-
al, such as a city diverting a school district’s
revenue.
• Enterprisezones,whichtypicallyinclude
property tax incentives as part of a larger
incentive package and are usually targeted
to distressed areas, have limited effectiveness.
• Verylittleinformationisavailableregarding
either firm-specific property tax incentives or
property tax exemptions in connection with
issuance of industrial development bonds.
Despite a generally poor record in promoting
economic development, incentives can be help-
ful in some cases. When these incentives attract
new businesses to a jurisdiction they can in-
crease income or employment, expand the tax
base,andrevitalizedistressedurbanareas.Ina
best case scenario, attracting a large facility can
increase worker productivity and draw related
firms to the area, creating a positive feedback
loop. This report offers recommendations to
improve the odds of achieving these economic
development goals.
Alternatives to tax incentives should be
considered by policy makers seeking more cost-
effectiveapproaches,suchascustomizedjob
training, labor market intermediaries, and busi-
ness support services. State and local govern-
ments also can pursue a policy of broad-based
taxes with low tax rates or adopt split-rate prop-
erty taxation with lower taxes on buildings than
land.
State policy makers are in a good position
to increase the effectiveness of property tax in-
centives since they control how local govern-
ments use them. For example, states can restrict
the use of incentives to certain geographic areas
or certain types of facilities; publish information
on the use of property tax incentives; conduct
studies on their effectiveness; and reduce de-
structive local tax competition by not reimburs-
ing local governments for revenue they forgo
when they award property tax incentives.
Local government officials can make
wiser use of property tax incentives for business
and avoid such incentives when their costs ex-
ceed their benefits. Localities should set clear
criteria for the types of projects eligible for in-
centives; limit tax breaks to mobile facilities that
export goods or services out of the region; in-
volve tax administrators and other stakeholders
in decisions to grant incentives; cooperate on
economic development with other jurisdictions
in the area; and be clear from the outset that
not all businesses that ask for an incentive will
receive one.
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CHAPTER 1
Overview of Property Tax Incentives
for Business
T
he United States is emerging from
the worst economic downturn since
the Great Depression. The country
must create jobs to tackle a major
unemployment problem, while also address-
ing significant fiscal challenges at all levels
of government. Many local governments
have attempted to deal with these dual
challenges by using property tax incentives
for business, hoping they can spur economic
development and expand their tax base.
But whether tax breaks can achieve
these goals or not is an open question at best.
Some leaders believe that incentives can
be an effective tie-breaker that governments
can use to tip business location decisions
in their favor. For example, the vice president
of marketing for the Chattanooga Area
Chamber of Commerce argues:
Businesses look at a lot of factors in
deciding where to locate. But if they think
they can get the labor, transportation,
and their other needs in more than one
community, then they are going to look
at the incentives to decide where to go.
(Chattanooga Times Free Press 2010)
Yet many economists and policy analysts
who have studied tax incentives argue that
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 5
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Figure 1.1
Increasing Use of Property Tax Incentives
they are often given to firms that would
have chosen the same location regardless of
tax breaks, in which case they are a costly
tool with no significant effect on economic
development.
Tax incentives have the potential to
achieve a variety of economic development
goals, but overuse and poorly designed pro-
grams can leave localities with smaller tax
bases and no improvement in their local
economies. The dramatic growth in their
use over the past 30 to 40 years and the long-
term fiscal challenges facing many state and
local governments suggest that policy makers
need to rethink how they are using incentives.
This report offers recommendations for
howtoincreasetheoddsof realizingdevel-
opment goals with property tax incentives
whileminimizingthecommonpitfalls.
INCREASED USE OF
PROPERTY TAX INCENTIVES
Like many other economic development
tools, the use of property tax incentives has
grown dramatically in recent decades, with
the most rapid growth occurring in the
1970s and 1980s (figure 1.1). There are
several reasons for this growth. At the root
is the increased mobility of business over
recent decades. Transportation and com-
munications costs have declined dramati-
cally, supply chain management has im-
proved, and previously closed economies
have opened up in Asia and other areas.
As a result, firms are more sensitive to costs
that vary by location, such as labor and taxes,
and increased competition means that busi-
nesses ignoring these cost differences may
risk bankruptcy (Davidson 2012). With
greater mobility, the potential for incentives
to alter firm location decisions has grown.
Competition to attract a smaller number
of industrial facilities has placed pressure
on state and local government officials to use
all the tools at their disposal, including prop-
erty tax incentives. Figure 1.2 shows that
over the past three decades, the value of U.S.
manufacturing output has been stagnant,
growing only 4 percent since its 1978 peak
compared to 89 percent growth for the econ-
omy as a whole. Manufacturing employment
has declined 41 percent over this period.
15
8
1
31
24
22
33
38
37
35
40
42
37
49
0
10
20
30
40
50
Property Tax Abatements Tax Increment Financing Enterprise Zones
Number of States Allowing Incentives
’64
’79 ’91 ’05 ’10
’70 ’80 ’90
’00 ’10 ’81
’85 ’90
’10
Note: Property tax abatements are stand-alone programs that are not part of broader economic development programs.
Sources: Appendix Tables A.1, A.2, and A.3; Kerth and Baxandall (2011); U.S. Department of Housing and Urban Development
(1991); Wassmer (2009, 223–224).
6 Policy focus RePoRt � LincoLn institute of Land PoLicy
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Central cities have borne the negative
effects of these economic changes most
heavily, which has led some states to adopt
enterprisezones,taxincrementnancing,
and other types of geographically targeted
incentives meant to help distressed areas.
Among the 100 largest cities in 1960, 44
had lower populations by 2010, which is
particularly striking since over this period
the U.S. population grew 72 percent and
many central cities annexed large amounts
of land (Gibson 1998; U.S. Census Bureau
2012).Incontrast,thepercentageof Amer-
icans living in the suburbs grew steadily
from 15 percent in 1940 to 45 percent in
1980, and reached 50 percent in 2000
(Hobbs and Stoops 2002).
Tax incentives are politically appealing
to local officials. Because their cost is less
transparent and they are not subject to an-
nual appropriations, tax expenditures can
be more attractive than direct expenditures
on economic development, even if the effect
on tax rates and the ability to fund other
services is similar. Policy makers also may
Figure 1.2
Activity in the U.S. Manufacturing Sector, 1950–2010
Sources: U.S. Bureau of Economic Analysis (2006; 2011).
10
12
14
16
18
20
22
600
800
1,000
1,200
1,400
1,600
1,800
2,000
1950 1960 1970 1980 1990 2000 2010
Employment (millions)
Real Value Added ($2010, billions)
Value Added Employment
argue that they are not really forgoing tax
revenues because without the incentives the
firm would have located elsewhere and thus
paid no taxes to the jurisdiction. However,
this is not always the case (box 1.1). Since
attracting large facilities is a highly visible
sign of success, local officials may face
considerable pressure to offer incentives.
A self-perpetuating cycle can also drive
up the use of tax incentives over time. Their
use in one locality puts pressure on neighbor-
ing jurisdictions to offer incentives as well.
Localities may feel they have no choice but
to offer incentives if tax breaks are actively
used in surrounding jurisdictions; instead
of using incentives to gain an advantage to
attract firms, they are used just to remain
on a level playing field with their neighbors.
Some evidence also indicates that once
a municipality starts using property tax in-
centives it is unlikely to stop offering them
(Sands and Reese 2012). Offering tax breaks
to one firm makes it more likely that other
firms considering locating or expanding in
that jurisdiction will also lobby for incen-
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 7
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tives. This self-perpetuating cycle means
that tax incentives can move from being the
exception to the norm, and will be expected
by all firms rather than serve as a targeted
tax break.
ECONOMIC DEVELOPMENT
GOALS
Local governments use property tax incen-
tives to pursue a variety of economic devel-
opment goals. Policy makers must set clear
goals, think hard about the methods by
which tax incentives can help achieve those
goals, and consider obstacles that could
prevent success (table 1.1).
Increase Income or Employment
Business facilities that export goods or ser-
vices to national or international markets
provide an important economic base for a
local government or metropolitan area.
These facilities include manufacturing
plants, corporate headquarters, R&D cen-
ters, warehouses, back-office support, and
services for people living outside the region,
such as finance and insurance.
Such firms increase an area’s aggregate
income in direct and indirect ways. The
Box 1.1
Do Tax Incentives Really Tip Firm Location Decisions?
P
erhaps the greatest dilemma for policy makers considering in-
centives is the limited information about the true importance of
property taxes in an individual rm’s location decision. Firms consider
dozens of factors during site selection, but government ofcials rarely
know which factors are most important. They may feel compelled to
offer tax incentives since it is one of the few location factors they
can inuence directly.
Policy makers may think that tax cuts and incentive offers are decisive,
but this assumption is often wrong. When businesses lobby for tax
breaks, they have a clear motive to exaggerate the importance of in-
centives, because otherwise they are unlikely to receive any breaks.
In fact, evidence shows that in some cases businesses negotiate
for tax incentives after they have already chosen a location (Fisher
2007, 65).
TaBle 1.1
Property Tax Incentives and Economic Development Goals
Goal Goal May be Reached if Incentives: Goal May Not be Reached if Incentives:
Increase
Income or
Employment
• Attractfacilitiesthatexportgoodsorservicesout
of the area
• Promoteindustryclustersthatincrease
productivity in the area
• Havelittleimpactbecausepropertytaxesaccountfor
a small share of total business costs
• Createjobsthatlargelygotoin-migrantsorcommuters
• Createjobsthatarelow-wageorpart-time
• Requiregovernmenttoeffectively“pickwinners”
Improve
Fiscal Health
• Obtainpartialpropertytaxesfromrmsthatwould
have located elsewhere without tax breaks
• Attractsupplierspayingfulltaxesbyprovidingtax
breaks for anchor rms
• Obtainothertaxesorfeesfromthermthat
offset forgone property taxes
• Aregiventormsthatwouldchoosethesame
location even without tax breaks
• Aregiventofacilitiesthatrequirecostlyinfrastructure
investments by the jurisdiction
• Extendforalongertimeperiodthanthelifespan
of recipient plants
Promote
Urban
Revitalization
• Redirectbusinessinvestmentwithinametroarea
to distressed areas
• Offsetlowerbusinesscostsinwealthierareas
• Havelittleimpactonrelativetaxburdensdue
to widespread use of tax breaks
• Areutilizedaggressivelybywealthyareas
• Requireverylargetaxbreaksperjobcreated
to attract investment to distressed areas
firm spends money directly on its payroll,
inputs from local suppliers, and services
from local businesses. The indirect effects
occur when these workers and companies
then spend a large share of their incomes
on locally provided goods and services, and
those firms and their workers in turn spend
this money at other local establishments.
This chain of events is often measured by
8 Policy focus RePoRt � LincoLn institute of Land PoLicy
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a multiplier, which is the ratio of the total
increase in income, employment, or output
across the local economy divided by the
initial direct increase (Morgan 2010).
Using tax incentives to attract these types
of facilities may increase a locality’s per capita
income and employment rate, although the
latter effect is less likely given the high rate
of U.S. labor mobility. Conversely, provid-
ing tax incentives for retail establishments,
housing developments, and other businesses
serving the local population is extremely
unlikely to increase income or employment.
The local population can only support so
many of these businesses, and expansion
by one firm will likely displace sales for
competitors.
Inaddition,attractingalargefacility
may increase the productivity of other firms
in the area and the wages of their workers.
Aninitialclusterof rmsspecializedinone
industry can create a positive feedback loop:
workers with industry-specific skills will
move to the area, which will increase the
number of other similar firms in the area,
and in turn the concentration of firms
supplying inputs. Meanwhile, the sharing
of knowledge among workers and firms
will increase productivity and the rate of
innovation, leading to increased wages for
workers in the industry, which will draw more
skilled employees, firms, and suppliers.
Greenstone, Hornbeck, and Moretti
(2010) provide evidence of how attracting
one large facility can generate these types
of productivity spillovers, sometimes known
as agglomeration economies. For 47 large
manufacturing plant openings, the authors
compare economic trends for the “winner”
county and one or two “loser” counties that
were runner-ups. Before the plant openings,
winning and losing counties had similar
trends in productivity and other economic
variables. Five years after the opening, pro-
ductivity at existing plants in the winning
counties had grown 12 percent more than
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 9
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in the losing counties, and wage growth was
also significantly higher. Although this study
did not have data on incentive offers, if they
had played a decisive role in attracting large
plants then these spillover effects on produc-
tivity and wages could justify the cost of
the incentives.
Improve Fiscal Health
A common goal for individual municipalities
and counties using property tax incentives
is to improve fiscal health, which occurs if
revenue growth attributable to incentives
exceeds growth in public service costs
related to the business expansion.
If thermtrulywouldnothavechosen
the locality without the incentive, then local
officials can conclude that some property
tax revenue is better than none. This con-
clusion makes sense if the firm pays partial
property taxes on the facility, or if the firm
will pay full taxes in the future once a time-
limitedincentiveexpires.Intheory,ajuris-
dictioncanmaximizerevenuebynegotiating
taxes down to the level at which the firm
just slightly prefers that location to alterna-
tive sites, and maintain its fiscal health by
lowering taxes to the point at which they
equal the cost of providing public services
to the firm (Glaeser 2001).
Offering incentives for one firm could
also boost tax revenues if that facility attracts
other suppliers who would pay full taxes,
or if it increases the property tax base in
other ways. Greenstone and Moretti (2004)
found that attracting a large facility increased
property values in winning counties by 6.6
to 10.2 percent relative to runner-up coun-
ties over the course of six years.
Other taxes or fees paid by a firm could
also offset revenue losses from property tax
incentives.Inparticular,whileincentivizing
retail facilities may be unnecessary if they
are tied to specific sites with high market
exposure, attracting large retail stores can
substantially increase sales tax revenues for
the locality, which is especially important
in states with property tax limits.
However, for counties, municipalities,
and towns combined, property taxes raise
about 2.5 times more revenue than sales
taxes.In2007,propertytaxesaccounted
for 36.9 percent of own-source revenues
for these local governments, while sales
taxes accounted for 14.3 percent. Sales taxes
exceeded property taxes in only ten states
(State and Local Government Finance
Data Query System 2012).
Promote Urban Revitalization
Redirecting business investment within a
metropolitan region to areas with high un-
employment or declining populations is a
justifiable policy goal. Areas with declining
populationstendtohaveunderutilizedin-
frastructure, so business investment in these
areas is less likely to require costly new in-
frastructure to provide services for a new
facility than areas with growing populations.
Inaddition,thesocialbenetsfromnew
jobs may be greater in these areas, because
a larger proportion of people without jobs
has been involuntarily unemployed for
long periods of time (Bartik 2005); workers
with prolonged periods of unemployment
suffer from an erosion of job skills that
hurts long-term earnings (Bartik 2010);
and inner-city residents may have difficulty
obtaining jobs in wealthier suburbs due
to limited knowledge about opportunities,
difficulties commuting, or discrimination
(Anderson and Wassmer 2000).
As described in chapter 3, property tax
incentives are much more likely to sway a
firm’s choice of a specific site within a given
metropolitan area than to alter its broader
choicebetweendifferentregions.If incen-
tives are offered primarily in poorer areas
and center cities, they can help offset the
fact that the costs of business may be higher
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in these areas for a variety of reasons, in-
cluding higher property taxes, lower quality
public services, higher crime or land prices,
andtheneedtoredevelopbrownelds.In-
centives can be considered a compensating
differential to make these areas more com-
petitive with suburban areas that would
otherwise be more profitable locations for
many new facilities.
OBSTACLES TO ACHIEVING
DEVELOPMENT GOALS
Achieving these economic development
goals with property tax incentives depends
on a wide range of factors and is far from
guaranteed (box 1.2). Three general obsta-
cles apply to all three goals: property taxes
are a small part of total costs for most firms;
tax breaks are sometimes given to businesses
that would have chosen the same location
even without incentives; and widespread
use of incentives reduces their effectiveness.
Specific obstacles relate to the goal of
increasing income or employment with tax
incentives. First, most new jobs created by
business investment will go to in-migrants
or commuters instead of existing residents,
because people move to areas with strong
economic growth. For example, an analysis
of 18 studies by Bartik (1993) found that
between 60 and 90 percent of jobs created
by employment programs go to in-migrants
or unintended beneficiaries, while a study
byBlanchardandKatz(1992)suggeststhat
in the long run all newly created jobs will
be taken by in-migrants.
Incomegrowthorpovertyreduction
may be more realistic goals than increasing
the employment rate, but these benefits
depend on the characteristics of new jobs,
such as the wage level and percent of full-
time workers. Relying on selective incen-
tives to improve the economy requires local
governments to pick winners by strategic-
ally offering incentives and identifying key
firms and local sectors that can sustain
competitiveness.
Achieving the goal of improved fiscal
health by offering tax incentives also depends
on several factors. Most important is the cost
of new infrastructure and expanded public
services, which depends on the current use
of existing infrastructure. Because of these
costs, projects that require new infrastructure
are unlikely to improve fiscal health in the
shortrun(AltshulerandGómez-Ibáñez
1993)
Another issue is that expecting a firm to
pay full taxes in the future once an incentive
has expired is often unrealistic. Based on
several studies, Fisher (2007) has estimated
that the median manufacturing plant is
open for approximately 8 to10 years. Since
the duration for property tax abatements
exceeds 10 years in about two-thirds of pro-
grams (Dalehite, Mikesell, and Zorn 2005),
a majority of facilities may have closed
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Box 1.2
A Cautionary Tale in Michigan
I
n 2009, the State of Michigan offered
over 35 business tax incentive pro-
grams (Anderson, Rosaen, and Doe 2009).
The most expansive of these is the In-
dustrial Facilities Property Tax Abatement
program (Act 198). Crafted in 1974, Act
198 provides geographically targeted
property tax abatements for the creation,
expansion, renovation, or addition of in-
dustrial property (Sands and Reese
2012; CRC 2007). Practically any local
government may establish an industrial
development or plant rehabilitation dis-
trict. Once a district is established, any
qualifying business wishing to develop
within the district can apply for an ex-
emption certicate subject to local and
state approval and conditional upon job
retention and creation. Instead of pay-
ing property taxes, certied businesses pay a substitute
tax equal to 50 percent of the property tax for new facilities
and equal to the property tax on the unimproved value of
renovations or rehabilitations (Mikesell and Dalehite 2002;
Signicant Features of the Property Tax 2012).
Sands and Reese (2012) report that between 1974 and
2005 the program abated $77.4 billion in real and person-
al property, with an average of 600 exemption certicates is-
sued each year since 1980. The cost to local governments
in lost revenue between 1990 and 2005 was roughly $84
per person per year. In 2008, industrial property abated
by this program accounted for 20.5 percent of the total
industrial tax base (Anderson, Bolema, and Rosaen 2010).
Despite their widespread use, the impact of the Act 198
abatements is unclear. Over the 1990–2005 period, busi-
nesses receiving abatements reported they would create
234,000 new manufacturing jobs and retain 728,000
manufacturing jobs that otherwise would have been lost.
Yet the number of jobs reported is not the same as the
number of jobs actually attributable to the abatements,
because the promised jobs do not always materialize and
many that do would have been created even without the
abatements. In fact, in some industries the number of jobs
reportedly created or retained through abatements actually
exceeds the total number of all jobs in those industries.
More generally, Michigan lost a slightly higher percentage
of manufacturing jobs than the country as a whole over
the time period. Although manufacturing job losses may
have been even greater in the absence of abatements, the
abatements were not effective in preventing substantial
job losses (Sands and Reese 2012).
Evidence shows the abatements have not effectively tar-
geted incentives to distressed areas or central cities. Among
communities that awarded abatements between 1998
and 2000, distressed areas were no more likely to award
them than ourishing communities, but spent more per
job retained or created than wealthier areas. Furthermore,
suburbs award abatements at a higher rate per capita than
central cities. The suburbs report more jobs per capita as
a result of incentives and had higher investment per capita.
Abatements may promote sprawl to the extent that new
investment spurred by the abatements is more likely to
occur outside of central cities (Reese and Sands 2006).
12 Policy focus RePoRt � LincoLn institute of Land PoLicy
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before they ever paid the full tax rate. For
these reasons, some studies have found that
greater reliance on property tax incentives
increases fiscal stress for local governments
(Mullen 1990).
Finally,promotingurbanrevitalization
with property tax incentives depends on
theirgreaterutilizationindistressedareas
than wealthier communities; if both types
of areas use incentives aggressively, then
relative tax burdens may change little. How-
ever, in practice, economic development in-
centives do not appear to be notably more
common in low-income areas (Peters and
Fisher 2004). There is also evidence that
tax incentives are more cost effective in areas
with high incomes and low unemployment,
and thus their use could actually widen
economic disparities between high- and
low-income areas (Goss and Phillips 2001;
Sands and Reese 2012). While the social
benefits of creating jobs with tax incentives
may be greater in areas with high unemploy-
ment, the costs could be even greater if
it takes substantially larger tax breaks to
induce business investment in these areas.
PITFALLS WITH
DISCRETIONARY PROPERTY
TAX INCENTIVES
Discretionary tax incentives, which are dis-
tinct from as-of-right incentives given to all
firms meeting certain criteria, have other
pitfalls. Selective use of incentives raises
majorconcernsabouthorizontalequityand
the distribution of taxes, because granting
tax breaks to some mobile businesses likely
means that long-standing local businesses
or homeowners will pay more. This type
of system is likely to be viewed as unfair
by many taxpayers.
Decisions to grant discretionary tax
incentives are sometimes not transparent
or are made in ad hoc ways without clear
economic justification. This process may
be unduly influenced by political consider-
ations, with incentives granted to well-
connected firms or campaign contributors.
For example, Felix and Hines (2010) found
that communities in states with more cor-
rupt political cultures were more likely
to offer incentives.
A related concern is that politicians may
grant incentives regardless of the economic
rationale. Politicians can grant incentives
and claim that they played an instrumental
role in attracting a new facility to the com-
munity, even if a firm may have located
there without incentives. Wolman and
Spitzley(1996)ndevidenceof thistype
of credit-claiming among elected officials.
Conversely, if politicians decide not to
offer incentives, they could be blamed if
the firm chooses to locate elsewhere. A final
consideration is that negotiation over tax
incentives significantly increases the cost
of property tax administration for the local
government.Itisalsoeconomicallyinef-
cient for firms to spend time and money
lobbying for tax breaks instead of focus-
ing on improving their business.
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 13
. . . . . . . . . . . . . . . . . . .
CHAPTER 2
Property Taxes on Business
B
usiness property includes nonresi-
dential, income-producing prop-
erty such as commercial, industrial,
farm, mineral, railroad, or public
utility properties (Cornia 1995). This report
focuses primarily on commercial and indus-
trial property.
WHY BUSINESSES PAY
PROPERTY TAXES
Inordertoputpropertytaxincentivesinthe
proper context, it is important to consider
the reasons for requiring businesses to pay
property taxes.
To fund services received. State and
local governments provide a wide array of
services that benefit business activity, in-
cluding a small proportion that directly and
solely benefit businesses, such as economic
development support. Other types of state
and local government expenditures, such
as on the court system, transportation, and
public safety, provide critical benefits for
bothbusinessesandhouseholds.Education
is the single largest expenditure of state and
local government. Although education pro-
vides direct benefits to individuals, it also
benefits businesses by increasing the pro-
ductivity of their employees.
Oakland and Testa (1996) examine several
rationales for state and local taxation of busi-
ness, concluding that the primary basis for
14 Policy focus RePoRt � LincoLn institute of Land PoLicy
. . . . . . . . . . . . . . . . . . .
taxing businesses is to recover the cost of
government services provided to them. The
authors further argue that taxing businesses
in accordance with benefits provided is
both fair and efficient.
To generate revenue for local gov-
ernments. Although popular discussion of
property taxes tends to focus on those paid
by homeowners, the assessed value of busi-
ness property is an important part of the
taxbase.In1986,themostrecentyearthat
the U.S. Census collected data on assessed
property values, 39 percent of the property
tax base could be attributed to businesses.
This included commercial properties (16
percent), industrial properties (6 percent),
farms (7 percent), and personal property
(10 percent). The latter can be classified as
business property since most states no longer
tax household personal property. Residential
property accounted for 55 percent of the
tax base, split between single-family houses
(48 percent) and multifamily properties
(7percent).Vacantlotsaccountedforthe
remaining 6 percent (U.S. Department
of Commerce 1989).
More recent data can be obtained
at the state level, but not all states report
assessed values by property type, and the
states that do report may not divide the
property tax base into the same categories.
Thirty-one states report some division of
their property tax base by property type
(table 2.1). For these states on average,
nearly 60 percent of the property tax base
was residential, 22 percent was commer-
cial and/or industrial, and 19 percent was
categorizedas“other,”whichincluded
various types, such as personal property
and vacant land.
Revenue from business property taxes
also constitutes a substantial proportion of
all property tax revenue collected. Accord-
ing to Phillips et al. (2011), in FY2009 busi-
nesses contributed $247 billion in property
TaBle 2.1
Property Tax Base by Property Type in 31 States, 2009
State Residential
Commercial
and/or Industrial Other
U.S. Average 59.8% 21.6% 18.6%
Alaska 59.7 22.4 17.9
Colorado 46.2 25.7 28.1
Delaware 71.0 29.0 0.0
District of Columbia 58.4 40.9 0.7
Florida 74.2 17.1 8.8
Hawaii 68.6 24.8 6.7
Idaho 69.7 22.7 7.5
Illinois 65.0 32.5 2.5
Indiana 49.3 29.0 21.7
Iowa 44.5 30.2 25.3
Kansas 51.9 25.8 22.3
Kentucky 65.8 24.3 9.9
Maryland 80.2 18.0 1.8
Massachusetts 83.0 14.5 2.5
Michigan 69.4 20.1 10.5
Minnesota 66.9 13.3 19.8
Missouri 53.7 21.4 24.9
Montana 47.1 13.6 39.3
New Hampshire 79.6 16.3 4.1
New Jersey 62.5 15.2 22.3
North Carolina 65.0 15.8 19.2
North Dakota 43.3 23.3 33.5
Ohio 69.3 20.8 10.0
Oregon 52.5 19.0 28.5
South Dakota 39.2 24.1 36.6
Tennessee 55.5 27.1 17.4
Texas 52.3 20.3 27.4
Utah 47.2 19.4 33.4
Vermont 60.9 16.5 22.6
Washington 75.4 16.6 8.0
Wisconsin 72.1 20.3 7.6
Wyoming 15.2 10.5 74.3
Notes: The other 19 states do not report divisions of their tax base into classes for residential
andcommercialand/orindustrialproperties.States’denitionsof“other”propertyvarywidely.
Source: Signicant Features of the Property Tax (2012).
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 15
. . . . . . . . . . . . . . . . . . .
tax revenue to state and local governments,
constituting 58 percent of all property taxes
raised and 40 percent of all state and local
taxes paid by business (figure 2.1). These
estimates include multifamily housing,
although many other researchers would
not include it as business property. Business
property taxes have been quite stable over
the past two decades, although they did
jumpsignicantlyin2009and2010.It
is likely that business properties will help
shore up total property tax revenues in
coming years, as the dramatic fall in hous-
ing values weighs down residential tax
payments.
To add progressivity to the state-
local tax system. For those concerned
with state and local government use of
regressive taxes, such as reliance on the
general sales tax, levying property taxes on
businesses can be a way to add a progres-
sive element to the total state-local tax sys-
tem. The property tax, particularly the part
of the property tax levied on businesses, is
often conceived as a tax on capital. Owner-
ship of capital is proportionately greater
for higher-income households, so any tax
on capital places a higher tax burden
on high-income households than on
low- and moderate-income households.
POLICIES AFFECTING THE
PROPERTY TAX BURDEN ON
BUSINESS
Property tax incentives for business can
only be understood fully within the context
of other major policies affecting the prop-
erty tax burden on business.
State Constitutions
Although they vary enormously and have
evolved over time, state constitutions together
with case law set the framework that guides
legislative action regarding business property
taxes. The most important constitutional
provisions are the uniformity clauses includ-
ed in 39 state constitutions, which require
property taxation at a uniform rate within
a jurisdiction, although they are subject to
important qualifications that vary by state
(Coe 2009).
One example of a uniformity clause is
Alabama’s constitutional requirement that
“all taxable property shall be forever taxed
Figure 2.1
Property Taxes on Business, Fiscal Years 1990–2010
Sources: Cline et al. (2011); State & Local Government Finance Data Query System (2012); U.S. Bureau of Economic Analysis (2011).
20
30
40
50
60
1.50
1.75
2.00
2.25
2.50
1990 1995 2000 2005 2010
Percent of Total Taxes (lines)
Percent of Private Sector Output (bars)
Percent of Total Property Taxes
Percent of Total State/Local Business Taxes
Percent of
Private Sector
Ouput
16 Policy focus RePoRt � LincoLn institute of Land PoLicy
. . . . . . . . . . . . . . . . . . .
atthesamerate”(ArtXI,sec.217(b)).
Arizona’sconstitutionalrequirementthat
“all taxes shall be uniform upon the same
class of property” provides an important
clue to the practical application of most
suchclauses(Art.IX,sec.1).
Although these clauses ostensibly require
all property to be taxed at a uniform rate,
in reality most allow differential taxation
between different classes of property at the
same time that they require uniform taxa-
tion within a given class. But even that re-
quirement is subject to the exceptions that
arise from property tax exemptions, which
areallowedinmoststates.Itisimportantto
realizethatcourts“areinclinedtogivestate
legislatures extensive leeway in their power
to tax, as long as it does not violate any
explicit provision of the state constitution”
(Coe 2009, 131).
State constitutions also commonly
address the issue of exemptions, but they
range from strictly limiting the state legis-
lature’s discretion in granting exemptions
(e.g.,Arizona),toallowingthelegislature
broadlatitude,asinIdaho,whoseconstitu-
tion states, “the legislature may allow such
exemptions from taxation from time to time
asseemnecessaryandjust”(Art.VII,sec.5)
(Coe 2009, 150–151). The Florida consti-
tution addresses the issue of property tax
exemptions for the purposes of economic
development: “Any county or municipality
may . . . grant community and economic
development ad valorem tax exemptions to
new businesses and expansions of existing
businesses.”(Art.VII,sec.3(c)).
A recent legal case challenging tax
incentives for business went all the way
to the U.S. Supreme Court (box 2.1).
Classification or Split Roll
Classification or split roll taxation is a policy,
either constitutional or statutory, that applies
different effective tax rates to different classes
Box 2.1
Cuno Supreme Court Case
I
n 1998 the City of Toledo, Ohio and two local school
districts offered DaimlerChrysler, Inc., a $280 million
tax incentive package to expand operations within the
city. The company estimated that the $1.2 billion devel-
opment of a new Jeep manufacturing facility would cre-
ate thousands of new jobs. The tax incentive package
included a 10-year, 100 percent property tax exemption
and a state franchise tax credit (DaimlerChrysler Corp
v. Cuno [2006]).
Led by Toledo resident Charlotte Cuno, a group of nine
Ohio taxpayers and some area businesses led a law-
suit against DaimlerChrysler, the State of Ohio, and the
City of Toledo charging that the tax incentive package
violated the U.S. Commerce Clause and the Ohio Equal
Protection Clause (Carty 2006). The case was led in
state court, but DaimlerChrysler moved the case to
federal court where the U.S. District Court ruled that
the incentives violated neither the U.S. nor Ohio clause
and dismissed the case (Lunder 2005).
On appeal, in 2005 the U.S. Court of Appeals for the
Sixth Circuit afrmed the U.S. District Court’s ruling
upholding the property tax exemption, but reversed its
ruling on the franchise tax credit, maintaining that the
credit ran afoul of the U.S. Commerce Clause. In March
2006, the U.S. Supreme Court reviewed the lower court
decisions and dismissed the case, ruling that the plain-
tiffs had no standing to challenge the credit for the
state franchise tax.
Summing up the unanimous ruling, Supreme Court Chief
JusticeJohnRobertswrote,“Indeedbecausestate
budgets frequently contain an array of tax and spending
provisions, any number of which may be challenged on
a variety of bases, affording state taxpayers standing to
press such challenges simply because their tax burden
gives them an interest in the state treasury would inter-
pose the federal courts as virtually continuing monitors
of the wisdom and soundness of state scal adminis-
tration, contrary to the more modest role Article III
envisionsforthefederalcourts”(DaimlerChrysler
Corp v. Cuno [2006]).
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 17
. . . . . . . . . . . . . . . . . . .
of property.Effectivetaxratesarecomputed
by dividing total tax liability by total prop-
erty value. Comparison of effective instead
of statutory tax rates is particularly impor-
tant when comparing one jurisdiction that
assesses property at market value with an-
other jurisdiction that assesses property at
some fraction of market value. For example,
a jurisdiction can levy an effective property
tax rate of 1 percent either by assessing
property at 100 percent of market value and
employing a statutory tax rate of 1 percent,
or by assessing property at 50 percent of mar-
ket value and employing a 2 percent tax rate.
States that employ classification typically
use it to apply higher tax rates to commer-
cial, industrial, and other business property
than to residential property. Classification
can be accomplished in two ways: statutory
tax rates can vary by class, or the ratio of
assessed value to market value can vary by
class. As an example of the latter, Alabama
applies a uniform statutory tax rate to all
types of property, but assesses utility prop-
erty at 30 percent of market value; commer-
cial and industrial property at 20 percent;
and residential property at 10 percent (Sig-
nifcant Features of the Property Tax 2012).
Twenty-six states plus the District of
Columbia employ some form of property
tax classification and California policy mak-
ers have been considering adopting a split-
roll property tax in order to increase property
taxes on businesses relative to residential
property (Lee and Wheaton 2010; Sheffrin
2009). Many state constitutions address the
issue of classification. Some, like Florida’s,
prohibit classification, but others give the
state great leeway in creating a classification
system. Some place limits on classification,
18 Policy focus RePoRt � LincoLn institute of Land PoLicy
. . . . . . . . . . . . . . . . . . .
such as the Massachusetts constitution,
which limits the number of permissible
classes to four (Coe 2009).
Certain states, including Connecticut,
Illinois,Massachusetts,NewYorkand
RhodeIsland,allowlocalgovernments
some discretion in adopting or adjusting
property tax classification. Others, such as
Colorado, have adopted a system termed
“dynamic classification” in which effective
tax rates for each property class are changed
over time in order to maintain a specific re-
lationship between the share of the property
tax paid by residential properties and other
properties (Bell and Brunori 2011).
Assessment Practices
Although classification systems are generally
used to impose greater effective tax rates on
business than residential properties, a state
can accomplish the same thing as a de facto
rather than a de jure policy. Some states
even had long-standing policies of assessing
business properties at a greater proportion
of market value than residential properties
before enacting legislation establishing clas-
sification systems to codify such practice.
Another way in which business properties
can be systematically taxed differently from
residential property is by using a different
appraisal methodology. Of the three stan-
dard methods—sales, income, and cost—
the sales method is most often used for resi-
dential properties and least often for business
properties. Although each methodology
should in theory lead to the same valuation,
in practice they may differ. One concern is
that the cost method might systematically
undervalue properties, which would tend
to lead assessors who employ that method
to undervalue business properties relative
to residential properties (Cornia 1995).
Personal Property Taxes
Inconsideringpropertytaxesonbusiness,
it is important to include personal property
as well as real property, which consists of
land, improvements to land, and buildings.
Personal property includes machinery and
equipment, inventories, and fixtures such as
furniture or office equipment, and is typically
taxed only when owned by a business. Per-
sonalpropertyischaracterizedbyitsmobil-
ity, whereas real property is immovable (Almy,
Dornfest,andKenyon2008).Inpartbecause
of this greater relative mobility, the case for
taxing business personal property is weaker
than that for taxing business real property.
For example, a business could easily move
inventories from a high-tax to a low-tax
jurisdictioninordertominimizetaxliability.
Over time, personal property has become
a smaller part of the U.S. property tax base,
as most household personal property and
later some business personal property was
removed from the tax base. Personal prop-
erty as a share of the local property tax
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 19
. . . . . . . . . . . . . . . . . . .
Figure 2.2
Effective Property Tax Rates for Urban Commercial Property ($1 million value), 2010
base was 17 percent in 1956, 13 percent
in 1971, and 10 percent in 1986 (Mikesell
1995).In1961,fourstatesexemptedper-
sonal property from taxation; by 2011,
12 states had exempted personal property
(Mikesell1995;Thompson/ReutersRIA
2012).Inthepast12years,8statesreduced
their reliance on personal property taxes,
including raising exemption levels and
eliminating personal property taxes on
inventories (Drenkard 2012).
Ohio and Michigan recently reduced
taxation of business personal property as
part of their tax reform initiatives. Ohio
adopted a new commercial activity tax,
exempted new tangible personal property
from taxation, and enacted a five-year
phase-out of taxes on existing personal
property. Michigan replaced its Single
Business Tax with a new business tax struc-
ture at the same time that it significantly
reduced personal property taxes for both
commercial and industrial taxpayers
(NeubigandCline2008).
EFFECTIVE TAX RATES ON
BUSINESS PROPERTY
The most comprehensive measure of
effective tax rates is the one calculated for
the largest city in each state by the Minnesota
Taxpayers Association (MTA), which esti-
mates effective tax rates for commercial,
industrial, and homestead properties (Min-
nesota Taxpayers Association 2011). The
MTA takes a number of factors into account,
such as differences in assessment practices;
exemptions, credits, or refunds that apply
to a majority of taxpayers; tax rates for all
state and local governments that serve a
city; and tax classification when it is used.
Figure 2.2 shows that effective property
tax rates for urban commercial properties
2.50% to 4.01%
1.96% to 2.49%
1.40% to 1.95%
0.65% to 1.39%
Rate for Largest
City in Each State
Note: In most cases property
tax structures are uniform across
states, with the exception of
Illinois and New York. This map
illustrates the effective tax rate
for Aurora, Illinois (2.39%). The
rate for Chicago is 1.79%
Source: Minnesota Taxpayers
Association (2011, 21).
20 Policy focus RePoRt � LincoLn institute of Land PoLicy
. . . . . . . . . . . . . . . . . . .
2.00% to 3.15%
1.50% to 1.99%
1.20% to 1.49%
0.44% to 1.19%
Rate for Largest
City in Each State
Figure 2.3
Effective Property Tax Rates for Urban Industrial Property (50% Personal Property, $1 million value), 2010
with a $1 million market value range be-
tween 0.7 percent in Cheyenne, Wyoming,
and 4 percent for Detroit, Michigan. These
rates are highest in the Midwest and Middle
Atlantic states and lowest in the West. They
vary for many reasons, including reliance
on other local revenue sources (e.g., sales
tax and user fees), property values, and the
level of local government spending.
Because some states tax personal prop-
erty and others do not, estimates of effective
tax rates for industrial property depend on
the proportion of the total property value
that is personal property. Figure 2.3 shows
effective tax rates for urban industrial prop-
erty valued at $1 million, assuming that half
of thevalueispersonalproperty.Effective
tax rates for industrial property are some-
what lower than for commercial property,
ranging from 0.4 percent in Wilmington,
Delaware, to 3.2 percent in Columbia,
South Carolina. These rates are highest
in the Midwest and South and lowest
in the West.
Inthemajorityof citiestheeffective
tax rates for commercial properties exceed
those for homesteads. Figure 2.4 shows the
ratio of commercial to homestead effective
property tax rates for the largest city in each
of 25states.Effectivetaxratesoncommer-
cial properties exceed rates on homestead
properties in 20 of them. A few cities, such
asBaltimore,Maryland,andVirginiaBeach,
Virginia,haveahighertaxonhomestead
properties than on commercial properties.
The MTA has tracked the ratio of effec-
tive tax rates of commercial versus home-
stead property since 1998, when that ratio
was 1.76, indicating that on average across
the country commercial properties were
taxed about 76 percent higher than home-
stead properties. That ratio declined until
2002, then rose through 2008, and has
declinedslightlysincethen.In2010the
Note: In most cases property
tax structures are uniform
across states with the exception
of Illinois and New York. This
map illustrates the effective tax
rate for Aurora, Illinois (1.44%).
The rate for Chicago is 1.18%.
Source: Minnesota Taxpayers
Association (2011, 23).
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 21
. . . . . . . . . . . . . . . . . . .
Figure 2.4
Ratio of Commercial to Homestead Effective Property
Tax Rates, 2010
Notes: Figure shows the largest city in the 25 most populous states, with the
exception of Illinois and New York, which show the second largest city. The U.S.
average is for the largest city in each state, with New York City excluded.
Source: Minnesota Taxpayers Association (2011, 14).
ratio was 1.72 (Minnesota Taxpayers
Association 2011).
Whether or not effective tax rates for
industrial properties exceed those for home-
steads depends on the split of industrial
property between personal and real prop-
erty.In2010,thenationwideaverageof
effective property tax rates on median value
homes across the United States was 1.34
percent. This fell short of the 1.43 percent
effective tax rate for urban industrial prop-
erty valued at $1 million, assuming that 50
percent of the total property value was per-
sonal property. However, it would exceed
the 1.3 percent rate if personal property
was assumed to account for 60 percent of
total property value (Minnesota Taxpayers
Association 2011).
Itisimportanttonotethateffectivetax
rates measure the initial incidence of prop-
erty taxes, but other studies explore final
incidence, a more complicated concept that
takes into account the fact that the ultimate
burden of taxation always falls on persons.
That is, depending upon factors such as
whether a business serves a local or national
market, the final incidence of business taxes
will fall on business owners, workers, or
consumers.
SUMMARY
Requiring businesses to pay property taxes
is based on three rationales: businesses ben-
efit from local government services; business
property tax payments are an important
revenue source for local governments; and
business property tax payments add a pro-
gressive element to the state-local tax sys-
tem. This chapter surveyed policies other
than property tax incentives for business
that serve to either increase the property
tax burden on business (e.g., classification
or split-roll systems) or decrease the burden
(e.g., phasing out personal property taxes).
Effectivetaxratesoncommercialand
industrial property vary enormously across
the United States for a variety of reasons.
Inthelargestcityinmoststatestheeffective
tax rates on commercial property exceed
those for homeowners, but in some states
the reverse is true.
0 1 2
VA: Virginia Beach
MD: Baltimore
NC: Charlotte
NJ: Newark
WA: Seattle
CA: Los Angeles
WI: Milwaukee
IL: Aurora
TX: Houston
MI: Detroit
OH: Columbus
GA: Atlanta
FL: Jacksonville
PA: Philadelphia
TN: Memphis
U.S. Average
NY: Buffalo
MO: Kansas City
AL: Birmingham
LA: New Orleans
MN: Minneapolis
AZ: Phoenix
IN: Indianapolis
SC: Columbia
CO: Denver
MA: Boston
3
Higher tax rates on
commercial properties
Equal tax rates
Higher tax rates on
homestead properties
22 Policy focus RePoRt � LincoLn institute of Land PoLicy
. . . . . . . . . . . . . . . . . . .
CHAPTER 3
The Impact of Property Taxes
on Firm Location Decisions
T
he site location process used by
many businesses, as well as eco-
nomic theory and empirical studies,
suggests that the impact of proper-
ty taxes on firm location decisions depends
on the type of facility and the geographic
area under consideration.
THE SITE LOCATION PROCESS
With over 36,000 jurisdictions in the United
States and a much larger number of poten-
tial sites, firms could not possibly evaluate
all sites across the many location criteria
that are typically considered in such deci-
sions.Instead,thesitelocationprocessnor-
mally occurs in several stages during which
firms systematically narrow the geographic
area under consideration and compare
with increasing detail the competing
locations. The importance of property
tax differentials in firm location decisions
varies with the stage of site selection.
A two-stage process is one way to think
about site selection, in which a firm first
chooses a metropolitan area and then a
specific site within that region. Property
taxes are relatively unimportant in choosing
a metropolitan area since tax differences
have a much smaller impact on profits than
differences in costs for labor, transportation,
energy, and rent or occupancy. However,
since effective property tax rates can vary
significantly within a metropolitan area,
differences in property taxes can be a
deciding factor when selecting a single site
within an area. At this stage, state taxes
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 23
. . . . . . . . . . . . . . . . . . .
and regulations as well as energy costs are
often constant; labor cost differences are
small because of the ease of intrametropoli-
tan commuting; and there is little variation
in proximity to suppliers or consumers.
Ady (1997) describes a more detailed
three-stage process for facility location,
developed by Fantus Consulting, which
isnowusedwidelybysiteselectors.Inthe
first stage, the search is narrowed to a broad
region, several states, or several counties
based primarily on wage differentials, trans-
portation variables (for manufacturing), and
project-specific essentials such as access to
port facilities, right-to-work laws, or prox-
imity to an engineering school. Taxes will
be considered, but only at a high level to
eliminate clearly uncompetitive states.
Inthesecondstage,3to5communities
will be chosen out of a list of as few as 15
to 20 or as many as 50 to 100. The focus is
on modeling operating costs for the specific
project in each community. According to a
database of firms using Deloitte & Touche/
Fantus Consulting for site selection during
1992–1997, Ady (1997) reports that total
operating costs for a typical manufacturing
facility can be estimated with the following
weights for five categories of input costs:
labor (36 percent), transportation (35), utili-
ties (17), occupancy (8), and taxes (4). Again,
taxes are relatively unimportant at this stage
because they account for a small part of
geographically variable costs.
But in the third stage, when choosing a
specific site, firms examine actual properties
that can meet their needs, and then all taxes
and incentives are compared in detail and
the quality of public services is measured
carefully. As Ady (1997, 80) says, “The only
case where taxes alone could sway a loca-
tion decision is a company relocation in a
relatively autonomous geographic area,
such as a city or metropolitan area.”
THE EFFECT OF INPUT
COST DIFFERENCES
The importance of differences in each cost
factor will depend on each factor’s share
of total costs for the firm and the extent of
variation across states, regions, or jurisdic-
tions. Large variations will have little effect
on firm location decisions if a cost factor
accounts for a small share of total costs, while
factors accounting for a large share will be
unimportant if there is little variation across
competing regions.
When a manufacturing firm chooses
a region in which to locate its facility, its
decision is typically driven by proximity to
suppliers and consumers (and the transpor-
tation costs to reach them) and the wages,
skills, and availability of local workers. That
is because three-quarters of costs for the
average manufacturing firm are inputs pur-
chased from suppliers, with labor account-
ingformostof theremainingcosts.Infact,
figure 3.1 shows that the manufacturing
Figure 3.1
Input Costs as a Share of Total Costs for the Manufacturing
Sector, 2004–2009
Note: See Appendix Notes for an explanation of the calculations.
Sources: Phillips et al. (2011); U.S. Bureau of Economic Analysis (2011).
21.8%
2.7%
0.8%
0.3%
0%
5%
10%
15%
20%
25%
Labor Energy State/Local
Taxes
Property
Taxes
24 Policy focus RePoRt � LincoLn institute of Land PoLicy
. . . . . . . . . . . . . . . . . . .
Figure 3.2
Impact of Relocation to Different States on Total Costs for an Average Manufacturing Facility
Note: See Appendix Notes for an explanation of the calculations.
Sources: Moody’s Analytics, Inc. (2011); Phillips et al. (2011); U.S. Bureau of Economic Analysis (2011); U.S. Energy Information Administration (2011).
sector spends nearly 75 times more on
labor (21.8 percent) than on property taxes
(0.3 percent).
Eventhoughtaxesvarymoreacross
states than do labor costs, differences in
labor costs are still much more likely to
drive firm relocations. Figure 3.2 estimates
the effect on an average manufacturing
facility of relocating from a high-cost state
to a low-cost state, using actual data on
state input costs and the share of total costs
for each input. Moving from the state with
the fifth highest state-local taxes to the state
with the fifth lowest will reduce business
costs by 0.4 percent on average whereas
moving from the state with the fifth high-
est labor costs to the fifth lowest will save
almost 9 times as much (3.1 percent).
The importance of taxes is much greater
when a firm chooses a specific site within a
metropolitan area. At this stage, differences
in the cost of labor, energy, state taxes,
and transportation are normally small, but
property taxes often vary more across indi-
vidual jurisdictions within a given region
than they do across states. For example,
among 103 Massachusetts municipalities
in the Boston metropolitan area that have
notzonedoutindustry,effectiveproperty
tax rates on industrial properties ranged
from 1.13 percent in the municipality with
the tenth lowest rates to 2.82 percent in the
municipality with the tenth highest rates.
This means that a firm’s total operating
costs could be reduced by 0.5 percent by
locating in the low-tax municipality instead
of thehigh-taxone(seeAppendixNotes
for calculations).
ECONOMIC THEORY
Differences in effective property tax rates
on new investment will affect a jurisdiction’s
ability to attract mobile capital investment
in direct and indirect ways. Above-average
property taxes on business will directly
reduce business investment, because higher
property taxes decrease the rate of return
oninvestment.Accordingtothe“NewView”
0.1%
0.2%
0.7%
2.1%
0.2%
3.1%
0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5%
Property Taxes
State/Local Taxes
Energy
Labor
1.4%
0.4%
Change in Total Costs from Moving:
From: State with 5th highest costs for input
To: State with 5th lowest costs for input
From: State with 12th highest costs for input
To: State with 12th lowest costs for input
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 25
. . . . . . . . . . . . . . . . . . .
of thepropertytaxrstputforthbyMiesz-
kowski (1972), the average business property
tax rate constitutes a profits tax that reduces
the rate of return on business property na-
tionally. Property taxes above the national
average will reduce business activity, land
prices, wages, and the employment rate.
However, higher property taxes are often
associated with higher-quality public services
forbusinessandwillbecapitalizedinto
lower land values. These indirect effects will
tend to increase business investment. Higher-
quality police and fire protection, highways,
infrastructure, utilities, and education all
affect firm location decisions (Ady 1997).
Public services affect firm costs and produc-
tivity, such as the impact of police protection
on insurance rates and the impact of edu-
cation on labor productivity.
If propertytaxdifferentialswerecom-
pletely offset by differences in the quality of
public services, then property taxes would
be benefit taxes and have no effect on
firm location decisions. Oates and Schwab
(1991) have argued that under perfect com-
petition all local government taxes would
be benefit taxes, because jurisdictions would
bid against each other to attract mobile
businesses up to the point where the cost
of providing public services to a firm would
exactly equal the amount it pays in taxes.
Inthiscase,thelevelof publicservices
provided would be economically efficient,
although there would be no scope for
redistribution at the local level.
Some research has cast doubt on the
property tax being a benefit tax for business.
According to Oakland and Testa (1998), in
1995 businesses paid twice as much in state
and local taxes as the cost of public services
they received. However, these estimates de-
pend on assumptions about how the benefits
of public goods are shared between house-
holds and business. For example, if 25 per-
cent of public education spending is count-
ed as a benefit for business, then the esti-
mated ratio of taxes-to-benefits drops
from 2.06 to 1.31.
Inaddition,propertytaxesarecapital-
izedintolandvalues—thatis,forotherwise
identical properties with similar location
advantages and public services, the one with
higher property taxes will have a lower land
value,whichequalizestotalexpensesover
the life of the property. However, Yinger
et al. (1988) found that property tax differ-
entialsarenotfullycapitalizedintoprop-
erty values.
Thus despite some caveats, the balance
of evidence supports the basic intuition that
firm location decisions are responsive to
differences in property taxes. However, the
net effect of a property tax cut on business
26 Policy focus RePoRt � LincoLn institute of Land PoLicy
. . . . . . . . . . . . . . . . . . .
investment in a jurisdiction is much smal-
ler than the direct effect, and depends on
whether the tax cut is financed by reducing
public services for business and the extent
that land values increase in response to
a tax cut.
Inaddition,whilelowerpropertytaxes
should increase business investment, the
effect on employment is less clear, because
lower property taxes reduce the cost of
machinery and equipment relative to labor.
Job growth induced by greater business
investment (i.e., scale effect) could be out-
weighed by job losses due to substituting
machinery for labor (i.e., substitution effect).
Finally, the effect of property taxes on the
location decision for a specific facility can
be significantly different from the average
effect for all firms.
EMPIRICAL EVIDENCE
There are three common approaches
for estimating the effect of taxes on local
economies: surveys, regression analysis,
and representative firm models. Surveys
ask business decision makers about the role
of taxes and incentives in their facility loca-
tion decisions. While surveys can be influen-
tial, they are unreliable since those surveyed
have an incentive to exaggerate the effect of
taxes and incentives on their decisions as a
way to lobby for preferred policies. Regres-
sion analysis and representative firm models
are more reliable because they look at a
firm’s actual decisions and take into account
many of the other local factors that affect
profitability to determine the true impor-
tance of taxes and incentives.
An examination of studies done between
1990 and 2011 suggests that the best litera-
ture reviews on this issue are still Bartik (1991)
andWasylenko(1997),whosummarize
the results of roughly 90 studies that used
regression analysis to estimate the effect of
state and local taxes on economic activity.
Table 3.1 describes the methodology used
in these studies, including the measures of
economic activity, which include employment,
firm births and relocations, investment, and
income. One key result is that differences
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 27
. . . . . . . . . . . . . . . . . . .
TaBle 3.1
Impact of State and Local Taxes on Economic Activity:
A Summary of Empirical Evidence
Tax Differences Across Regions Tax Differences Within a Region
Impact of Tax Cuts
on Economic Activity
Increase in Economic Activity from
10% Cut in Total State & Local Taxes
Increase in Economic Activity from
10% Cut in Local Property Taxes
Median Estimate 2% to 3% 16% to 20%
Most Likely Range 1% to 6% 10% to 30%
Tax Revenue Change Per
Job Created by Tax Cuts
Annual Recurring Change
in Total State and Local Tax Revenue
Annual Recurring Change
in Local Property Tax Revenue
Median Estimate – $17,337 $1,035
Most Likely Range – $52,011 to -$3,853 $0 to $1,553
Methodology These studies measure the long-run
relationship between differences in
taxes for entire regions (states or metro
areas) and differences in employment,
rm births and relocations, investment,
income, and gross product for these
regions.
These studies measure the long-run
relationship between differences in
property taxes for individual jurisdic-
tions within a region (typically a metro
area) and differences in employment
and rm births and relocations for
these jurisdictions.
Note: See Appendix Notes for details and calculations.
Sources: Bartik (1991; 2005).
in taxes within a given region have a five to
ten times greater impact on economic activ-
ity than differences in taxes across regions.
This key distinction reflects the two-stage site
selection process described earlier. However,
while a 10 percent cut in property taxes for
one jurisdiction is associated with a 16 to
20 percent increase in economic activity,
the site location process suggests this effect
islargelyazero-sumgamefortheregionas
a whole, because the increase in economic
activity in one jurisdiction is offset by de-
creases in other jurisdictions (Wassmer 2009).
The across-region results in table 3.1 also
rule out the possibility of across-the-board
tax cuts generating enough new economic
activity to actually increase tax revenues at
theregionallevel.Infact,themedianesti-
mate suggests that creating one job through
tax cuts would require a recurring annual
loss in state and local tax revenue of $17,337.
Again, the story is quite different for indi-
vidual jurisdictions. The within-region
results suggest that decreased revenues from
lower tax rates could be more than offset
by increased revenues from new economic
activity, so that lower property tax rates
could increase revenues by $1,035 per year
for each job created.
To obtain reliable estimates of the effect
of taxes on economic activity, it is crucial
to measure the quality of public services
accurately. Otherwise the effect of higher-
quality public services (expected to increase
economic activity) can be incorrectly attrib-
uted to the effect of higher taxes (expected
to decrease activity), which will underesti-
mate the effect of taxes.
For example, Phillips and Goss (1995)
find that studies that control for public ser-
vices estimate the effect of tax differences
betweenregionstobetwicethesizefound
by studies that do not. The average effect of
a 10 percent cut in state and local taxes is a
4.48 percent increase in regional economic
activity in studies with a public service
28 Policy focus RePoRt � LincoLn institute of Land PoLicy
. . . . . . . . . . . . . . . . . . .
control variable, and 2.16 percent in studies
that do not account for differences in public
services. The 4.48 percent estimate could be
interpreted as the effect of tax cuts holding
public services constant, while the 2.16 per-
cent estimate is the combined effect of tax
cuts and accompanying reductions in public
services.
Regression analyses must overcome a
host of other econometric problems and
measurement issues to obtain reliable esti-
mates of the effect of taxes (Wasylenko 1997).
Because of these significant challenges, re-
gression studies may have inexplicably large
variations across industries, statistically in-
significant coefficient estimates, a very wide
range of elasticity estimates, or be difficult
to replicate using data from different years
(McGuire 2003). One possible reason for
these wide variations is suggested by Ady
(1997), who is skeptical of trying to reach
general estimates of the effect of taxes on
economic activity because the importance
of taxes varies so much across industries,
the stage of site selection, and even individ-
ual firms in the same sector. For example,
property taxes place a higher burden on
capital-intensive industries, such as most
manufacturing firms, than on labor-inten-
sive industries, such as many service-sector
firms (figure 3.3).
An alternative methodology is the repre-
sentative firm approach, which combines
models built to accurately reflect the finan-
cial statements of typical firms with detailed
information about state and local tax provi-
sions. Starting with the same pre-tax profit
rate for each city or state, researchers calcu-
late the marginal after-tax profit rate for
new investment projects in each location
for specific industries. These studies allow
for a much more complete picture of the
tax system, including the treatment of
depreciation, tax credits, exemptions,
Figure 3.3
Capital Investment per Job for Selected Industries, 2010
Note: Based on an analysis of 6,500 large mobile business investments in 2010 worth $137 billion.
Source: Ernst & Young LLP (2011, 11).
0 100 200 300 400 500
Business Support Services
Financial and Real Estate Services
Health Care Insurance
Professional Services
Wholesale and Retail Trade
Transport, Storage, and Logistics
Motor Vehicle and Parts Manufacturing
Food Manufacturing
Machinery and Fabricated Metal Manuf.
Semiconductor and Electronic Manuf.
Investment per Job ($ Thousands)
Most
Capital-
Intensive
Most
Labor-
Intensive
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 29
. . . . . . . . . . . . . . . . . . .
and apportionment formulas; and how
these features interact with firms’ federal tax
payments, geographic distribution of sales
and existing facilities, and asset types. These
factors often have a larger impact on firms’
profits than do statutory tax rates.
Fisher and Peters (1998) look at 16
manufacturing sectors in 112 cities and find
small differences in effective marginal tax
rates for most cities, although there are sig-
nificant differences between the highest-
and lowest-tax cities. Similarly, Papke (1995)
finds that tax differences have very little
effect on after-tax rates of return among six
states in the Great Lakes region. However,
Papke (1987) finds significant tax differences
across states, and her analysis suggests that
higher effective tax rates do reduce capital
investmentinastate.Inaddition,thisre-
search shows how federal deductibility of
state and local taxes significantly reduces
the effect of property tax differentials on
firms’ profits.
SUMMARY
Research suggests that taxes play a role in
explaining differences in economic activity
between different states and regions, but this
effect is fairly small and easily outweighed
by differences in other factors. On average,
a 10 percent reduction in total state and
local taxes will increase economic activity
in a state or metropolitan area by 2 to 3
percent. However, the effect of property
tax differentials within a given metropolitan
region is five to ten times greater. On aver-
age, a 10 percent reduction in local prop-
erty taxes will increase economic activity
in a jurisdiction by 16 to 20 percent. Thus,
a jurisdiction may be able to significantly
increase business investment through tax
cuts or incentives, although this effect will
largely disappear if competing jurisdictions
respond with similar policies.
Property taxes are usually a less impor-
tant determinant of firm location decisions
compared to other factors, such as the
wages and skills of local workers, proximity
to suppliers and consumers, and transpor-
tation costs. Yet because differences in these
other factors are often small across juris-
dictions within the same metropolitan area,
property taxes play a more important role
in the choice of a specific site in the broader
region.Itisimportanttonotethattheeffect
of property taxes on firm location decisions
varies widely based on the characteristics
of individual facilities.
30 Policy focus RePoRt � LincoLn institute of Land PoLicy
. . . . . . . . . . . . . . . . . . .
CHAPTER 4
Types of Property Tax Incentives
for Business
F
ive types of property tax incentives
for business are examined here:
property tax abatement programs;
firm-specific property tax incentives;
taxincrementnancing;enterprisezones;
and tax-exempt industrial development
bond(IDB)issuancewhenitiscombined
with full or partial property tax exemption.
An overview of each type of incentive offers
evidence on how it works, its magnitude,
and a summary of evidence regarding its
effectiveness. Although each of these incen-
tives is covered separately, economic devel-
opment authorities often use these tools in
combination. The primary source for the
data included here is the online database
Significant Features of the Property Tax,
publishedsince2008bytheLincolnInstitute
of Land Policy and the George Washington
Instituteof PublicPolicy.
PROPERTY TAX ABATEMENT
PROGRAMS
Property tax abatement programs allow
partial or full reduction in property tax
liability for certain manufacturing, commer-
cial, or retail parcels. Property tax abate-
ments in the United States are as old as the
property tax, but one of the first surveys on
their use found that in 1967 they were used
in only 15 states (Wassmer 2009). Dalehite,
Mikesell, and Zorn (2005, 158) coined the
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 31
. . . . . . . . . . . . . . . . . . .
term “stand-alone property tax abatement
programs,”orSAPTAPs,tocharacterize
programs with these four elements:
(a) They provide for a reduction in tax
liability for select parcels; (b) they have a
purpose beyond tax relief alone, such as
redevelopment or economic development;
(c) there is a time limit on how long the
reduction remains in effect; and (d) they
can be used by themselves and not in con-
junction with other incentive programs.
This definition omits property tax incentives
that can be offered only as part of a broader
economic development package, such as
property tax abatements that are part of
enterprisezoneprograms,aswellasresiden-
tial property tax relief programs such as
circuit breakers. The stated goal of most
SAPTAPs is an increase in employment
or income in the jurisdiction offering them
(Wassmer 2009). Dalehite, Mikesell, and
Zorn (2005) found that 35 states employed
SAPTAPs in 2004, and Wassmer (2009)
confirmed this count for 2007. Appendix
table A.1 shows that in 2010 there were
82 property tax abatement programs in
37 states plus the District of Columbia.
How the Incentive Works
Property tax abatements vary along several
dimensions. For example, the types of eligible
properties include industrial (51 programs),
commercial (44), and a wide variety of
other types of properties. The taxes that
are abated include real property taxes (70
programs), personal property taxes (46),
taxes on improvements (24), and others. The
form of abatement also varies with exemp-
tions being most common (50 programs),
buttaxcredits(12),freezes(8),andother
approaches are also used to reduce tax
liabilities. Some are geographically targeted,
suchasIndiana’sDeductionforRehabilita-
tion or Redevelopment of Real Property
inEconomicRevitalizationAreas,but
most are not.
The most common duration for tax abate-
ments is 10 years, but they are frequently
renewable. While nearly half of these pro-
grams have no limiting provisions, 35 percent
allow for the termination of tax incentives
if firms do not meet job creation targets or
other program criteria; 18 percent include
“clawbacks” that attempt to require these
firms to pay back some portion of the
abatement; and 7 percent have a “sunset”
or end date (figure 4.1). When a program
has a sunset, it is important whether that
date triggers an evaluation of the program
or merely a pro forma renewal.
The governmental unit bearing the
cost of the abatement also varies. For the
majority of programs, each local govern-
ment must approve its own abatement.
However, for about a third of programs,
an abatement granted by one local govern-
ment, such as a municipality, automatically
abates the firm’s property taxes owed to
overlapping governments, such as school
districts or counties. Some states reimburse
local governments for property taxes they
forgowhenabatementsaregranted.In
all cases, the state government controls the
local government’s ability to grant property
tax abatements.
Magnitude
The best nationwide source for firm-specific
data on state and local business tax incen-
tives is the Subsidy Tracker on the Good
Jobs First website. For 2009 it reports that
the states of Louisiana, Maine, and Michigan
granted a total of 1,889 property tax abate-
ments with a total dollar value of $813.9
million.Inaddition,SubsidyTrackerreports
the combination of property tax abatements
andtaxcreditsorrebatesforNewYork
state, which granted 2,631 such incentive
32 Policy focus RePoRt � LincoLn institute of Land PoLicy
. . . . . . . . . . . . . . . . . . .
programs in stimulating economic growth.
Dalehite, Mikesell, and Zorn (2005, 160)
conclude, “. . . the evidence on abatement
effectiveness is mixed and leans toward the
tentative conclusion that if abatements are
effective, they are only partially, tempo-
rarily, or conditionally effective at best.”
Inalengthierandmorerecentreview
of the literature on effectiveness, Wassmer
(2009) concludes that evidence supports
the finding that property tax abatement
packages can induce relocation of business
firms within a metropolitan area, but this
effect is likely to be temporary.
Anderson and Wassmer (1995) find one
explanation for this in copy-cat behaviors in
decisions to grant property tax abatements
among the 112 Detroit-area municipalities.
This helps explain their finding that manu-
facturing property tax abatements were
effective initially, but not in later years.
Wassmer (2009) also finds that abatement
programs that induce a business to locate
in a jurisdiction can provide fiscal benefits,
but this positive result also requires that the
new firm not impose substantial new public
packages in 2009, with a total dollar value
of $512.9 million.
Michigan has a number of property tax
incentives for business and presents estimates
of the revenue loss from them in its tax ex-
penditurebudget.InFY2010,thatrevenue
loss totaled $364 million, of which about
one-fourth can be attributed to various
enterprisezoneprograms.Thus,approxi-
mately $261 million in property tax revenue
was lost to Michigan’s local governments
in FY2010 because of the use of property
tax abatement programs (Connolly and Bell
2011). To put this loss in a larger perspective,
Michigan’s total tax expenditure budget in
FY2010 was $36.4 billion, and the total
amount for property tax and other local tax
expenditures was $10.1 billion. The largest
local tax expenditures were for the home-
stead exemption at $3.5 billion and the
taxable value cap at $3.4 billion (Michigan
Department of Treasury 2010).
Effectiveness
Two recent literature reviews question the
effectiveness of property tax abatement
Figure 4.1
Limiting Provisions in Property Tax Abatement Programs, 2010
Source: Appendix Table A.1.
0%
10%
20%
30%
40%
50%
No Limiting Provisions Termination Clawback Sunset
Percent of Programs
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 33
. . . . . . . . . . . . . . . . . . .
service requirements. Finally, he points
to studies that find an association between
offering property tax abatement packages
and fiscal stress. He explains that commu-
nities offering property tax abatements
often find they need to raise other taxes
to make up for the revenue loss, which
in turn has a negative impact on the
economic base.
Lee (2008) found that, after controlling
for other important economic factors, states
with property tax incentive programs did
not have significantly lower rates of plant
closuresorrelocations.Inanotherstudy
Anderson and Wassmer (2000) looked at
municipalities in the Detroit metropolitan
area from 1977 to 1992. They found that
manufacturing property tax abatements
offered shortly after they were allowed un-
der state law did increase manufacturing
property values in cities offering abatements.
However, within eight years manufacturing
abatements were no longer effective, and
abatements for commercial properties
did not increase nonresidential property
values in any years.
FIRM-SPECIFIC PROPERTY
TAX INCENTIVES
This type of tax incentive allows partial
or full reduction in property tax liability
for specific firms and is typically combined
with other financial incentives in a package.
These packages are sometimes known as
targeted tax incentives or company-specific
economic development subsidies. They are
offered on a case-by-case basis as opposed
to incentives offered under pre-existing state
programs, such as property tax abatement
programsorenterprisezones.
34 Policy focus RePoRt � LincoLn institute of Land PoLicy
. . . . . . . . . . . . . . . . . . .
How the Incentive Works
Firm-specific property tax incentives are
usually offered to a company considering
relocation. One example is the competition
forthefootloosemilitarycontractorNorthrop
Grumman. After operating in Los Angeles
for 72 years, the company signaled its in-
tention to move its headquarters to the
Washington, DC area, setting off vigorous
competition among the nearby local gov-
ernments. The District of Columbia offered
the contractor $19 million in property tax
abatements and a $5.5 million grant to
help fund relocation costs (Meyer 2010).
VirginiaandMarylandpresented
counteroffers to the Fortune 100 firm, with
NorthernVirginiaultimatelywinningthe
corporateheadquarters.VirginiaGovernor
Bob McDonnell said that the common-
wealth promised the company $12 to $14
million in various state grants and incen-
tives, but expected that obtaining the com-
pany’s headquarters would increase state
tax revenue by a minimum of $30 million,
and would help the state attract additional
companies to the region (Clabaugh 2010).
Magnitude
Data on the magnitude of firm-specific
property tax incentives are difficult to find.
Brunori (1997) tracked the largest tax in-
centive packages given to specific firms for
1986–1996, but he did not break out the
dollar magnitudes of property tax incentives
from the rest of the incentive package.
Effectiveness
We found no studies that examined the
effectiveness of firm-specific property tax
incentives. Besides general issues with tax
incentives, there are two particular concerns
with this type of incentive. One has to do
with equity:
The biggest drawback to using company-
specific tax incentives is that they are
fundamentally unfair. . . . Usually the
largest and most profitable companies
are in a position to take advantage of
targeted tax incentives. To give Fortune
500 companies substantial tax relief
while subjecting small businesses to
regular state taxes hardly distributes
burdens equally. (Brunori 1997, 55)
Another concern is that once a firm-specific
incentive is given to one firm, similar com-
panies will lobby for their own tax incentive
package. Although this appears to make
the tax system fairer, it can have a dramatic
impact on tax revenues. The pros and cons
of one firm-specific property tax incentive
are outlined in box 4.1.
TAX INCREMENT FINANCING
Withtaxincrementnancing(TIF),growth
in property taxes or other revenues in a
designated geographic area is earmarked to
support economic development in that area,
usually to fund infrastructure improvements.
Unlikepropertytaxabatements,TIFdoes
not lower taxes on business, but earmarking
property tax revenue is an option in all
TIFprograms.
TherstlawauthorizingTIFwas
passed in California in 1952, but by 1970
onlyeightstateshadadoptedTIFlegisla-
tion. Beginning in the mid-1970s, the pace
of TIFadoptionquickened,and38states
hadTIFprogramsby1990.By2010,only
ArizonahadnotenactedTIFlegislation
(Appendix table A.2). The reasons for this
expansion include decreases in federal aid,
declining urban areas, and public pressure
againsttaxincreases(JohnsonandKriz
2001).
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 35
. . . . . . . . . . . . . . . . . . .
Inmoststates,citiesarerequiredto
approveaTIFdistrict,butapprovalagencies
also include counties, school districts, states,
communityredevelopmentboards,andTIF
commissions (figure 4.2). States vary in the
permissibledurationof TIFprojects,which
may be unspecified, set to equal the term
of the bonds, or allowed for as long as 50
years. Property taxes are eligible to be ear-
markedforallTIFprograms,withsales
taxes being the next most common revenue
source, allowed under 15 programs.
Alabama’s program appears to be fairly
typical.Eitheracitycounciloracountycan
approveaTIFproject,andpublichearings
How the Incentive Works
TIFisamechanismthroughwhicheco-
nomic development can be jumpstarted in
a blighted area through a creative, flexible,
public-private partnership. Once a project
is created, the incremental property tax
revenue in the project area is used to fund
infrastructure improvements. Bonds can
be issued with future revenue growth ear-
markedtopaythemback.Inthiswaythe
project can be considered self-financing.
Afteraspeciedtimeperiod,theTIFdis-
trict is ended and all revenues flow back to
the various governmental entities serving
the geographic area in question.
© ANDREW F. GRIFFITH
Box 4.1
Illinois Gives Sears a Tax Break
I
n 2011 Illinois lawmakers passed a temporary increase in the corporate
tax rate from 7.3 to 9.5 percent in order to reduce a dangerously large state
budget decit (Keen 2011). In response, Sears Holdings Corporation, the suc-
cessor to Sears, Roebuck and Co., threatened to leave the state unless law-
makers granted the company a substantial tax break. Sears had been based
in Illinois for over 100 years, employing 20,000 people in 2011 and paying
$213 million in taxes in 2010 (Sears Holdings Corporation 2011).
Ohio offered Sears a $400 million tax incentive to relocate to that state, and
Sears was reportedly also considering relocating to Texas (Associated Press
2011). In December 2011, the Illinois legislature enacted SB397 to provide
the company $15 million in new tax breaks annually, in addition to an extension
of existing property tax breaks for 10 years. Shortly after Illinois legislators
approved the tax incentive package, Sears announced that it was closing 120
stores nationwide, including ve stores in Illinois (Chicago Tribune 2011). In
addition, Sears announced 100 layoffs at its Illinois headquarters where it
employed 6,000 people (Associated Press 2012).
Those who support the Illinois legislature’s tax incentive package can note
the company’s longstanding importance to the state, the need to counter offers
from other states, and the necessity of reducing taxes selectively on some mobile
companies in light of the overall corporate tax hike. Those who question the tax incentive package may wonder if the
announcement of layoffs shortly after approval of the tax incentive package indicates bad faith on Sears’ part. Those
opponentsargue,“Itspredecessorcompany,Sears,RoebuckandCo.,playedthesamejobblackmailgamein1989.The
$168million,23-yeardealitwonthenwassoontoexpirewhenSearsHoldingsannounceditmightagainbefootloose”
(LeRoy 2012).
36 Policy focus RePoRt � LincoLn institute of Land PoLicy
. . . . . . . . . . . . . . . . . . .
0
10
20
30
40
50
City County School
District
State Community
Redevelopment
Agency Board
TIF
Commission
Other
Number of States
Figure 4.2
Approval Agencies for Creation of a TIF District
Source: Appendix Table A.2.
arerequiredtoauthorizethedistrictand
approvethespecicdeal.Itisnecessary
to stipulate that the district is blighted or
economically distressed, and there must
be a project plan. Bonds are issued to fund
the project, and property tax increments
from increases in assessed value go into
a fund to reimburse the municipality or
county for the principal and interest on
the bonds.
Magnitude
Some cities and states use tax increment
finance extensively to earmark tax revenues
for a particular use. Youngman (2011) re-
ports that in 2009 the City of Chicago had
morethan$1billioninTIFrevenueswhile
the city budget totaled $6 billion. Merriman
(2010) notes that there is no comprehensive
national database with information about
TIFusage,buthecitessomestatestudies
that show extensive use: in Missouri in 2007
thetotalpropertytaxfundedcostinTIF
districtswasnearly$5billion;inIowain
2002TIFwasusedin323cities;andin
California in 2001 more than 10 percent
of statewide property taxes were used
byTIFdistricts.
Effectiveness
ConcernaboutTIF’seffectivenessin
promoting economic development was an
important reason why it was eliminated
in California (box 4.2).
Man (2001, 106) reviews a number of
TIFstudiesandconcludes:
Empiricalstudieshaveyieldedconicting
conclusionsabouttheeffectivenessof TIF
programs. There is evidence suggesting
thattheTIF-adoptingcitiesinMichigan
experienced faster property value growth
thannon-TIFcities,andTIFprograms
inIndianaraisedpropertyvalueandem-
ployment level in a city beyond the level
that would have been expected had the
TIFdistrictnotbeencreated.Butsuch
positivespillovereffectsof TIFonprop-
ertyvalueintheentireTIF-adopting
city are not found in the study using
data drawn from municipalities in the
Chicago metropolitan area.
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 37
. . . . . . . . . . . . . . . . . . .
Man also notes that empirical work on
TIFisparticularlychallengingbecausethe
structureof TIFprogramsvariesgreatlyby
state,andthenatureof TIFprojectsalso
varies.
A more recent article by Dye and Merri-
man (2006) is less sanguine as they report
ontheirtwopreviousstudiesof Illinoiscities.
The first found that “property values in
TIF-adoptingcitiesgrewatthesamerate
or even less rapidly than in nonadopting
municipalities” (Dye and Merriman 2006, 5).
Their second study concluded that “any
growthintheTIFdistrictisoffsetbydeclines
elsewhere” (Dye and Merriman 2006, 6).
Merriman(2010,309)summarizesthe
literatureonTIFeffectivenessasfollows:
“The key question that has been examined
inmostof theliteratureiswhetherTIF
adoption significantly raises the total
Box 4.2
California Eliminates Tax Increment Finance
E
arly in 2011 California Governor Jerry Brown proposed
disbanding all of the state’s redevelopment agencies
except those that agreed to share revenues with the state
as part of his efforts to close a gaping state budget decit.
These agencies were responsible for administering both
TIF and Enterprise Zone programs. A recent Legislative
AnalystOfcereportconcluded,“Thereisnoreliable
evidence that redevelopment projects attract business
to the state or increase overall economic development in
California”(Buchanan2011,C2).
The League of California Cities vehemently opposed
Governor Brown’s proposal, arguing that it would hurt the
creation of jobs. The League further argued that such a
move was hypocritical, since Brown had relied on such
programs to lead the redevelopment of Oakland when he
was the mayor. Nora Davis, mayor of Emeryville, said that
withoutredevelopmentfundshercity“wouldstillbe
decaying,industrialjunk”(Kuruvila2011).
Counties supported Brown, arguing that such redevelop-
mentfunding“hasnothingtodowithreversingblight,but
everything to do with subsidizing private real estate ven-
turesthatotherwisemadenoeconomicsense”(Dolan,
Garrison, and York 2011). The Governor stood rm, stating:
What’s outrageous is that at a time when so much is
being taken from education, care for the elderly, universi-
ties and community colleges, these local politicians can
only express grief at the loss of redevelopment. There
are a lot of things people could put their effort behind.
They’re choosing redevelopment over everything else
that’s being cut. Cutting redevelopment was not a tough
choice because it’s so wasteful. (Kuruvila 2011, C1)
Once the laws were enacted that disbanded the state’s
redevelopment agencies and allowed for revenue sharing
with the state, the League of California Cities sued the
state. In late December 2011, the California Supreme
Court upheld the law disbanding the agencies, but struck
down the measure permitting the state to claim revenues
from the agencies as a condition of their survival. As a
result, all 400-plus redevelopment agencies in the state
were disbanded on February 1, 2012 (Walters 2012).
38 Policy focus RePoRt � LincoLn institute of Land PoLicy
. . . . . . . . . . . . . . . . . . .
economicactivityinanarea.Empiricalnd-
ings have been mixed.”
ENTERPRISE ZONES
Enterprisezonesaredesignatedgeographic
areas, usually economically depressed, with-
in which special tax and other incentives are
provided to encourage business development.
In2010therewere48enterprisezonepro-
grams in 42 states plus the District of Co-
lumbia. Thirty-one of the programs included
some form of property tax reduction or
exemption (Appendix table A.3).
Enterprisezoneswererstproposedin
Great Britain in the 1970s and enacted in
1980 under the Thatcher administration.
InterestinenterprisezonesintheUnited
States followed. Some of this support arose
from the liberal concern with inner-city
poverty caused by the decline in industry
and the difficulties low-income workers had
in finding employment opportunities. Other
support derived from the conservative con-
cern about excess government intervention,
which made the policy approach of promot-
ing business growth by cutting taxes and
streamlining regulations attractive.
In1981Connecticutwastherststateto
enactanenterprisezoneprogram(Hirasuna
and Michael 2005). The federal government
enactedenterprisezonelegislationduring
the Clinton administration in the form of
the1993EmpowermentZonesandEnter-
prise Communities Act. The discussion
belowfocusesonstatezones.
How the Incentive Works
Thecommongoalof allenterprisezones
is to increase economic growth in a specific
area. This may mean providing an incentive
forbusinessestorelocatetothezoneorfor
established businesses to expand. Another
goal is to increase employment opportuni-
tiesforresidentsinthezone.Tothatend,
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 39
. . . . . . . . . . . . . . . . . . .
enterprisezonesoftenprovideajobstax
credit when a business employs these
local residents.
There is enormous variation in enterprise
zonesaroundtheUnitedStatesandintheir
names, such as Pennsylvania’s Keystone
Opportunity Zones or Maine’s Pine Tree
Development Zones. Although the most
common tax incentive is a reduction in the
property tax, income and sales tax incen-
tives are also used. The criteria for creation
of anenterprisezonerangewidely,but
many appear chosen to guarantee that the
zoneistargetedtoanareaof economic
distress, with unemployment, poverty, and
low income being the most common criteria
chosen (figure 4.3). Although most enterprise
zonesarelocatedinurbanareas,someare
inruralareas.Manyenterprisezonesare
small, but in a few states qualifying business-
es anywhere in the state can obtain the ben-
ets.Connecticuthasspecialzoneprograms
for entertainment districts, bioscience enter-
prises, and railroad depots.
Hawaii’sEnterpriseZonePartnership,
enacted in 1986, is fairly typical, and by
2004ithadestablished19zonesstatewide.
Toqualifyasanenterprisezone,acensus
tract or two or more contiguous census
tracts must meet specified criteria for low
income and high unemployment. Once
qualied,businessesinthezoneareeligible
for reductions in property, income, unem-
ployment, and general excise taxes. Zones
also receive regulatory relief such as waivers
for permits and priority in job training and
community development funds.
Magnitude
Currently there are about 3,000 enterprise
zonesintheUnitedStates(Schram2010),
but no comprehensive estimates are avail-
able to report their cost to state and local
governments. Using tax expenditure estimates
for Michigan and Oregon, which do have
tax expenditure budgets that include esti-
matedrevenuelossesforenterprisezones,
a rough estimate of nationwide losses could
0 10 20 30 40 50 60 70
Other
Low Wages
High Tax Burden or Low Tax Capacity
Plant Closures or Job Losses
Provision of Local Incentives
Local Support
Population Receiving Public Assistance
Development Potential
Vacancy Rates
Federal Zone Designation or Grant Eligibility
Consistent with Comprehensive Plan
General Distress or Blight
Population Decline or Slow Growth
Low Income
Poverty
Unemployment
Percent of State EZ Programs
Figure 4.3
Criteria for Creation of an Enterprise Zone
Source: Appendix Table A.3.
40 Policy focus RePoRt � LincoLn institute of Land PoLicy
. . . . . . . . . . . . . . . . . . .
be as high as $1.9 to $6.3 billion (Connolly
and Bell 2011).
Effectiveness
Althoughenterprisezoneshavebeenused
in the United States for 30 years, there is
a lack of definitive evidence regarding
whether they are effective or not. One rea-
son for the inconclusive findings is that en-
terprisezonestakedifferentformsandhave
somewhat different objectives in each state.
Another reason is that data are generally
availablebycensustract,zipcode,orlocal
government,butanenterprisezonemay
be created with boundaries that do not
match any of those entities.
This report draws on three credible re-
views of the literature on U.S. cases. Papke
(1993)reviewsenterprisezoneswithaspe-
cialfocusonIndiana,astatewhichatthat
time had a decade of experience and was
cited in a number of other studies as having
one of the most successful programs. Papke
foundthattheIndianaprogramincreased
both employment and business inventories,
but that the income of the residents of
theenterprisezonesdidnotimprove.Her
overall conclusion regarding enterprise
zonesacrosstheUnitedStateswasthatsuch
programs “do not seem to have improved
theeconomicstatusof zoneresidents.”She
speculated that if business is attracted to
theenterprisezoneinordertoemployits
low-skilled, low-wage labor, “there may
be employment growth without income
growth” (Papke 1993, 62–63).
Peters and Fisher’s 2002 review of enter-
prisezonessummarizestheexistingliterature,
examinestheexperienceof zonesin75
cities in the 13 states with significant enter-
prisezoneprogramsby1990,andanalyzes
data for 104 cities in Ohio, a state with
richdataandmanyenterprisezones.Their
mainconclusionisthatenterprisezones
have little impact on employment growth.
They also find that the typical package of
taxincentivesinenterprisezonescreates
a bias in favor of using capital rather than
labor in production. This means that even
if anenterprisezoneattractsadditional
rmstothezone,itmaynotincrease
local employment.
Inaskingwhetherstateandlocalgov-
ernments are likely to gain or lose revenue
fromestablishingenterprisezones,Peters
and Fisher (2002, 121) conclude that “it is
unlikely that state and local governments
collectively will gain revenues from the incen-
tive programs they offer within enterprise
zones”andthatthe“magnitudeof these
revenuelossescouldbeverysizeable.”They
estimatethatforanaverageenterprisezone
in the 1990s, state and local governments
lost about $1.5 million per year as a result
of offering a typical incentive package.
Peters and Fisher (2002) also estimate that
the average state and local government
cost per manufacturing job gained through
enterprisezoneswas$60,700perjob,or
$7,130 per year per new job.
The most recent review of enterprise
zonestudieswasdonebyHirasunaand
Michael (2005, 11), who conclude:
The most sophisticated statistical studies
fail to identify a reliably narrow band
of estimates on the employment perfor-
manceof stateenterprisezones.Afew
studies find some increase in jobs or in-
come. However, most studies suggest no
significant and prolonged increases in
employmentfromenterprisezones.
They also ask whether some areas are more
likelytobenetfromenterprisezonesthan
others. Their finding is that the areas most
likely to benefit are suburban governments
with low unemployment rates and histori-
cally high levels of investment in manufac-
turing facilities. Unfortunately, this implies
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 41
. . . . . . . . . . . . . . . . . . .
thatenterprisezonesaremostlikelytobe
effective for the local governments that least
need them.
Arecentstudyof federalenterprisezones
(Hanson and Rohlin 2012) found that the
zonesgainedbusinessesattheexpenseof
similar nearby areas that lost businesses.
This study has important implications for
futureenterprisezoneresearch.If researchers
merely compare business growth in enter-
prisezonestogrowthinneighboringareas,
they can mistakenly conclude that enter-
prisezonescreateactivity,wheninactuality
thezoneincentivesmerelymoveexisting
activity. This can be beneficial if economic
activity is shifted from a less needy area to a
more needy one, but if the shift is from one
areatoanotherwithsimilarneed,thezone
provides no overall economic benefit when
spillovers are taken into account.
INDUSTRIAL DEVELOPMENT
BONDS COMBINED WITH
PROPERTY TAX EXEMPTION
When a local government issues tax-exempt
industrialdevelopmentbonds(IDBs)on
behalf of a firm, the government typically
holds title to the property where the develop-
ment is taking place, so the firm incurs no
property tax liability. This package provides
a double benefit for the firm: a below
market interest rate and exemption from
propertytaxes.Inmanycasesthermis
required to compensate the local govern-
ment for some portion of the forgone
property taxes through payments in lieu
of taxes(PILOTs).
Since the federal income tax was estab-
lished, interest income from most bonds
issued by state and local government has
been exempt from federal income taxation.
42 Policy focus RePoRt � LincoLn institute of Land PoLicy
. . . . . . . . . . . . . . . . . . .
Intheearlyyears,tax-exemptbondswere
issued for traditional government purposes,
suchasroadsorschoolbuildings.In1936,
Mississippi was the first state to issue bonds
for industrial development. Since then, state
and local issuance of tax-exempt bonds for
projects other than traditional government
purposes has expanded.
IDBsfallunderthebroadercategory
of private activity bonds, which states and
localities can issue for a wide range of uses,
including multifamily housing, student
loans, and mortgage credit. Between 1975
and 1985, private activity bonds as a share
of total tax-exempt bond volume increased
from 21 to 68 percent, prompting concern
that state and local governments were abus-
ing their power to issue tax-exempt bonds,
and that such issuance was reducing federal
income tax revenue and thereby increasing
the federal deficit (Zimmerman 1990;
Gordon 2011). The Tax Reform Act of
1986 capped the amount of tax-exempt
private activity bonds that state and local
governments could issue within each state.
ThefocushereisonIDBsissuedtopro-
vide financing for manufacturing facilities.
They amounted to $665.9 million and
accounted for 4.6 percent of all private
activity bonds in 2010 (Bond Buyer 2011).
Of particular interest in this report are
cases where the property on which the
manufacturing facility is built is partially
exempt from property taxation.
How the Incentive Works
The program offered by the City of Albu-
querque (2011) provides one example of
howtax-exemptIDBsandpropertytax
abatements are combined. Albuquerque
issuesIDBstoattractcompaniesinterested
in relocating or expanding. Companies
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 43
. . . . . . . . . . . . . . . . . . .
benefit from reduced interest costs because
of the exemption from federal and state
income taxation on bond interest (both
of which result in a lower interest rate),
but they also benefit from a substantial
reduction in property taxes.
As part of the package, the city holds title
to the property and leases it to the business
for the term of the bond, typically 20 years.
The city requires the company to pay 2.5 to
3.5 percent of the property taxes that would
havebeenassessedthroughaPILOT.Our
researchhasfoundsomeformof IDB/
PILOTarrangementinthefollowingstates:
Kentucky, Louisiana, Mississippi, Missouri,
NewJersey,NewMexico,NewYork,North
Dakota, South Carolina, Tennessee, Texas,
andWestVirginia.
The property tax benefits that accom-
panytheIDBdependonstatelaw,the
structureof theIDB,andthelocalgovern-
ment’spolicyonrequiringPILOTs.Ohio,
for example, requires private companies
thatreceivenancingfromIDBstopay
fullpropertytaxes.If thelocalgovernment
holds the property and leases it to the busi-
ness, Ohio law stipulates that the property
is subject to the local property tax as if the
property were held by the business (Ohio
Rev. Stat. §165.01).
Effectiveness
Fisher and Peters (1997, 116) reviewed five
studies of the impact of issuing industrial
revenue bonds on state economic growth
andconcludedthat“theworkonIDBs
does not support any firm conclusions about
theimpactof IDBissuanceandgrowth,
although the majority of the evidence sug-
gests little impact.” Unfortunately, all of the
literature they reviewed was based on data
from before 1986, when the federal tax code
was changed to limit issuance of private
activitybonds.Intergovernmentalconicts
related to issuance of state and local tax-
exempt bonds continue to arise, however.
State and local governments are tempted
to make maximum use of this economic
development tool because they do not bear
the cost of reduced federal income tax
revenues.
A recent example is the issuance by
NewYorkCityof IDBstonanceYankee
Stadium.Interestratesonthesebondswere
about 25 percent lower than they would
have been without tax-exempt status, saving
the project between $7.7 and $15.7 million
per year (Greaves and Henchman 2009).
Because the city legally owns the property,
44 Policy focus RePoRt � LincoLn institute of Land PoLicy
. . . . . . . . . . . . . . . . . . .
the stadium was exempt from property
taxes,butthecitynegotiatedaPILOT.
TheIRSbecameconcernedbecauseit
appeared that the city intentionally over-
assessed the property to obtain a large
PILOT,possiblylargerthantheproperty
taxes that would have been owed if the
property were subject to normal property
taxes.Inthiswayitappearedthatthecity
was able to provide an interest subsidy for
the Yankee Stadium project while boosting
local tax revenues, all paid for by the federal
government.SincethentheIRShastight-
eneditsregulationsonIDBsincombina-
tionwithPILOTs(McConnell2006).
WIDESPREAD USE OF
INCENTIVES
Despite their widespread use, only rough
estimates of the total dollar value of proper-
ty tax incentives for business are available.
Bartik (2003) used tax expenditure estimates
from the State of Michigan to project esti-
mated revenue losses from tax incentives of
at least $10 billion per year for the entire
United States.
Bartik’s methodology can be updated
by using Michigan’s 2010 tax expenditure
budget (Connolly and Bell 2011), but with
tax increment financing omitted since it is
an earmarking device that does not reduce
revenue. This analysis yields an $11 billion
estimate for the nationwide revenue loss
from property tax incentives for business.
Sincesomeof Michigan’senterprisezones
contain incentives other than property tax
incentives, it may be more accurate to say
that local governments forgo between $5
and $10 billion annually through the use
of property tax incentives for business.
Incentivescanmakeonejurisdictiona
more attractive location for business invest-
ment by offering lower taxes in comparison
to other areas, but overuse can reduce their
effectiveness as an economic development
tool. When few competing governments are
offering incentives, tax breaks may be an
effective policy for attracting mobile firms.
However, if most jurisdictions in a region
offer incentives, then they no longer provide
a significant tax advantage for one jurisdic-
tion over others, and they will have limited
effects on firm location decisions, but all
municipalities will end up collecting lower
revenues. Whether or not communities ben-
efit from property tax incentives depends
crucially on whether the state government
puts limits on their use.
SUMMARY
State and local governments use many
types of property tax incentives for business
and the features of the programs vary wide-
ly across the states. The majority of studies
suggest that property tax incentives have
little impact on local economic growth,
althoughevidenceontheimpactof TIF
is more mixed.
These findings conflict with the econo-
metricstudiessummarizedinchapter3
showing that, within a given region, prop-
erty tax differentials have a large effect on
economic activity for individual jurisdictions.
One reason for this apparent contradiction
is copy-cat behavior among competing
jurisdictions in a region, which reduces the
effectiveness of property tax incentives over
time. Some studies have even shown that
property tax abatements and enterprise
zonesworsenalocality’sscalhealth.Since
the effectiveness of any incentive program
dependsonitsdetails,generalizationsob-
scure the fact that some programs are effec-
tive even if the majority of them are not.
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 45
. . . . . . . . . . . . . . . . . . .
CHAPTER 5
Tools for Assessing the Effectiveness
of Property Tax Incentives
A
lthough property tax incentives for
business can help achieve economic
development goals, their effective-
ness varies. This chapter examines
some ways that policy makers can assess prop-
erty tax incentives—a critical step in using
them more effectively.
High-quality evaluations of tax incen-
tives are uncommon. A recent study by the
Pew Center on the States (2012) found that
16 states evaluate all major tax incentives,
15 states measure their economic impact,
17 states draw clear conclusions, and 4 states
use evaluations to inform policy choices.
Only Oregon met all criteria, and 25 states
did not meet any criteria. States generally
have greater resources and expertise available
for evaluating tax incentives than local gov-
ernments. Thus, assessments of property tax
incentives, which primarily affect local reve-
nues, may be even less common than sug-
gested by the Pew report on state evaluations.
A related problem is that many impact
studies are biased in favor of incentives be-
cause they attribute any changes in employ-
ment or other variables to the tax breaks. A
simple before-and-after comparison can result
in egregiously wrong estimates of job creation
or other effects because it fails to consider
what would have occurred without the incen-
tives. For example, firms may have chosen
the same locations without incentives or the
measured effect could be caused by broad
economic changes rather than incentives.
46 Policy focus RePoRt � LincoLn institute of Land PoLicy
. . . . . . . . . . . . . . . . . . .
Table 5.1 illustrates one way to estimate
the true impact of incentives by controlling
for what would have occurred without them.
Many other variables besides employment,
such as payrolls, property values, or the
number of new businesses, can be used for
this type of study, known as “difference-
in-differences” analysis.
TRANSPARENCY
Assessing the effectiveness of property
tax incentives requires transparency about
program costs and outcomes. One way to
promote transparency is through state tax
expenditure budgets, which provide infor-
mation on the total revenue impact of in-
centive programs. These reports estimate
the revenue impact of tax expenditures,
which are generally thought of as revenue
losses due to special provisions in the tax
code, such as deductions, exemptions,
or exclusions that reduce taxable income
or assessed value; tax credits; preferential
tax rates; or deferral of taxes.
Currently 44 states produce tax expen-
diture reports, but only 18 include property
taxes. These reports focus on state tax ex-
penditures; only 8 states estimate local prop-
erty tax revenue forgone, which is critical
information since the property tax is pri-
marily a local revenue source (Connolly and
Bell 2011). As a result policy makers in most
states currently have limited information
about the revenue effects of property tax
incentives for business. The most important
step in putting together a tax expenditure
report is to make a distinction between the
normal tax structure and deviations from
that structure. With few exceptions, state
property tax expenditure reports use all
real property as the normal tax structure
(Connolly and Bell 2011).
An alternative way to improve transpar-
ency is disclosure of tax incentive awards.
Nebraska,forexample,requiresdataon
business tax incentive programs to be pub-
lished annually. This approach does not
require as much effort by the state govern-
ment, but allows outside researchers to use
thedatatoanalyzetheeffectivenessof these
programs. Providing this information in
online databases makes it more accessible
to the public. As mentioned in chapter 4,
Good Jobs First has compiled information
on economic development subsidies for
businesses into a database called the Sub-
sidy Tracker, which as of April 2012 had
information on more than 121,000 subsidy
awards from 308 programs in 48 states.
IMPACT OF INCENTIVES ON
FIRM LOCATION DECISIONS
Assessments of tax incentives depend on
assumptions about their impact on firms’
investmentdecisions.If localofcials
offer an incentive and the firm locates
in their jurisdiction, there are two
possible scenarios:
TaBle 5.1
Analyzing the True Impact of Incentives on Employment
Jobs Before
Incentive
Jobs After Incentive
( ≈ 5 years later) Difference Explanation
Enterprise zone area
with tax incentives
5,000 6,000 1,000
(6,000 – 5,000)
Simple before-and-after comparisons typically show
that incentives are effective (i.e., 1,000 new jobs).
Similar area without
tax incentives
5,000 5,800 800
(5,800 – 5,000)
Other economic factors could be driving job growth
in some areas (i.e., 800 new jobs).
The impact of incentives on employment
200
(1,000 – 800)
Only the difference in job gains in these two areas
can be attributed to incentives (i.e., 200 new jobs).
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 47
. . . . . . . . . . . . . . . . . . .
1. The incentive “worked”—it caused the
firm to locate in that jurisdiction; without
the tax break, the firm would have located
elsewhere.
2. The incentive did not “work”—the busi-
ness would have located in that jurisdiction
even without incentives.
Intherstcase,policyanalysiscanmeasure
the expected economic and fiscal effects of
the firm’s investment, which can be attributed
to the incentive and compared to the direct
revenue loss from granting the incentive.
Inthesecondcase,theeffectsof therm’s
investment should not be considered when
analyzingtheincentive,becausetheinvest-
ment would have occurred regardless of
the tax breaks. There are several ways policy
makers can judge the likelihood that an
incentive will actually work.
For example, as a condition for receiving
tax breaks, localities could require businesses
to present data showing that without incen-
tives the businesses would be more profit-
able in another location. Businesses would
be free to locate in the jurisdiction without
disclosing this information, but they would
not be eligible for tax incentives. Another
approach is to use the type of representative
firm models described in chapter 3 to esti-
mate firms’ profits at different locations with
and without incentives, although construct-
ing these models is a significant challenge.
Without this kind of detailed informa-
tion, policy makers considering whether a
tax incentive is likely to tip a firm’s invest-
ment decision can take into account these
aspects of the facility.
• Property taxes as a share of total costs. The
importance of tax incentives increases
as this percentage grows. This statistic
is easy to approximate with estimates
of the facility’s assessed value and total
operating costs, which may be provided
by the firm or can be derived from
operating costs at comparable facilities.
• Geographic area of the facility’s market.
Businesses serving the local market will
choose their location primarily based
48 Policy focus RePoRt � LincoLn institute of Land PoLicy
. . . . . . . . . . . . . . . . . . .
on market exposure. For example, they
may strongly prefer a specific street,
intersection, or shopping center. Thus,
tax incentives are unlikely to tip their
location decisions. Businesses that serve
national or international markets are
more likely to have their decisions
affected by tax incentives.
• Industry or property class.Ingeneral,manu-
facturing facilities are more likely to be
capital-intensive and serve national mar-
kets than commercial or retail facilities.
Thus, tax incentives are more likely to
tip location decisions for manufacturing
facilities.
Another way to understand this issue is
to consider a range of probabilities that in-
centives induce investment. For example,
box 5.1 discusses a report on Connecticut
tax incentives that considered a range of
assumptions—20 percent, 50 percent, or
100 percent of business investment was
caused by the incentives. These probabilities
can be multiplied by the projected economic
and fiscal effects of a firm’s investment to
estimate the effects attributable to the tax
incentive. For example, if economic impact
analysis estimates that a firm’s investment
will increase regional income by $1 million,
then the estimated income increase caused
by the incentive is $200,000, $500,000,
or $1 million depending on which percent
of the business investment was caused
by the incentive.
The range of estimated effects can be
compared to the revenue loss from grant-
ingtheincentive,whichisknown.If the
Box 5.1
Assessing Connecticut’s Tax Credits and Abatements
I
n 2010, the Connecticut General Assembly
passed a law requiring the Department of Eco-
nomic and Community Development to assess the
economic and scal impact of the state’s tax credit
and abatement programs every three years. This
led to the release of a 165-page report, which as-
sesses more than 30 programs that had reduced
tax revenues by roughly $240 million in 2007
(CDECD 2010). The analysis assumes that provid-
ing tax incentives to rms has a direct initial effect
in reducing state tax revenue, which translates
into lower state spending and thus reduced pub-
lic employment. In order for a business tax incen-
tive to increase employment it must stimulate
a sufcient increase in economic activity to
counterbalance that initial effect.
While the sophisticated regional economic model
used in the study provides more reliable impact
assessments than most alternative approaches,
the arcane methodology may be difcult for non-
specialists to understand. Thus, the inclusion of
clear recommendations for each program administered by the
department is especially valuable. For example, the report con-
cludes,“WerecommendthattheEnterpriseZonepropertytax
abatement program be eliminated. The analysis above suggests
the Enterprise Zone property tax abatement generates negative
net benets for Connecticut for a range of inducement assump-
tions”(CDECD2010,137).
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 49
. . . . . . . . . . . . . . . . . . .
The cost of providing new public ser-
vices because of population and employ-
mentgrowthdependsontheutilizationof
existing infrastructure. Areas with declining
populations typically have excess capacity,
so the cost of providing expanded services
is relatively small. Conversely, if new infra-
structure is needed, then the cost of new
public services can significantly exceed
growth in taxes attributable to the project
intheshortrun(AltshulerandGómez-
Ibáñez1993).
Labor market benefits include jobs for
previously unemployed residents as well as
higher earnings for current workers caused
by occupational upgrading. Bartik (1991;
1993) finds that a 1 percent increase in
local employment is associated with a 0.1–
0.2 percent increase in average real wages
in the long run. This increase is caused
solely by workers moving to higher-paying
occupations, because there are no wage
changes within occupations. This benefit
depends on wages for the newly created
jobs. Bartik (2004) finds that employment
economic and fiscal benefits generated
by a firm’s investment outweigh the direct
revenue loss from the incentive, even if the
probability that the incentive works is only
25 percent, then policy makers should feel
more comfortable granting an incentive
than if it must work 75 percent of the time.
BENEFIT-COST FRAMEWORK
FOR EVALUATING INCENTIVES
Benefit-cost analysis is frequently used to
evaluate the effectiveness of a wide array
of government programs. Table 5.2 shows
the most important factors to consider when
weighing the benefits and costs of property
taxincentivesforametropolitanarea.Esti-
mating the direct revenue loss from a tax
incentive is straightforward: it is simply
the full property tax without any incentive
minus the actual property tax paid. How-
ever, the indirect revenue gain depends on
measuring growth in economic activity (and
the tax base) that is attributable to the tax
incentive, that is, activity that would not
have occurred otherwise.
TaBle 5.2
Benefit-Cost Framework for Property Tax Incentives
Benefits Costs
Fiscal Effects
Revenue gain from expanded economic activity
attributable to tax incentive
Revenue loss from tax incentive
Increase in public service costs due to growth in
employment and population
Labor Market Effects
Increase in earnings for newly employed local
residents (excludes in-migrants)
Less time for leisure and work at home for newly
employed residents
Increase in earnings for currently employed local
residents (switch to better paying occupations)
Economic and Social Effects
Increase in prots for rms serving the local market Decrease in prots for rms serving the national
market
Increase in property values Environmental and congestion costs
Changes in community character viewed positively Changes in community character viewed negatively
Source: Bartik (2005).
50 Policy focus RePoRt � LincoLn institute of Land PoLicy
. . . . . . . . . . . . . . . . . . .
growth in industries paying 10–15 percent
less than the average industry may not boost
wages for other local residents, in which
case it is doubtful that tax incentives will
generate net benefits.
When previously unemployed people
become employed, they have less time for
leisure, school attendance, or child care,
which can be assigned a dollar value. Many
economists argue that these costs are small-
er in high-unemployment areas, which is
a rationale for targeting incentives to these
areas. Higher crime and other social prob-
lems provide further justification for focus-
ing economic development efforts on areas
with high rates of poverty and unemploy-
ment (Bartik 2005).
Itisalsoimportanttoconsiderhow
attracting a new facility with incentives will
affect the profits of other firms in the area.
Businesses that serve the local market, such
as many service-sector firms, will generally
experience higher profits due to growth in
the local population and its overall income.
However, businesses that export goods and
services to other regions could face lower
profits if local wages or rents increase.
Finally, if incentives are offered to firms
that will compete directly with other local
businesses, then the net economic benefits
from the incentives could be insignificant
as profits for new firms largely displace
profits for existing firms.
A host of other economic and social
effectsresultfromincentives.Newprojects
can lead to environmental or congestion
costs, although projects that redevelop
brownfields can provide significant environ-
mental benefits. Other effects are difficult
to quantify, including community changes
such as gentrification.
The framework in table 5.2 can be used
by a locality, metropolitan area, or state.
Evaluationsof incentivesforindividual
jurisdictions must take into account that
many effects are dispersed throughout the
region. For example, earnings increases
will largely benefit residents living in other
jurisdictions, and much of the cost of pro-
viding new services for households will be
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 51
. . . . . . . . . . . . . . . . . . .
bornebysurroundinggovernments.In
general, the larger the area, the less the
researcher will have to worry about bene-
fits and costs that spill over jurisdictional
boundaries.
ECONOMIC AND FISCAL
IMPACT ANALYSES
The benefit-cost framework is a useful way
to think about the effects of incentives gen-
erally, but empirical research on economic
development projects are more frequently
carried out with economic and fiscal impact
analyses. For example, the report on busi-
ness tax incentives by the Connecticut
Departmentof EconomicandCommu-
nity Development used these approaches.
Morgan (2010) outlines the frameworks and
techniques that are typically used for these
analyses, and describes six commonly used
software packages.
Economicimpactanalysisestimates
the direct, indirect, and induced effects of
a new project, which are often measured in
terms of employment, income, or business
revenue. Direct effects are first quantified
with data on a firm’s initial increase in pay-
roll or production that results from a project.
Then indirect and induced effects are esti-
mated by applying industry multipliers from
input-output models to the quantified direct
effects.Indirecteffectsaccountforincreased
business for local suppliers that sell goods
or services to the firm that expanded, while
induced effects account for growth in the
local economy that occurs when higher in-
comes for affected workers boost spending
on local goods and services.
Fiscal impact analysis accounts for
changes in public service costs and revenues
due to the project. Costs include tax reve-
nues lost due to incentives, new public infra-
structure needed for the project, and growth
in public services caused by population or
employment growth. The share of new
jobs going to current residents instead of
in-migrants is important to know, because
new residents will require additional services,
which results in much smaller net fiscal
benefits compared to projects that create
jobsmainlyforexistingresidents.Newrev-
enues include growth in property and sales
taxes, user charges, utilities revenue, and
changes in intergovernmental revenue.
SUMMARY
Assessing the effectiveness of property tax
incentives is important, although carrying
out comprehensive evaluations can be chal-
lenging. One way to facilitate such assess-
ments is to improve transparency about
program costs and outcomes, including full
disclosure of incentive awards to make it
possible for outside researchers to conduct
evaluations.
A benefit-cost framework also can
provide some rules of thumb to determine
if incentives are likely to generate benefits
thatexceedtheircosts.Inparticular,property
tax incentives are most likely to generate
net benefits when they are (1) used in low-
income areas with high unemployment and/
orunderutilizedinfrastructure;(2)givento
facilities that export goods and services out
of the region; and (3) able to create jobs
with pay equal to or greater than average
local wages.
Empiricalevaluationsof taxincentives
most frequently use economic and fiscal
impact analyses to measure the benefits
and costs of projects receiving tax breaks.
However, assessments of incentives hinge
on assumptions about whether or not they
tiparm’slocationdecision.If theydo,the
measured economic and fiscal effects of a
project can be attributed to the incentives;
if not, these effects cannot be attributed
to the incentives because they would have
occurred even without tax breaks.
52 Policy focus RePoRt � LincoLn institute of Land PoLicy
. . . . . . . . . . . . . . . . . . .
CHAPTER 6
Policies to Reduce Reliance on
Property Tax Incentives
P
olicy makers who wish to reduce
reliance on property tax incentives
for business can consider adopting
policies that diminish interlocal
competition for business investment,
enacting tax reform, or pursuing nontax
alternatives.
REDUCTION OF INTERLOCAL
COMPETITION
Using tax incentives to lure firms from one
jurisdiction to another in the same metro-
politan area will leave the region as a whole
worse off unless the incentives are targeted
primarily to low-income areas. Relocations
within a metropolitan area do not increase
economic activity; they simply redistribute
it throughout the area, while leaving the
region with a smaller tax base. A variety
of policies can reduce the likelihood that
localities will engage in destructive incen-
tive wars with neighboring jurisdictions.
Policies that change state aid to localities
when they offer business tax incentives can
significantly alter such decisions. States that
reimburse local governments for the revenue
lost from offering property tax abatements
essentially provide “a state subsidy that may
induce local jurisdictions to award abate-
ments indiscriminately” (Dalehite, Mikesell,
and Zorn 2005, 170). State reimbursement
eliminates one of the strongest constraints
on localities granting incentives—concerns
that giving away tax breaks will reduce
theirrevenues.Arizonatakestheopposite
approachbypenalizinglocalgovernments
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 53
. . . . . . . . . . . . . . . . . . .
incentives for economic development pur-
poses. Another option is for local govern-
ments to form pacts to pursue economic
development cooperatively rather than
competitively (box 6.2).
TAX REFORM
Fundamental tax reform can promote
economic development by improving the
business tax climate and reducing the
need to use tax incentives.
Broad Tax Base and Low Rates
Notallstatesmakeextensiveuseof property
taxincentivesforbusiness.NewHampshire,
for example, offers very few incentives and
is the only state in the country that has never
levied a broad-based income or sales tax.
Instead,itsoveralltaxburdenislow,andthe
in the Phoenix metropolitan area for offer-
ing tax incentives to attract retail develop-
ment. Since 2007 all such incentives must
be reported to the state, and the value of
the incentives is deducted from the state
aid allocated to the local government
(Corbett 2007).
Another way to reduce interlocal com-
petition is to enact tax-base sharing, as has
been used in the Minneapolis–St. Paul met-
ropolitan area for the commercial-industrial
tax base since the 1970s (box 6.1). Going
further, some states have converted part of
the local property tax base into a state tax.
Michigan,NewHampshire,andVermont
have chosen this option as part of their
school finance restructuring efforts. Reduc-
ing the importance of local property taxes
may also reduce the use of property tax
Box 6.1
Tax-Base Sharing in Minneapolis–St. Paul
T
he Fiscal Disparities Act, enacted by the Minnesota
legislature in 1971, requires all communities in a
seven-county area around the Twin Cities to share 40 per-
cent of the growth in the commercial and industrial tax
base (Oreld 1997; Oreld and Wallace 2007). The original
goals of the program were to promote more orderly region-
al development and to improve the fairness of how scal
resources were distributed. The tax base that is contrib-
uted to the pool is now distributed among communities
based on scal capacity, which is dened as equalized
market value per capita. Although reduced competition
for business investment is not a major goal of the pro-
gram, it is one of them.
Communities generally believe that commercial and
industrial properties pay more in taxes than it costs to
provide services to them. This encourages communities
to compete for these properties by providing tax conces-
sions or special services. Tax-base sharing may reduce
this competition. (Minnesota Department of Revenue
2012, 91)
It is an open question whether tax-base sharing has
reduced competition for economic development. Local
governments within the tax-base sharing area can use TIF
as an alternative means to compete for businesses, so it
is conceivable that local governments can merely change
the tool they use to compete. Tax-base sharing can also
create political tensions between wealthier communities
that donate some of their tax base and poorer commu-
nities that benet from this policy.
54 Policy focus RePoRt � LincoLn institute of Land PoLicy
. . . . . . . . . . . . . . . . . . .
absence of income or sales taxes is often
referredtoasthe“NewHampshireadvan-
tage.” The state’s low taxes, together with
other attributes such as a low crime rate,
have resulted in the most robust economy
amongtheNewEnglandstatesformany
years(NewEnglandEconomicPartner-
ship 2011).
Other states could reform their tax
systems with the objective of levying low
tax rates on a broad tax base. This might
entail reducing both individual and business
tax rates, or simply reducing business tax
rates if the primary concern is attracting
new businesses. With this approach, policy
makers would not have to “pick winners,”
governments and businesses would spend
much less time and money negotiating in-
centives, and the tax system would treat all
businesses equally. However, the revenue
impact of across-the-board tax cuts would
be much greater than targeted tax breaks,
and would require larger increases in
household taxes or cuts in public services.
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. By exempting businesses from
property tax on new development, policy
makersreducethetaxonstructures.If such
exemptions proliferate, the tax system can
come to resemble a modified split-rate tax,
with most business revenue obtained from
land instead of structures.
Itcouldbefairerandlessadministra-
tively costly for states and localities to simply
adopt a split-rate property tax with a higher
Box 6.2
Metropolitan Cooperation in Metro Denver
T
he Metro Denver Economic Development Corporation,
whose members include 70 cities, counties, and eco-
nomic development organizations, arguably offers the best
example of a collaborative approach to regional economic
development in the country. This cooperation centers on
a Code of Ethics adopted in the mid-1980s (Metro Denver
Economic Development Corporation 2004). While there
are no statutory requirements, all members are expected
to follow the principles established in the code, some
of which are described below.
• Promote“MetroDenverFirst”andindividualcommu-
nities second.
• Whencompaniesconsiderrelocatingwithinthemetro
area, notify the community where the facility is currently
located of the potential move—violation of this commit-
ment is considered the most serious breach of the code.
• Neversolicitanothermember’sprospects.
• Neveradvertiseorpromoteoneareainawaythat
is insulting to other areas in the region.
• Sitelocationcompetitionamongmembersisne,as
long as the prospect has requested specic proposals.
More recently, executives of all 10 local economic develop-
ment organizations in the Fort Wayne, Indiana area signed
a similar pact following a trip where 36 regional leaders
witnessedthe“powerfulcollaborativecultureinDenver”
(Northeast Indiana Regional Partnership 2011). Some
other regions with these types of agreements include
the Bay Area of California, South Florida, and Columbus,
Ohio (Patten 2006; Ball 2007).
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 55
. . . . . . . . . . . . . . . . . . .
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 with
regard to the timing of new development,
and discourages urban sprawl (Dye and
England2010).
NONTAX ALTERNATIVES
A key issue in evaluating property tax in-
centives is not necessarily whether they gen-
erate net benefits, but how they compare to
alternatives. Granting incentives typically
means that local governments have less rev-
enue to pursue other policies for promoting
economic development. The opportunity
cost for using tax incentives is the net benefit
that would have been generated if revenues
used to pay for incentives were instead
available to fund the next-best alternative.
Several characteristics mark successful
policies for promoting local business growth.
First, these strategies are focused on in-
creasing local productivity, not merely
reducing business costs. Policies that boost
productivity are generally more cost effec-
tive than tax incentives or cash subsidies,
because profits can increase directly through
financial incentives that lower business costs
and indirectly with higher productivity.
Higher productivity may also be a more
sustainable way to promote long-run
economic growth.
Second, these policies should build on
local competitive advantages—such as
existing industrial specialties, advantageous
geographic locations, or local universities—
rather than following economic development
fads or trying to replicate strategies pursued
by regions with very different circumstances.
Third, policies should focus on export-based
firms that sell a large share of their goods or
services outside the region. Finally, policies
focusedonsmall-ormedium-sizedrms
may be more successful because they are
more likely to benefit from many types
of business services described in this chapter
and to face liquidity constraints that inhibit
investments that would improve produc-
tivity (Bartik 2008; 2010).
Figure 6.1 shows the current use of
various economic development policies based
on a 2009 survey of the country’s largest
municipalities and counties. Although tax
incentives are used frequently, local govern-
ments employ a wide array of other policies
to promote business development, and there
is no correlation between a tool’s frequency
of use and its effectiveness.
Most Effective Options
Customized job training. Businesses are
treated as clients under these programs, with
training designed to meet the specifications
of each firm. Research suggests that these
programs are 10 to 25 times more cost-
effective in creating jobs than tax incentives.
The most cost-effective programs cover
the costs of training, but not salaries, and
require firms to share training costs to en-
sure they are useful from their perspective.
NorthCarolina’scustomizedtrainingpro-
grams offer an excellent example (Bartik
2003; 2008; 2010).
Labor market intermediaries.
These programs focus on matching unem-
ployed workers with firms looking to hire.
“First-source” programs consult with busi-
nesses on their labor needs, and then train
unemployed workers and screen them for
local employers, so a larger share of new
hires are productive. Businesses are encour-
aged to hire these individuals, but typically
that is not mandatory. A good example is
the Berkeley First Source program in
California (Bartik 2008).
Regulatory assistance. Government
staff is in a good position to assist firms
with complex regulations and taxes, provide
56 Policy focus RePoRt � LincoLn institute of Land PoLicy
. . . . . . . . . . . . . . . . . . .
information on useful programs, and resolve
issues with state or federal agencies. Typi-
cally, this is a very low-cost program (Bartik
2008).
Moderately Effective Options
Worker-oriented job training. These
programsarenotcustomizedforindividual
firms, but will be most effective if they meet
the needs of local employers by focusing on
occupations in demand, providing up-to-
date training that firms desire, and actively
working to place trainees. Community
colleges are often well-suited to play this
role (Bartik 2008).
Incubators. These programs provide
selected start-ups with “cheap space, shared
office support, and business development
advice”(Bartik2008,26).Incubatorsand
training for potential new entrepreneurs
appear to be effective ways to increase the
odds of success for new businesses. One
0 20 40 60 80
100
Subsidized buildings
Employee screening
Relocation assistance
Regulatory exibility
Management training
Tax credits
Business incubator
Locally designated EZs
Special assessment districts
Federal/state designated EZs
Low-cost loans
Free land or land write downs
Matching improvement grants
Grants
Marketing assistance
Job training
Revolving loan fund
One-stop permit issuance
Small business development center
Tax abatements
Tax increment nancing
Infrastructure improvements
Zoning/permit assistance
Percent of Local Governments Reporting Use
Tax Incentives
Figure 6.1
Local Policies Used to Promote Business Development, 2009
Source: International City/County Management Association and National League of Cities (2009).
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 57
. . . . . . . . . . . . . . . . . . .
successful incubator is University Park at
MassachusettsInstituteof Technology,part
of the Forest City + Technology Group,
which hosts a range of high-tech startups.
Business services. This approach
includes a wide range of services, including
“site selection assistance, procurement sup-
port, and government lobbying and research
support” (Currid-Halkett and Stolarick
2011, 151). Small Business Development
Centers provide advice to existing and pro-
spective businesses on issues such as export-
ing,modernization,andmanagement.
Business improvement districts
(BIDs).BIDsaddressthepossibilitythat
property owners in certain areas of a mu-
nicipality may be willing to pay for expand-
ed public services, such as increased police
patrols, street cleaning, signage, or beautifi-
cation. Once a majority of property owners
in a designated area agree to the special
assessment to pay for these services, the fee
is then mandatory for all owners under state
law, with local governments collecting and
remittingtheextrataxorfee.BIDshave
been shown to increase property values
(Ellen,Schwartz,andVioicu2007)and
reduce crime (Brooks 2006).
There is some evidence that greater
spending on highly valued public goods,
including police protection and transpor-
tation, can increase local economic growth
(Fisher 1997), and that higher growth due
to improved services may outweigh reduced
growth due to tax increases (Lynch 2004).
Less Effective Options
Creative class strategies. Many cities
have adopted policies to improve cultural
outlets and other urban amenities in the
hope that they will attract talented young
people who will in turn boost the local
economy,anideapopularizedbyRichard
Florida (2002). However, it is quite possible
that economic growth attracts creative class
workers rather than the other way around.
Inaddition,itisverydifculttoreplicate
the urban amenities and other characteris-
tics of cities where large classes of creative
people live (Currid-Halkett and Stolarick
2011; Bartik 2008).
Trying to replicate Silicon Valley.
While there have been many efforts to foster
high-tech development, replicating Silicon
Valleyishighlyunlikely.Currid-Halkett
and Stolarick (2011, 151) found 70 cases of
“Siliconias” in a survey of economic devel-
opment practices, but little evidence of suc-
cess.SiliconValleyemergedunderaunique
set of circumstances—including a highly
entrepreneurial culture, laws regarding in-
tellectual property, and a critical mass of
scientists, engineers, and venture capitalists
—that does not exist in most parts of
the world (Lehrer 2012).
SUMMARY
There are several ways that state and local
governments can promote economic devel-
opment while limiting their reliance on
property tax incentives. State policies can
make localities less likely to use incentives
by ending state reimbursement for property
tax incentives, withholding state aid from
communities that use incentives to attract
firms from other nearby jurisdictions, or
enacting tax-base sharing. Tax reform can
achieve economic development objectives
without the need for property tax incentives
if taxes are levied at a low rate on a broad
base, or if local governments reduce taxes
on business investment with a split-rate tax
system.Nontaxalternativescanbeeffective
if they focus on increasing local productivity,
building on local competitive advantages,
and targeting businesses that export a large
share of their goods or services out of
the area.
58 Policy focus RePoRt � LincoLn institute of Land PoLicy
. . . . . . . . . . . . . . . . . . .
CHAPTER 7
Findings and Recommendations
T
he use of property tax incentives
for business has escalated in the
United States since the 1960s, and
every state now employs at least
one type. The range of incentives includes
property tax abatement programs, firm-
specific property tax incentives, tax incre-
mentnancing,enterprisezones,andthe
combination of property tax exemptions
with industrial development bonds.
Despite the widespread use of property
tax incentives, documented evidence of
theireffectivenessislimited.Infact,most
studies suggest these incentives have little
impact on economic growth. Achieving eco-
nomic development goals with property tax
incentives can be difficult because property
taxes are a small part of total costs for most
firms and are easily outweighed by factors
such as differences in the wages and skills
of local workers, proximity to suppliers
and consumers, and transportation costs.
Although studies have shown that varia-
tions in local property tax burdens within
a metropolitan area can have a significant
impact on economic growth for individual
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 59
. . . . . . . . . . . . . . . . . . .
jurisdictions, the advantage gained by one
local government is often cancelled out
when matching incentives are adopted by
other local governments in the same region.
The best estimates of the dollar value
of property tax incentives suggest that state
and local governments are spending $5 to
$10 billion dollars each year on this economic
development tool, but information on these
incentives is limited. The approximately
3,000enterprisezonesacrossthecountry
are the most studied type of property tax
incentive. Good information is available
on the statutory provisions of tax increment
financing and property tax abatement pro-
grams, but only some states and local gov-
ernments track the revenue impact of these
incentives. There is even less information
on firm-specific property tax incentives and
property tax exemptions tied to industrial
development bonds.
ALTERNATIVES TO INCENTIVES
This report’s first recommendation is to
forgo the use of property tax incentives be-
cause of their cost and the limited evidence
of theireffectiveness.Instead,localgovern-
ments should use more cost-effective eco-
nomicdevelopmenttoolssuchascustomized
job training, certain types of business support
services, and labor market intermediaries as
discussed in chapter 6. Cutting back on tax
incentives would provide revenue for locali-
ties to pursue policies that more effectively
promote economic development.
Alternatively, policy makers can attract
firms with across-the-board business prop-
erty tax cuts, and thus avoid the adminis-
trative costs and inequities involved in
selectively granting incentives. This option
is suitable for states with classified tax sys-
tems, which generally tax business property
more heavily than residential property.
Policy makers could simply reduce the
differentially high tax rate for business prop-
erties, or eliminate classification altogether.
STATE OPTIONS FOR
REFORMING TAX INCENTIVES
Given the widespread and longstanding
use of property tax incentives, policy mak-
ers may be reluctant to dispense with them
completely.Inthesecasesthereareways
to improve upon their use and address the
most egregious problems. Some states have
already employed such tools.
Restrict the proliferation of property
tax incentives.Incentivesaremorelikely
to be beneficial when used in areas with
high unemployment, low incomes, or under-
utilizedinfrastructure.Statescanlimitthe
number of local governments permitted to
use property tax incentives or restrict their
use to the communities where they are most
needed. Objective criteria should be used
to define eligible communities, such as
threshold levels of unemployment or
population declines.
Require that tax incentives be
approved by all affected governments.
Inmanypartsof theUnitedStates,asingle
property owner pays taxes to multiple local
governments—a municipality, county, school
district, and perhaps special purpose districts.
Local governments should be prohibited
from reducing firms’ property taxes paid to
other overlying governments without their
approval. States can also prevent destructive
incentive wars by requiring that incentives
be granted by metropolitan-level economic
developmentorganizationsratherthan
individual jurisdictions.
Penalize rather than subsidize local-
ities that use property tax incentives.
Some states reimburse local governments
for using property tax incentives, in effect
subsidizingperniciousinterlocaltaxcompe-
tition.Incontrast,Arizonacutsstateaidto
60 Policy focus RePoRt � LincoLn institute of Land PoLicy
. . . . . . . . . . . . . . . . . . .
local governments in the Phoenix area that
grant tax incentives for retail properties.
Publish information on incentives
and conduct assessments. Taxpayers
have the same right to information about
tax expenditures as they do to data on gov-
ernment spending. The first step in giving
voters useful information is to publish
data on all the firms receiving property
tax incentives. Then analysts in state gov-
ernment can conduct and publish benefit-
cost analyses or other types of assessments
of property tax incentive programs, and
the results can be used to reform or
eliminate unsuccessful programs.
LOCAL OPTIONS FOR
REFORMING TAX INCENTIVES
Attracting a new facility does not always
improve the economic prospects in a partic-
ularjurisdictionormetropolitanarea.Even
in the absence of state reform, localities
can benefit from unilaterally reforming or
reducing their use of property tax incen-
tives. Setting high standards for the use of
property tax incentives will help localities
avoid offering incentives with costs that
exceed their benefits. Local government
officials must weigh the cost of providing
new infrastructure and expanded public
services or the potential for environmental
degradation against the potential economic
benetsof attractingnewrms.Inaddition,
the benefits to the labor market from job
creation—higher wages and lower unemploy-
ment—depend on the types of jobs, not
merely the number of jobs. Figure 7.1 pro-
vides a list of questions local policy makers
should ask before offering tax incentives.
Set criteria for incentives. Restricting
incentives to projects that meet certain stan-
dards will improve the likelihood that their
benefits will exceed their costs. For example,
incentives can be limited to facilities with
wages greater than or equal to the region’s
average wage, or with a certain percentage
of full-time jobs. Similarly, projects hiring
local residents or the unemployed should
qualify for larger incentives than projects
hiring people who are currently employed
or reside outside the area. Local govern-
ments could also deny incentives for projects
that require substantial infrastructure
improvements.
Limit incentives to mobile facilities
that export goods or services out of the
region. Site location for mobile facilities
serving national or international markets is
strongly influenced by labor and other costs
that vary by location. Conversely, immobile
firms that serve local markets choose their
location based on proximity to their con-
sumers and other site-specific factors. Thus,
property tax incentives have the potential
to tip location decisions for mobile facilities,
but are unlikely to affect site choices for
immobilefacilities.Inaddition,attracting
firms that serve national markets will typi-
cally increase a locality’s aggregate income,
while providing incentives to firms serving
local markets may merely displace profits
for other local competitors. One way to
restrict incentives to mobile businesses
is to grant incentives to manufacturing
properties, and deny them for commercial
properties or residential developments.
Place limits on the number or total
dollar value of incentives. One reason
for the proliferation of tax incentives is that,
unlike direct expenditures that are subject to
annual appropriations, they are not typically
constrained and are less likely to be evaluated.
Placing limits on the number or total dollar
value of incentives would force local officials
to be more selective in their decisions to
offer incentives.
Enforce an open process for deciding
on incentives.If thedecision-making
process for awarding property tax incentives
were transparent and not limited to politi-
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 61
. . . . . . . . . . . . . . . . . . .
Question 1: Will the rm asking for tax incentives
locate elsewhere with a signicantly high probability?
Question 2: Will offering tax incentives make the rm’s
protability higher in your jurisdiction than in other
alternative locations?
Question 3: Will granting incentives that attract the facility
improve your jurisdiction’s scal health (i.e., expected
taxes and fees paid by the rm exceed the cost of new
public services)?
Question 4: Is the increased scal stress more than
offset by other benets of having the facility locate in your
jurisdiction (i.e., jobs for residents, attraction of other
rms, or urban revitalization)?
Do not grant
incentive
Do not grant
incentive
Grant
incentive
Grant
incentive
Do not grant
incentive
Yes No
Yes No
NoYes
Yes No
Figure 7.1
Criteria for Granting Local Tax Incentives
Source: Based on Wassmer (2009, 252–254).
cians seeking reelection or economic devel-
opment officials, communities would be
likely to make better choices. For example,
if tax administrators or taxpayer groups
have a voice in the process, they can require
decision makers to weigh the revenue loss
of forgone taxes against the potential eco-
nomic benefits.
Cooperate with other localities.
Individualjurisdictionsoftenusetaxbreaks
to compete with neighboring communities
for business investment. However, moving
firms across jurisdictional boundaries does
not generate economic benefits for the re-
gion as a whole. Broad use of incentives can
leave the entire region with a smaller tax
base, but will not significantly alter the dis-
tribution of capital investment. Without
state intervention, localities can reach non-
statutory, metrowide agreements to pursue
cooperative economic development that
will benefit all communities by setting
standards for offering tax incentives.
62 Policy focus RePoRt � LincoLn institute of Land PoLicy
. . . . . . . . . . . . . . . . . . .
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December 13.
Sheffrin, Steven M. 2009. Economic aspects of a
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Significant Features of the Property Tax. 2012.
LincolnInstituteof LandPolicyandGeorge
WashingtonInstituteof PublicPolicy.http://
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State & Local Government Finance Data Query
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ThompsonReuters/RIA.2012.2012 all states
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U.S.Bureauof EconomicAnalysis.2006.
Employmentestimatesfor1948–1997basedon
NorthAmericanindustryclassicationsystem.
Washington, DC. http://www.bea.gov/industry/
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———. 2011. GDP-by-industry data.
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U.S. Bureau of Labor Statistics. 2011. Current
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http://www.bls.gov/
U.S. Census Bureau. 2012. American fact finder.
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U.S. Department of Commerce. 1989. Taxable
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U.S. Department of Housing and Urban Devel-
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Washington, DC. http://search.usa.gov/search?affiliat
e=housingandurbandevelopment&query=1991
U.S.EnergyInformationAdministration.2011.
Industrialsectorenergypriceestimates.Washing-
ton, DC.http://www.eia.gov/state/state-energy-
profiles-more-prices.cfm
Walters, Dan. 2012. Wipeout of California’s
redevelopment continues to reverberate.
Sacramento Bee, April 27.
Wassmer, Robert W. 2009. Property tax abate-
ment as a means of promoting state and local
economicactivity.InErosion of the property tax
base: Trends, causes, and consequences,ed.Nancy
Y.Augustine,MichaelE.Bell,DavidBrunori,
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Wasylenko, Michael. 1997. Taxation and eco-
nomic development: The state of the economic
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April): 37–52.
Wolman,Harold,andDavidSpitzley.1996.The
politics of local economic development. Economic
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Yinger, John, Axel Borsch-Supan, Howard
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Youngman,JoanM.2011.TIFataturningpoint:
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Zimmerman, Dennis. 1990. The volume cap
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AdvisoryCommissiononIntergovernmental
Relations. (July).
66 Policy focus RePoRt � LincoLn institute of Land PoLicy
. . . . . . . . . . . . . . . . . . .
TaBle a.1
State Property Tax Abatement Programs, 2010
State Program Name
1
Maximum
Duration
(Years)
Granting Authority
2
Who Bears Cost Eligible Property
LG ST CO AR CI O LG OG ST UN I C H R O
AL
Alabama Property Tax Abatements 10 X X X X X X
AK
Property Tax Exemption or Deferral for Economic Development 5+ X X X X X
Exemption or Deferral for Deteriorated Property 5–10 X X
AZ
Environmental Technology Assistance Program 40 X X
CA
Economic Revitalization Manufacturing Property Tax Rebates 5 X X X X
Capital Investment Incentive Program 15 X X X
CO
Local Incentives for New Business Facilities 10 X X X X X X X X X
CT
Manufacturing and Machinery Equipment Exemption 5 X X X X X X
Abatement for Improvement of Property 2–7 X X X X
Urban Reinvestment Abatement 5 X X X
DC
Real Property Tax Abatement for Commercial Properties 5 X X X X X X
FL
Economic Development Tax Exemption 10 X X X
Qualied Target Industry Refund 4+ X X X X X
HI
Wasteland Development Program 5 X X X
Exemption for Property Used in Manufacturing of Pulp and Paper 5 X X X X
ID
Tax Cap on Property Value Exceeding $800 Million NS X X X
Small Employer Growth Incentive Exemption NS X X X
New Capital Investment Incentive Act NS X X X
IL
Abatement for Commercial and Industrial Property 20+ X X X X X X X
IN
Deduction for Rehab/Redevelopment in Economic Revitalization Areas 10 X X X X X X
Investment Deduction 3 X X X
IA
High Quality Jobs Program 20 X X X X
Industrial Property Exemption 5 X X X X X X X
KS
Economic Development Property Tax Exemption 10 X X X X X X
KY
New or Relocating Manufacturing Exemption 5 X X X
City Tax Exemption 5 X X
Moratorium of Property Assessment 5 X X X X X
LA
Industrial Tax Exemption Program 15 X X X X X
Restoration Tax Abatement 10 X X X X X X
ME
Business Equipment Tax Reimbursement 12 X X X X X
Business Equipment Tax Exemption NS X X X X X X
MD
Credit for Buildings Undergoing Renovation for Communications 10 X X X X X
Credit for Businesses that Create Jobs 12 X X X X
Manufacturing Facilities Tax Credit LO X X X X X
Credit for Property Used as a Publicly Sponsored Business LO X X X
Commercial Waterfront Property Tax Credit LO X X X X
Vacant and Underutilized Commercial Buildings LO X X X X X X
Rehabilitated Property 10 X X X X
MA
Economic Development Incentive Special Assessment 4 X X X X X
MI
Industrial Facilities Tax Abatement Program 12 X X X X
Obsolete Property Rehabilitation Districts 12 X X X X X X
Commercial Rehabilitation District 10 X X X
Commercial Redevelopment District 12 X X X X
MN
General Abatement Authority 15 X X X X X X
Economic Development Tax Abatement 10 X X X X
Property Tax Exemption for Redevelopment Projects X X X X X
MO
Land Clearance for Redevelopment Abatement 10 X X X X
Key to abbreviations on pages 68–69.
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 67
. . . . . . . . . . . . . . . . . . .
Criteria Firms Must Meet to Receive Abatements Form of Abatement
3
Tax Abated
Maximum Abatement
Termination;
Clawback or Sunset
AP QU PI J I RL W LO NB SP SE ER EX CR F R SA O RP PP IM LE S T CL SU
X X X X X 100% X
X X X X X X 100%
X X X X 100%
X X X X X 5% AR X
X X X X 100% X
X X X X X 100% of value > $150M X
X X X X 50%
X X 100% X
X X X X X X
X X X X X 50% VA X X
X ? X X 100% VA
X X X X X X 100% VA X
X X X X X $1.5 million/year
X X X N/A X X
X X X X 100%
X X X X X 100% of value > $800M X
X X X X X 100%
X X X X 100% of value > $400M
X X ? X 100%
X X X X X X X 100% VA X
X X X X X X 75% of VA or $2 million
X X X X X X X X 100% VA X X
X X X X 75% VA X
X X X X X X 100% X X
X X X X X 100%
X X X
X X X X
X X X X X X X 100% VA
X X X X X
X X X 100% X
X X X 100%
X X X 100%
X X X X X 58.50% X X
X X X 100%
X X X LO
X X X X LO
X X X LO
X X X X X 100% VA
X X X X 100%
X X X X X X 50% X
X X X X X X X X X Freeze X X
X X X X X X X X SA X
X X X X X SA X
X X X 100%
X X X SA
X X X X SA
X X X X 100% VA
68 Policy focus RePoRt � LincoLn institute of Land PoLicy
. . . . . . . . . . . . . . . . . . .
TaBle a.1 (conTinued)
State Property Tax Abatement Programs, 2010
State Program Name
1
Maximum
Duration
(Years)
Granting Authority
2
Who Bears Cost Eligible Property
LG ST CO AR CI O LG OG ST UN I C H R O
MS
Industrial Exemptions 10 X X X X X
Start-Up Exemptions 5 X X X X
MT
Property Tax Abatement for New or Expanding Firms 10 X X X
Local Option Abatement for Expanding Value Added Machinery and Equipment 7 X X X X X X
Remodeling of Business Structures Abatement 5 X X X X X
New Industrial Property 3 X X X
NE
Nebraska Advantage Act Tier 4, 5, and 6 Exemptions 10 X X
NV
Personal Property Tax Abatement for New or Expanding Businesses 10 X X X X
NY
Abatement and Exemption for Industrial and Commercial Property in NYC 19-25 X X X X
Business Investment Exemption 10 X X X X
Residential Commercial Urban Exemption 12 X X X X X
Food Retail Expansion to Support Health 25 X X X X
Commercial Expansion/Revitalization Program 5 X X X X
ND
Property Tax Exemption for Improvements to Commercial Buildings 5 X X X X X
Exemption for New or Expanding Business Projects 5-20 X X X X X
OK
Five Year Exemption for Manufacturing Facilities 5 X X X X X
Local Development Act 5-6 X X X X X
OR
Strategic Investment Program 15 X X X X X X X
Construction in Process Program 2 X X X X X X
PA
Economic Revitalization Tax Assistance 10 X X X X
RI
Exemption for Manufacturing, Commercial, or Residential Property 20 X X X X X
Exemption of Idle Manufacturing or Mill Property 1 X X X X
Exemption/Valuation Freeze of Wholesaler’s Inventory 25 X X X
SC
Manufacturing and Research and Development Exemption 5 X X X X
Corporate Headquarters, Ofce, or Distribution Facilities Exemption 5 X X X
SD
Property Tax Abatement for New or Expanding Firms 5 X X X X X X X
Exemption of Multi-Tenant Business Incubator 5+ X X X
VT
Property Tax Stabilization Agreements 10 X X X X X X X
Construction in Progress Exemption 2 X X X X X X
VA
Exemption for Rehabilitation, Renovation, or Replacement of Commercial/
Industrial Structures
15 X X X X X
WA
Aerospace Industry Business and Occupation Tax Credit for Property Tax Paid NS X X X X
Business and Occupation Tax Credit for Property Tax on Aluminum Smelter NS X X X X
WV
Exemption of Inventory/Warehouse Goods 20 X X X
Five-for-Ten Program 10 X X X
Business Investment and Jobs Expansion Credit NS X X X X
82 Programs in 37 States (Plus DC) 44 26 16 9 9 5 43 29 15 4 51 44 13 9 48
Key NS:
Not
specied
LO:
Determined
locally
LG: Local government
ST: State
CO: County
AR: As-of-right
CI: City
O: Other
LG: Awarding local
government
OG: Overlapping
governments
ST: State
UN: Unspecied
I: Industrial or
manufacturing
C: Commercial
H: Housing or residential
R: Research
O: Other
Note: See Appendix Notes on page 74.
Sources: Mikesell and Dalehite (2002); Signicant Features of the Property Tax (2012); Various state sources and statutes.
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 69
. . . . . . . . . . . . . . . . . . .
Criteria Firms Must Meet to Receive Abatements Form of Abatement
3
Tax Abated
Maximum Abatement
Termination;
Clawback or Sunset
AP QU PI J I RL W LO NB SP SE ER EX CR F R SA O RP PP IM LE S T CL SU
X X X X X X X X 100% VA or SA X
X X X X 100%
X X X X X 50% X
X X X X SA
X X X X X 100% VA X
X X X X X 3% Rate
X X X X X 100% X
X X X X ? X 50% X
X X X X X 95% or 100% VA X
X X X X 50% VA
X X X X 100% VA
X X X X 100%
X X X 100%
X X X X 100% VA X
X X X X X X X 100%
X X X X X X X X 100% VA X X
X X X X X 100%
X X X X X X 100% X
X X X X X 100%
X X X X X X X 100% LO
X X X X X X X 100% X
X X X X 100%
X X X X 100% or SA
X X X X X X X 100%
X X X X X X X 100%
X X X X X X Freeze
X X X 100% X
X X X X X 100% X X
X X X X X X X X 100% X X
X X X X X 100% VA or 50% PC LO
X X X X X X 100% X
X X X X X 100% X
X X X
X X X X X SA X
X X X X X X 80% X
36 22 23 22 17 8 6 5 5 4 4 2 50 12 8 5 5 11 70 46 24 10 3 29 15 6
AP: Application form or certication requirement
QU: Property used for qualifying use
PI: Property improvement, renovation, or rehabilitation
J: Job creation or retention
I: Investment
RL: Relocation/Expansion
W: Wage, benet, or employment agreement
LO: Determined locally
NB: New business or expanded business
SP: Substitute payment
SE: Socioeconomic criteria
ER: Export requirements
EX: Exemption
CR: Credit
F: Freeze
R: Rebate
SA: Special assessment
O: Other
RP: Real property
PP: Personal property
IM: Improvements
LE: Land excluded
S: School or education
tax
AR: Assessment ratio
VA: Value added
SA: Special assessment
PC: Project cost
T: Termination
CL: Clawback
SU: Sunset
LO: Local option
70 Policy focus RePoRt � LincoLn institute of Land PoLicy
. . . . . . . . . . . . . . . . . . .
TaBle a.2
State Tax Increment Finance Programs, 2010
State Program Name
Duration
(Years)
Eligible Tax Revenues
1
Requirements for District Creation
2
Approval Agencies
3
Public Hearing
Required?
P S I PI EA GR O B BF FS CB CP PP PB DP O CT CO SB ST RA TC O A D
AL
Tax Increment Districts 30 X X X X X Y Y
AK
Debt for Improvement Area Projects Unspecied X X X X N N
AR
TIF for Community Redevelopment Districts 25 X X X X X X Y Y
CA
TIF for Community Redevelopment Project Areas Unspecied X X X Y Y
CO
Community Redevelopment 25–50 X X X X X Y N
CT
TIF for Municipal Development Projects 40 X X X X X Y N
DE
Municipal TIF District 30 X X X X X X X X X X Y N
DC
Tax Increment Financing X X X X X X X X X X N N
FL
Community Redevelopment 7–40 X X X X X Y N
GA
Tax Allocation Districts Term of bonds X X X X X X X Y N
HI
Tax Increment Financing Term of bonds X X X Y Y
ID
Revenue Allocation Areas 24 X X X X X X Y N
IL
Tax Increment Allocation Redevelopment 23 X X X X X X X Y N
IN
Tax Increment Finance 25 X X X X X X Y Y
IA
Urban Renewal 20 X X X X X X Y Y
KS
Tax Increment Financing 20 X X X X X X X X X X Y N
KY
Kentucky Increment Financing 30 X X X X X X X X X X X Y Y
LA
Tax Increment Development 30 X X X Y N
ME
Municipal Development District 30 X X X X X Y Y
MD
Tax Increment Financing Unspecied X X X X Y ?
MA
Economic Development Incentive Program 30 X X X X Y N
MI
TIF Program 30 X X X X X X X Y Y
MN
Tax Increment Financing 26 X X X X X X Y N
MS
Tax Increment Financing 30 X X X X X Y Y
MO
TIF for Redevelopment Areas 23 X X X X X X X X X X Y Y
MT
Tax Increment Finance 15–40 X X X X X X X X Y N
NE
TIF for Community Redevelopment Areas 15 X X X X X X X Y Y
NV
Tax Increment Areas 30–45 X X X Y N
NH Municipal Economic Development
and Revitalization Districts
Term of bonds X X X Y N
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 71
. . . . . . . . . . . . . . . . . . .
NJ
Revenue Allocation District Unspecied X X X X X X X N N
NM
Urban Development 25 X X X X X X X X X Y N
NY
Municipal Redevelopment Unspecied X X X X X X X Y Y
NC
Development Financing Districts 30 X X X X X X Y N
ND
TIF for Development or Renewal Areas 15 X X X Y Y
OH
Municipal TIF 30 X X X X X Y N
OK
Tax Increment Finance 25 X X X X X X X X Y Y
OR
TIF for Urban Renewal Areas Unspecied X X X X X X X Y N
PA
TIF Districts 20 X X X X X X X X X X X Y Y
RI
TIF Areas 25 X X X X Y N
SC
TIF Districts Unspecied X X X X X X X X Y N
SD
Tax Incremental Districts 15 X X X X Y N
TN
TIF for Redevelopment Plans Varies X X X X X Y N
TX
Tax Increment Financing 40 X X X X X X X X Y N
UT
TIF Districts Varies X X X X X X X X X X X Y Y
VT
Tax Increment Financing 20 X X X X X Y Y
VA
Tax Increment Financing Unspecied X X X X N Y
WA
Community Revitalization Financing No limit X X X X X X Y N
WV
Tax Increment Financing 30 X X X X X X Y N
WI
Tax Increment Districts 23-27 X X X X X Y Y
WY
Urban Renewal 25 X X X X Y N
50 Programs in 49 States (Plus DC) 49 15 2 6 3 3 8 34 19 18 13 4 6 3 3 12 41 21 8 11 10 4 14 46 20
Key P: Property tax
S: Sales tax
I: Income tax
PI: PILOTs
EA: Economic activity tax
GR: Gross receipts tax
O: Other
B: Blight
BF: “But for” test
FS: Feasibility study
CB: Cost-benet analysis
CP: Consistent with comprehensive plan
or development plan
PP: Project plan
PB: Finding of public benet
DP: Finding of development potential
O: Other
CT: City
CO: County
SB: School board/district
ST: State
RA: Community redevelopment
agency board
TC: TIF commission
O: Other
A: Authorization
D: Deal approval
Notes:
1. Other Elibigle Tax Revenues: DE Other assets; DC Other assets/funds; KS Private sources, transient guest, state/federal; KY Limited liability entity tax; NJ Payroll/wage taxes, lease payments, parking tax; OK
Other local taxes by consent of juris; PA Any ad valorem tax; SC Utility revenues, assessments, redevelopment project revenues.
2. Other Requirements for District Creation: CA Impact report; CT Creation of local development agency; DC Potential for tax revenue growth; FL Shortage of affordable housing; GA Deterioration and inadequate infra-
structure; IL Housing impact study, map of land uses to be funded; IA Slum or economic development need; ME Suitability for commercial uses; MD Resolution designating area and pledge of revenue; MT Inadequate
infrastructure; NM No net expense; VA Development needs.
3. Other Approval Agencies: DE Delegated by bond issuer; IL Joint Review Board; KS County and state in some cases; MN Governing Board of Authority; MT Urban Renewal Authority; NM State Board of Finance; NM
Finance Authority and Legislature; OK Review Committee; OR All taxing agencies; SC Affected taxing entities; SD Planning Commission; VA Local governing body; WA Fire protection district; WI Joint review board; WY
Planning Commission.
Sources: Council of Development Finance Agencies (2008); Johnson (2002); Kerth and Baxandall (2011); Signicant Features of the Property Tax (2012); Various state sources and statutes.
72 Policy focus RePoRt � LincoLn institute of Land PoLicy
. . . . . . . . . . . . . . . . . . .
TaBle a.3
State Enterprise Zone Programs, 2010
State Program Name
Number
of Zones
(2009)
Type of Incentive Criteria for Designating an Enterprise Zone
1
Zone Size
Limits
P I S OT NT U PV LI GD PD CP FD PA DP V LS LO PC TR LW O PL AL
AL Alabama EZ Act 28 X X X X X X X X X X
AZ EZ Property Tax Reduction 24 X X X X X X X X X
AR Consolidated Incentive Act of 2003 Entire State X X X X
CA EZ Program 42 X X X X X X X X X X X X X
CO EZ Program 16 X X X X X X X X
CT EZ Programs 17+ X X X X X X
DE Targeted Area Tax Credits 30 (2004) X X X X X X X X X
DC Economic Development Zones 3 X X X X X X X X
FL EZ Program 59 X X X X X X X X X X
GA
EZ Program
43+
X X X X X X
Opportunity Zones 73 X X X X X X
HI EZ Partnership 19 (2004) X X X X X X X X
IL EZ Program 91 (2004) X X X X X X X X X X X X
IN EZ Program 24 X X X X X X X
IA EZ Program 41+ X X X X X X X X X
KS EZ Initiatives Entire State X X
LA Economic Development Zones 1,740 (2004) X X X X X X X X
ME Pine Tree Development Zones Entire State X X X X
MD
EZ Tax Credits 29 X X X X X X X X X X
Tax Credit for Arts District 19 X X X X
MA Economic Opportunity Area 40 (2004) X X X X X X
MI
EZ Program X X X X X X X
Renaissance Zone Program 39 (2004) X X X X X X X X
MN
Border City Development Zones 5 X X X X X X X X X X
Job Opportunity Building
Zones and Agricultural
Processing Facilities Zones
15 X X X X X X
MO Enhanced EZ Program 66 (2004) X X X X X X X X
MS Growth and Prosperity Areas 18 X X X X X X
NE EZ Act 5 (2004) X X X X X X
NH Economic Revitalization Zones 77 X X X X X X X
NJ Urban EZ 32 X X X X X X X X X X X
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 73
. . . . . . . . . . . . . . . . . . .
NM EZ Program 1 (2004) X X X X X X X X X X
NY Empire Zones 62 (2004) X X X X X X
NV Zones for Economic Development X X X X X X X X
NC
Urban Progress Zones
and Agrarian Growth Zones
43 (2011) X X X X X
ND Renaissance Zone Program 48 X X X X X
OH EZ Program 409 X X X X X X X X X
OK Local Development Act 228+ X X X X X X X X X X
OR EZ Program 57+ X X X X X X
PA Keystone Opportunity Zone Program 12 X X X X X
RI EZ Program 10 (2011) X X X X X X
SC Economic Impact Zones 27 X X
TN Local EZ Act 2 (2004) X X X X X X X X X X
TX Reinvestment Zones/EZs 183 (2004) X X X
UT EZ Program 58 (2011) X X X X X X X X X
VA EZ Program 57 X X X X X X X X X X
WA Commercial Empowerment Zones 6 Max X X X X X X
WI
EZ Program 9 X X X X X X X X
Development Zones 22 Max X X X X X X X X
48 Programs in 42 states (Plus DC) 31 30 18 29 15 31 26 20 19 15 10 8 7 7 7 6 5 4 4 3 8 15 36
Key EZ: Enterprise Zone P: Property tax
I: Income tax
S: Sales tax
OT: Other tax
NT: Nontax
U: Unemployment
PV: Poverty
LI: Low income
GD: General distress or blight
PD: Population decline or slow population growth
CP: Consistent with comprehensive plan or community character
FD: Federal zone designation or grant eligibility
PA: Public assistance reliance and/or free lunch participation
DP: Development potential
V: Vacant or underutilized land
LS: Local support
LO: Provision of local incentives
PC: Plant closures/Job losses
TR: High tax burden/Low tax capacity
LW: Low wages
O: Other
PL: Population
limit
AL: Area limit
Note: 1. Other Criteria: AL Migration; CA Gang activity; LA Rural parishes with less than 75,000 residents can designate a zone; MD State designation as art and entertainment districts; MN Low land market value,
substandardhousing,and“adverseeconomicconditionsresultingfromcompetitionfromborderstateor1997oods;”RIOvercrowdedhousing;SCCounty,municipality,orareawithin50milesof,oradversely
affected by, a military base closure; WI Effectiveness of other development programs.
Sources: Engberg and Greenbaum (1999); Ham et al. (2008); Signicant Features of the Property Tax (2012); Various state sources and statutues.
74 Policy focus RePoRt � LincoLn institute of Land PoLicy
. . . . . . . . . . . . . . . . . . .
APPENDIX NOTES
Chapter 3
The Impact of Property Taxes
on Firm Location Decisions
Figure 3.1: Input Costs as a Share
of Total Costs for the Manufacturing Sector,
2004–2009
The share of total costs for each input is esti-
mated with a 2004–2009 average of data from
theGDP-by-IndustryDataformanufacturing,
with total costs calculated as industry gross output
minus gross operating surplus (U.S. Bureau of
EconomicAnalysis2011).Foreachyear,theshare
for labor and energy is estimated by dividing costs
for employee compensation and energy inputs
by total costs.
State/local taxes and property taxes reported
annuallybyErnst&YoungLLPandCouncilon
State Taxation are divided by total taxes on pro-
duction for all private businesses in the GDP-by-
IndustryData.Theanalysissuggeststhatforthe
2004–2009 period state/local taxes averaged 57.7
percent of total business taxes and property taxes
averaged21.2percent.Eachyear’spercentagefor
all private businesses was then multiplied by total
taxesreportedintheGDP-by-IndustryDatafor
manufacturing to estimate state/local taxes paid
by manufacturing firms.
Figure 3.2: Impact of Relocation to
Different States on Total Costs for an
Average Manufacturing Facility
The impact of relocation on total costs is esti-
mated by multiplying the share of total costs for
each input calculated for figure 3.1 by the per-
centage change in input prices from relocating
from a high-cost state to a low-cost state.
State labor costs are the per unit labor costs
for2009calculatedbyMoody’sAnalytics,Inc.
(2011), which measures labor compensation per
dollarof outputforselectedthree-digitNAICS
industry classifications, and then calculates a
single state measure of labor costs by weighting
unit costs for each industry based on the national
share of employment.
State energy costs are 2009 total energy
prices for the industrial sector measured as dollars
permillionBritishthermalunits(U.S.Energy
InformationAdministration2011).
State/local taxes and property taxes are
2010 total effective business tax rates, which are
total business taxes as a share of gross state
product (Phillips et al. 2011).
Calculations for the Boston Metropolitan Area
The Boston Metro area includes 147 Massachu-
setts municipalities in the Boston-Cambridge-
Quincy MSA as defined by the U.S. Census
Bureau.Effectivetaxratesarecalculatedby
dividingeachmunicipality’sequalizedvalueby
its nominal tax rate for the industrial class using
FY2010 data from the Massachusetts Department
of Revenue (2011). Since some municipalities
may use prohibitively high tax rates as a way to
zoneoutindustrialfacilities,thisanalysisfollows
Fox (1981) and excludes 44 municipalities where
industrial properties account for less than 1 percent
of total assessed value. The change in operating
costs is calculated the same way for figure 3.2.
Table 3.1: Impact of State and Local
Taxes on Economic Activity
In74across-regionstudiescoveredinWasylenko
(1997), the variables used to measure economic
activity (i.e., the dependent variable) included
aggregate regionwide data on employment
(35.1% of studies), investment (17.6%), and gross
product, income, or value-added (17.6%); and
microdata on firm births or new plant locations
(27.7%).In11within-regionstudies,themeasures
of economic activity included aggregate data on
employment (45.5% of studies) and microdata
on firm births or new plant locations (54.5%).
Intheacross-regionstudies,67.6%of studies
used measures of economic activity specifically
for the manufacturing sector, while 54.5% of
within-region studies used variables specifically
for manufacturing.
Intheacross-regionstudies,thevariablesused
to measure taxes are most frequently state and
local taxes per capita or as a percent of personal
income; nominal or effective tax rates for specific
taxes (most frequently corporate income and
property taxes); and sometimes measures of tax
effort.Inthewithin-regionstudies,thetaxvariable
is always property taxes, most frequently effective
property tax rates, but sometimes nominal or
average tax rates (Bartik 1991).
Bartik (1994) shows how to estimate revenue
loss per job created from tax reductions.
Revenue loss per job =
(Businesstaxrevenueperjob)x(1+1/E),
whereEisthetaxelasticityof economic
activity with respect to state and local
business taxes.
Total state and local taxes paid by business in
FY2010 were reported as $619 billion by Phillips
et al. (2011) and nonfarm private sector employ-
ment averaged 107,118,000 in FY2010 according
to the Bureau of Labor Statistics (2011), which
yields business tax revenue per job of $5,779.
With an across-region elasticity of -0.25, this
suggests revenue change per job of -$17,337:
$5,779 x [1 + (1/-.25)].
Property taxes paid by business in FY2010 were
reported as $249.5 billion by Phillips et al. (2011),
which yields property tax revenue paid by busi-
ness of $2,329 per job. With a within-region
elasticity of -1.8, this suggests property tax
revenue change per job of $1,035:
$2,329 x [1 + (1/-1.8)].
Appendix Table A.1
State Property Tax Abatement
Programs, 2010
This table defines property tax abatement
programs somewhat differently than Dalehite,
Mikesell,andZorn(2005).Itexcludesprograms
that primarily benefit housing development, have
a primary purpose other than economic devel-
opment, or are linked to industrial development
bonds.Itincludessomeprogramsthatarenot
strictly stand-alone programs and thus were not
reported by Dalehite, Mikesell, and Zorn (2005).
Notes
1. This table excludes 12 programs that are
identiedintheIncentivesforEconomicDevel-
opment table on Significant Features of the Prop-
erty Tax (2012) because they are either limited
to a specific industry or have a primary purpose
other than economic development. These pro-
grams include: AZ Healthy Forest Property Tax
Reduction;CTExemptionforNewCommercial
Vehicle;DCSupermarketExemptionAct;HI
CommercialCropSheltersExemption;IASpecu-
lativeShellBuildingsExemption;MDCreditfor
Operating Railroad; MD Restoration/Rehabili-
tation of Historic Property; MD Business Proper-
tythatisSoftware;MNAgriculturalProcessing
FacilityExemption;MTSuspension/Cancellation
of Delinquent Taxes; OR Oregon Food Processor
Exemption;andRICreditforHistoricStructures.
2. Other Granting Authority: AL Public
Authority; CA Redevelopment Agency; CO
SchoolDistricts;ILSchoolDistricts;and
MT Public Authority.
3. Other Forms of Abatement: AK Deferral;
AZReclassication;MIAlternativeTax;MN
Abatement of taxes owed in excess of what would
be owed in neighboring county; MS Fee in Lieu
of Taxes;MTRateReduction;NDPaymentin
Lieuof Taxes(PILOT);NEDeferral;andRI
Stabilization.
Kenyon, LangLey & Paquin � Rethinking PRoPeRty tax incentives 75
. . . . . . . . . . . . . . . . . . .
ACKNOWLEDGMENTS
We thank the following Lincoln Institute of Land Policy staff for their helpful comments
on the work in progress and other contributions: Gregory K. Ingram, President and CEO;
Ann LeRoyer, Senior Editor and Director of Publications; Emily McKeigue, Managing
Editor; and Joan Youngman, Senior Fellow and Chair of the Institute’s Department of
Valuation and Taxation.
We also thank the following staff of the George Washington Institute of Public Policy
for their guidance in using the Signicant Features of the Property Tax database for
this report: Patricia Atkins, Research Professor; Catherine Collins, Senior Research
Associate; and Eric Stokan, Graduate Research Assistant.
Outside reviewers also improved the report with their careful reading and insightful
comments, including:
• JamesAdams,CommercialRealEstateBrokerandConsultant,
J. Adams Commercial
• JaniceGregory,AssociateStateDirector,NewHampshireSmallBusiness
Development Center
• StanleyMcMillen,Economist
• ChristopherSteele,President,CWSConsultingGroupLLC
Special thanks go to the following individuals who participated in the January
2012 review session on the draft report:
• JohnE.Anderson,ProfessorofEconomics,UniversityofNebraska
• EstebanG.Dalehite,Counsel,Cacheaux,Cavazos&NewtonLLC
• RichardF.Dye,Professor,InstituteofGovernmentandPublicAffairsatthe
University of Illinois at Chicago, and Visiting Fellow, Lincoln Institute of Land Policy
• JaneMalme,Fellow,LincolnInstituteofLandPolicy
• LauraA.Reese,ProfessorofPoliticalScience,MichiganStateUniversity
• AndrewReschovsky,ProfessorofPublicAffairsandAppliedEconomics,
University of Wisconsin, and Visiting Fellow, Lincoln Institute of Land Policy
• ShawnRohlin,AssistantProfessorofEconomics,UniversityofAkron
• RobertW.Wassmer,ChairpersonandProfessorofPublicPolicyandEconomics,
California State University-Sacramento
Although the authors integrated reviewer comments in crafting their conclusions
and recommendations, the nal report does not represent the views of the individuals
or organizations listed above.
76 Policy focus RePoRt � LincoLn institute of Land PoLicy
. . . . . . . . . . . . . . . . . . .
ABOUT THE AUTHORS
Daphne A. Kenyon is a visiting fellow in the Lincoln Institute’s Department of Valuation and
Taxation and principal of D. A. Kenyon & Associates, Windham, New Hampshire. She has
worked on a wide range of public nance issues as professor of economics at Dartmouth
College and Simmons College, as a policy analyst for the U.S. Department of Treasury and
the Urban Institute, and as a consultant. She earned her B.A. in Economics from Michigan
State University and her M.A. and Ph.D. in Economics from the University of Michigan.
Contact: [email protected]
Adam H. Langley is a research analyst in the Department of Valuation and Taxation at
the Lincoln Institute of Land Policy, where he has coauthored papers on property tax relief
programs, nonprot payments in lieu of taxes, and state-local government scal relation-
ships. He earned a B.A. in political studies from Bard College and an M.A. in economics
from Boston University. He previously worked in the New York State Assembly. Contact:
Bethany P. Paquin is a research assistant for the Lincoln Institute of Land Policy and
D. A. Kenyon & Associates.She is a coauthor of another Lincoln Institute policy focus report
on property tax circuit breakers.She earned her B.A. in political science from Grove City
College in Pennsylvania. Contact: bethan[email protected]
ABOUT THE LINCOLN INSTITUTE OF LAND POLICY
www.lincolninst.edu
The Lincoln Institute of Land Policy is a leading resource for key issues concerning the
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Institute strives to improve public dialogue and decisions about land policy. As a private
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policy concerning land, both in the United States and internationally.
about the LincoLn institute of Land PoLicy
www.lincolninst.edu
The Lincoln Institute of Land Policy is a leading resource for key
issues concerning the use, regulation, and taxation of land. Providing
high-quality education and research, the Institute strives to improve
public dialogue and decisions about land policy. As a private operating
foundation whose origins date to 1946, the Institute seeks to inform
decision making through education, research, policy evaluation,
demonstration projects, and the dissemination of information, policy
analysis, and data through our publications, Web site, and other
media. By bringing together scholars, practitioners, public ofcials,
policy makers, journalists, and citizens, the Lincoln Institute integrates
theory and practice and provides a nonpartisan forum for multidisci-
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regions—large networks of metropolitan areas where most of the
population growth by mid-century will take place—and how to organize
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ISBN 978-1-55844-233-7
Rethinking Property Tax Incentives
for Business
ISBN 978-1-55844-233-7
Policy Focus Report/Code PF030
S
tate and local governments across the United States use several types of property tax incentives for business,
including property tax abatement programs, rm-specic property tax incentives, tax increment nancing,
enterprise zones, and industrial development bonds combined with property tax exemption.
When these incentives attract new businesses to an area, they can increase income or employment, expand tax
revenues, and revitalize distressed urban areas. Unfortunately, research shows that the escalating use of property tax
incentives for business over the last 50 years has resulted in local governments spending billions of dollars with little
evidence of economic benets. There are several obstacles to the successful use of these incentives: property taxes
account for a very small part of total costs for most rms; incentives are sometimes provided to businesses that
would have chosen the same location without tax breaks; and the proliferation of incentives reduces their effective-
ness since similar tax breaks offered by competing jurisdictions largely offset one another.
This report provides an overview of property tax incentives for business and offers recommendations for state
and local governments.
• Alternatives to tax incentives should be considered by policy makers seeking more cost-effective economic
development tools, such as customized job training, labor market intermediaries, and provision of business services.
If tax policy is the preferred approach, ofcials can employ a general policy of low tax rates with a broad base, or
move to a split-rate property tax with lower taxes on buildings than land.
• State policy makers should consider the following reforms to improve the effectiveness of property tax incentives:
place limits on their use; require their approval by all affected governments; improve transparency and measure
effectiveness; and end state reimbursement of local revenues forgone because of property tax incentives.
• Local government officials should consider the following reforms to avoid some of the pitfalls of business property
tax incentives: set objective criteria for the types of projects eligible for incentives; target incentives to mobile rms
that export goods or services out of the region; limit the total number of incentives; enforce an open process for
decisions on incentives; and forge regional cooperative agreements.
