The articles reviewed in this section are labeled “The Good” simply because they accept the existence of tax abatement and incentives. They acknowledge that under some circumstances tax abatement can be productive and useful and are searching to both understand how abatements actually operate in the field and how to improve their performance. The Economic Development Curmudgeon doesn’t believe these authors “like” or advocate tax abatement but rather recognize their pervasiveness and that, in certain circumstances and conditions, abatements in their various forms can, at least partially, satisfy their intended purposes.
Some incentives are socially beneficial because they are helpful, perhaps essential, in a community’s effort to retain capital (firms and private investment) in an increasingly mobile and footloose global system.Our first article is by Timothy J. Bartik, Solving the Problems of Economic Development Incentives, a chapter in Ann Markusen (Ed), Reining in the Competition For Capital, 2007, W.E. Upjohn Institute for Employment Research, Kalamazoo, MI. This article is both a summary and an extension of various studies and articles by the author over the last decade. Bartik maintains the position that SOME incentives are socially beneficial because they are helpful, perhaps essential, in a community’s effort to retain capital (firms and private investment) in an increasingly mobile and footloose global system. In addition, he believes that these incentives CAN produce employment opportunities which are obviously helpful to the community. To be fair to Bartik’s analysis, he does approach his task by using a cost/benefit analysis and, in some unfortunate instances, derives cost/benefit estimations to defend his positions. If the reader has read any of the previous sections, she will understand the ED Curmudgeon has “issues” with using cost/benefit analyses to prove or disprove the effectiveness of tax abatement and incentives.
For Bartik, the potential problem with tax abatements and incentives is that (1) local policy-makers tend to overvalue the benefits of incentives, and (2), the local policy process is often dominated by business interests (the old growth coalition again) and they press for generous incentives. Bartik’s core problem is that tax abatements and incentives tend to default to the generous side relative to the benefits obtained by the community. To deal with this problem, Bartik advocates for reform of the policy process—making it more open and “democratic” as opposed to its present closed and oligarchic nature.
All this is music to the Curmudgeon’s ear – not necessarily because he likes open and democratic; much to the contrary. Rather, the Curmudgeon likes to call attention to his delusional reality that local economic development tools, strategy and practices are hugely shaped by the local policy process. The micro-economic, cost/benefit, and/or negotiation approaches favored by most academics reduce politics to insignificance or the result of an evil Darth Vader-like business-led growth coalition, if they acknowledge politics at all.
The delusional reality is that politics and policy decision-making enter into tax abatement and incentives in a very big way.To the ED Curmudgeon (who you remember has confessed to being a serial tax abater) these academic approaches float in a surrealistic atmosphere, totally divorced from his experience, and his delusional reality. Returning to Bartik’s reality, however, his analysis operates in a twilight area between the traditional micro-economic, cost/benefit, negotiation paradigm and a larger more public policy perspective. This is a great step forward. The delusional reality is that politics and policy decision-making enter into tax abatement and incentives in a very big way. So Bartik opens the door and allows us and the reader to question in what ways politics and policy making can shape the use of tax abatements.
But the music plays on. Bartik implicitly endorses our distinction between tax abatement (one form of incentive) and incentives as an aggregate of different types of distinctive programs/tools (i.e. tax credits, exemptions, IRB, TIF, etc). For him incentives include anything that “looks most like legalized bribery of the rich: cash or near-cash assistance” (P.104). For example, property tax abatements, discretionary income tax credits, low-interest and small business financing and equity, business counseling (including SBDC), free land, customized training and services, and infrastructure.
Tax abatement is more to the advantage of localities than statesThe important point from our perspective is that he does not lump them all together but recognizes their discreteness as individual forms of the larger concept of incentives. Also, he does not attempt to “cost out” or estimate one program and then apply those numbers on a national scope. Equally important, he does not fall victim to a definition of tax abatement abuse which relies on whether the recipient of the abatement is a business or a worker/unemployed or a desired technology (green or innovative, for instance) or sectors. Bartik seems to incorporate a number of the Curmudgeon’s concerns expressed in the other sections of this issue.
Bartik reviews some important forces which affect the locational decisions of firms; in some instances and conditions, he concludes that tax reductions can marginally, but positively affect firm location. His calculus and logic suggest that tax abatement is more to the advantage of localities than states and he recognizes that any form of an incentive is usually not rifle focused on only the “deserving” firm or to the firm “on the edge” of making a decision adverse to the community. He estimates that only 3 out of 10 firms receiving incentives really needed the incentive to make a “correct” decision. Further, he acknowledges that each project/tax abatement exhibits a different rate of benefits and costs depending on the situation and economic base of the community or the income level, etc., of the individual. Finally, he implies that multiplier effects, important in a cost/benefit analysis, vary from project to project and there is no one size fits all which can be applied to all projects, never mind all types of incentives.
A very important observation arising from his analysis is that tax abatement can make considerable sense to the “winning” community, while the larger community (state for instance) or nation suffers the costs created by any relocation or dislocation. While he does not focus to any great length on this factor, he does expose his readers to a major reason why any community empowered to authorize an incentive will do so, even if from a state or national perspective it makes little or no sense. A locational prism can shape the calculus of how one perceives the value, ethics, and effectiveness of an incentive. Viewed from the bottom of the federal system, it can make lots of sense to offer tax abatements; viewed from the national system – no sense at all. There are at least two sets of costs benefit calculations in operation simultaneously. The Curmudgeon injects that tax abatement by sub-state jurisdictions may be the price we pay for a federal political system.
Many business people do not approve of tax abatement/incentives ideologically, and others oppose it if the recipient is a competitor or potential competitor.The ED Curmudgeon must confess he was not overwhelmed by Bartik’s treatment of the policy process and the politics within it. His politics and policy process is rather predictable and frankly general. He calls attention to “the ignorance” of local elected officials to the real costs and benefits of incentives while they succumb to pressure from the business community. Certainly, Bartik is correct in suggesting these are key forces which impact tax abatement decisions; but for every dumb mayor there is usually a smart one and, at least in the Editor’s not so humble opinion, the business community is seldom unified about anything, certainly not tax abatement. Many business people do not approve of tax abatement/incentives ideologically, and others oppose it if the recipient is a competitor or potential competitor. In any cases, elected officials have multiple constituencies which vary by political party and community. Labor unions, for instance, can be a surprising supporter of tax abatements to a firm from which they represent workers.
The policy alternatives that Bartik suggests can improve tax abatement decisions include:
- Just Say No! Communities always have the option of not providing tax abatements.
- Target incentives to better assist the type/sector of firm the community wishes to attract or which offer the most benefit to the community.
- Incentives are not an entitlement and should not go automatically. Cap incentives individually and specify an annual allotment/quota.
- Transparency. Publish details in a timely manner and publically disclose the terms of the incentive package.
- Better cost/benefit calculations (that’s an oxymoron, says the Curmudgeon).
- Target quality jobs or require first source hiring and enforce through clawbacks.
- Employ forms of incentives less lucrative to the firm and of more benefit to the community such as training rather than tax abatement.
In summary, Bartik offers a refreshing “bottoms-up” perspective, a perspective which combines the seemingly inevitable cost/benefit calculation with political and public policy factors. He recognizes that from some angles incentives and tax abatements not only can appear to work, but do work to some extent. He urges municipalities and communities to clean up their own act and improve the quality of incentives they offer rather than incessantly crying for federal/state intervention to end incentives outright. Bartik seems to recognize that incentives are so prevalent, not because local economic developers are so stupid or malevolent, but because such incentives can be of benefit to their community and, in any case, also evolve from and are supported by the community’s policy process. Incentives are here to stay, Bartik concludes; let’s make them work for the greater good.
Are you in the mood for even More Good?
We conclude our “The Good” section with Esteban G. Dalehite, John L. Mikesell, and C. Kurt Zorn, Variation in Property Tax Abatement Program among States, Economic Development Quarterly, and Vol. 19 No 2, May 2005, PP.157-173. In many ways we’ve saved the best for last, figuring that if the reader lasted this long, she deserves a break. Despite a title which is more boring than a street sign, the article itself reflects its title. This is no engaging mystery novel. It simply does what it is supposed to do: describe in real terms how one type of abatement is structured throughout the fifty states. DMZ concentrate on one form of incentive exclusively: the simple old single program tax abatement.
If during some sleepless night you desire to delve into the best single analysis of plain vanilla old tax abatement, here it is! The detail is its glory; after perusing DMZ, the reader cannot escape the central reality of any form of incentive: there are at least 50 ways in which it is structured. After reading this article no one can believe there is a one size fits all cost/benefit calculation which can be applied nationally (or even within a single state).
Blame the States!
DMZ initiate their analysis by observing, correctly in our opinion, that property tax abatements are the “core tool” of an economic development incentive program. Flexibility is the chief advantage of this tool in that it can be structured to pursue virtually any goal, purpose or recipient so long as the target possesses a taxable asset. Accordingly, they can serve attraction, cluster recruitment, and retention equally well. Tax abatement is an excellent tool to ameliorate an adverse business climate and can even stimulate productivity and innovation. It is the cornerstone, perhaps the foundation, of development and redevelopment projects.
States that set up and empower the locals to issue tax abatements in the first place.Virtually every state has some form of a tax abatement program (DMZ find 35 states have set up a SAPTAP or stand alone property tax abatement program) and most states have at least partially empowered their local jurisdictions to participate in shared state/local tax abatement or have authorized eligible county/municipal jurisdictions to make the abatement decision in their sole discretion.
After reading DMZ, there is no escape for the reader from admitting that it is the states that set up and empower the locals to issue tax abatements in the first place. For the most part, local tax abatement programs reflect state goals and purposes and are authorized by state legislation. If so, the real culprit for all these controversial and much criticized programs is not the dumb, irresponsible, growth coalition dominated local jurisdictions—but the ultimate regional government of all: the state.
Despite its centrality to local economic development and despite the near hatred of these programs by some, tax abatement programs have not been studied on a national scale. Most research has concentrated on study of one or a few states, or combined tax abatement with a variety of other forms of tax abatements and incentives. DMZ, to our best knowledge, is the most exhaustive study of the fifty states.
The study clearly demarcates the significant factors which differentiate state programs and finally allows researchers to embrace an “apples to apples” comparison between states of programs which are similarly structured, designed, and intended to accomplish similar ends. Unfortunately, a thorough reading of DMZ would also reveal that few states design and structure a SAPTAP in common ways, and you will be amazed at the varying targets and goals that states are chasing. The reality is that there are precious few apples to compare with each other, so distinctive are the programs and their goals. So much for the one size fits all assumptions/calculations/estimations of the proponents of nation-wide cost/benefit analysis.
The Specific Findings
DMZ define SAPTAP property tax abatement as an economic development program “limited to specific parcels (of land) and are awarded after a review process that often is both political and bureaucratic. They typically target ‘improvements’, but not land, thereby enabling policy makers to use them to augment the attractiveness of particular locations for investment.” (P.157) More precisely, tax abatements, DMZ suggest, possess four central elements: they (1) contain a reduction in tax liability for selected parcels; (2) specify a purpose beyond the tax relief itself; (3) set a time limit, and (4) can be used by themselves and not necessarily tied to other incentive programs.
To use tax abatement more effectively we must first understand how tax abatement is designed and structured, how and why it works, and must acknowledge the considerable variation among states.The authors offer a short history of SAPTAP and a quite solid review of previous research from which they point out several trends or findings:
- The more recent programs emphasize broader economic development goals/purposes than the original smokestack chasing, recruitment goals. The most common goal of newer programs is increasing the tax base.
- Expansion to sectors beyond manufacturing into commercial and even residential, service, and extractive industries.
- They can be used for a single firm or for a sector or class of firms. They are quite FLEXIBLE (which probably is tax abatement’s chief asset);
- They are easy and cheap to administer;
- They offer one of the few opportunities of government to directly ameliorate a firm’s cost center;
- They offer compensation for unattractive or undesirable attributes of a parcel of land or even a community;
- They can play a meaningful role in creating a favorable business climate (which is predominately state-wide or at least regional)
In their literature review the authors encounter the semi-ideological disparagement of tax abatement which seeks to curtail, if not terminate outright, the use of tax abatement. But DMZ brush it aside by observing that if we desire to use tax abatement more effectively we must first understand how tax abatement is designed and structured, how and why it works, and must acknowledge the considerable variation among states.
Accordingly, DMZ then conduct an analysis of variation in SAPTAP among the thirty-five states which have such a program. Their major conclusion, while obvious, is very important and fundamental: state tax abatement systems are quite varied (how many times have I said this, already). Some states operate a single program with one narrow objective; others operate one program with several quite different objectives. Still others operate several distinct programs which are not only for different purposes, but have different processes, decision-making, and levels of benefits. No cookie cutter here.
Accordingly, states vary in the purposes or ends of their tax abatement program. Some use it for retention, redevelopment, or attraction. Some use it for affordable housing. However, “the general purpose of the vast majority of SAPTAPs is the promotion of economic development (?) or redevelopment, or both” (P.161).
States vary hugely on the conditions, terms, and duration of their tax abatement programs and the eligibility of recipients. The variety found simply discourages any attempt in this review to summarize because distinctive programs reflect distinctive design and structure. Importantly, each state defines its own eligibility criteria and awards process and the sub-state jurisdictions follow the parameters set by the state. To know and understand one state’s tax abatement program may offer little insight into any other state’s program.
The authors, in substantial detail, report their findings in regards to: processes for granting abatements, types of target areas, eligible property classes, variations on how the tax abatement is calculated, amounts of abatement allowed, durations, which taxing districts share in the abatement burden, varieties of administrative oversight and termination. The authors observe that commonly the features of the SAPTAP do not extend to other tax abatement programs within the state.
To lend some coherence to their findings, the authors present a four page three table summary, which also integrates findings by selected academic researchers deemed relevant by DMZ. If one is looking for information on the various SAPTAP tax abatement structures and designs, advantages, and disadvantages thereof, pp. 162-165 are for you. The authors indicate the data is available for use in program design.
At this point, we might try to be fair to traditional academic researchers. They are trying to find commonalities or common underlying dimensions. Contemporary social science research for the most part does not attempt to explain the unique or account for the distinctive. This detail is precisely what they do not want. How does one discover what is common to all tax abatement when it takes four pages of tables to summarize just one form of tax abatement. When social science researchers transplant economic research techniques (as many do), this detail becomes laughable, and is ignored. To a professional in the field, however, this detail is a treasure trove, essential for an intelligent design of a program.
To know and understand one state’s tax abatement program may offer little insight into any other state’s program.In their conclusion DMZ offer the following:
- Abatement programs are overly generous (supporting Bartik) in that states select in their designs and structures those features which are the most generous (tax break on pre-existing property, or personal property, for instance).
- Cost sharing by taxing districts not involved in the tax abatement decision can be a significant issue.
- Skeptical on the use of tax abatements for commercial property.
- Failure of states to fully recognize the importance of claw backs and target areas in their design of tax abatements.
- Design features can affect program generosity and should be selected by the program designers consciously to accomplish desired public purposes and local conditions at the least cost possible.
The Curmudgeon has abated his conclusion.
We hope the reader does not mind absorbing the costs of that decision. If they do, please turn to the section, “Behold the Pale Rider”.