Confessions of a Serial Tax Abater
Confessions of a Serial Tax Abater
A little over a year ago the Curmudgeon published a set of articles on tax abatement calling attention to the fact that he, during his career, was “a serial tax abater”. Aside from raising havoc with spell check, the articles did generate more than the usual reaction. So we have taken one of those articles (“The Ugly”) and significantly added to and reworked it.
Tax abatement in its very many forms is a very significant economic development tool. Frankly, nearly every jurisdiction, and certainly every state uses tax abatement to some degree and in some form. The trouble, however, seems to be that no one really likes tax abatement. All heck breaks loose when an economic developer actually uses it. Moreover, there is a large, verging on huge literature, ranging from academics to progressive think tanks that is uniformly critical of tax abatement, and have been so for decades. A chief criticism is that for one reason or another (generally for twenty reasons or another) they allege tax abatement just doesn’t work.
The problem, however, is, despite the “fact” if not the existential reality, that tax abatement is so very, very wrong, and never, never works, it’s critics generally acknowledge that the use of tax abatement is expanding each and every year since the 1960’s. How do we explain this multi-decade growth in tax abatement programs– programs which are so immoral and ineffective?
Well … economic developers must be either very, very dumb and/or the politicians for whom economic developers work must be so very, very short-sighted and probably, just parochial and self-serving. Evil, afterall, can be explained by incompetence and greed.
Is the Curmudgeon a little bitter? Is he being a bit too harsh? Is he over-stating and emotionalizing an important issue such as tax abatement? No doubt. The Curmudgeon is frequently a jerk! But there is a dilemma implanted in his wild opening remarks. If tax abatement is so wrong and ineffective, why is it growing so much, and for so many, many years. If economic developers are not simply stupid, or hacks, and tax abatement prone politicians not just parochial, self-serving and unintelligent, them why do we not only continue to use it, but in fact use it more? And why is there no substantial public or electoral reaction to its alleged misuse? The issue is visible through the local media. but voters don’t vote out mayors who abate taxes and mayors don’t fire economic developers who provide them. Why don’t state legislatures crack down? And why do states engage in ever more lucrative deals? Why is a tax abatement for green (solar) jobs and alternative energy firms desirable, but for manufacturing it is wrong and ineffective? Why? Why? Why?
Is there no middle ground? Could we entertain the thoughts, for just a very few minutes, that tax abatement is used more because it works, at least to some extent. Can it be that there is a grudging public “support” (toleration might be better) for its use? Can it be that while some of us see their use as immoral and ineffective, still others of us accept that tax abatement is one of the very few tools an economic developer (and politician) can use which actually can positively affect private sector decision-making?
The Curmudgeon is a self-confessed tax abater (by the way, there appears to be no consensus on how to spell this non word). In his career he has provided tax abatement to over a thousand firms–from General Motors to a supermarket in a brownfield. He made his mistakes and on occasion got it right. In the spirit of who else can better prevent computer hacking than a former hacker gone holy and noble, the Curmudgeon offers some ideas as to why the anti-tax abatement literature misses its mark and why the public, voter and tax payer doesn’t revolt, and why, heaven forbid, tax abatement can actually be effective.
Before we move along and present our arguments and thoughts we must observe that tax abatement comes in many forms and we are only going to talk about one of those forms in this article: property tax abatement. The other major types of tax abatement involve income tax (deductions, tax credits, exclusionary loopholes, reduced tax rates or some really cool definition of terms so that the firm’s accountant and auditor do not pay a tax. Income tax shenanigans are usually found at the state (and federal) level, so they would seem to be part and parcel of a state’s business climate strategy and accordingly we will discuss them in a future article. Instead in this issue we discuss LOCAL property tax abatement exclusively.
There are people out there who don’t want your tax abatement program to work! And you are not going to change their mind.
The rather basic and obvious starting point regarding property tax abatement is that no matter how an economic developer abates taxes, it will be controversial to someone. Controversy is best thought of as a natural and inevitable companion to tax abatement. Tax abatement creates winners and losers and crosses the ideological divides. Progressives and business conservatives scream at each other regarding tax abatement to firms preferred by one or the other’s ideology but rejected by the other’s. Both sides continuously provide tax abatement to the “right” firm compatible with their ideology although they both decry the concept of tax abatement. The unspoken truth is that academic and think tank literature really has no problem with tax abatement itself, except those abatements that it goes to firms they don’t think should get it. The problem is really the recipient of the abatement, not abatement.
There is no way we can bridge this chasm and the economic developer and politician had simply best recognize that for the most part, the immorality associated with tax abatement is ideology generated – and that the “evaluation” of that ineffective abatement is as much ideological-based as math driven. Ideology is not likely to go away…
So let’s move on.
Is Property Tax Abatement Important to Firm Site Location?
A second complaint questions whether or not private firms actually want and seek a tax abatement in the first place. This critique implies that economic developers hawk abatement to firms that not only don’t need them, but are not actively looking for them. In effect, we economic developers are just throwing tax dollars at firms for no real purpose other than to justify our sad existence. A frequent source of this critique often follows from one or another academic, site selector or trade association magazine survey which ask firms how important taxes are/were in their location decisions. These surveys dutifully report that firms rank tax abatement low in priority for firm location decisions. By extension, then, tax abatement becomes unnecessary.
A third attack against tax abatement observes that taxes are a very low percentage of a a firm’s cost of production – for instance, taxes are no where as costly as steel or labor in making a car. The costs of taxes are in comparison so low that firms should be indifferent to tax abatement . Taxes are an insignificant cost compared to production costs. This particular critique, however, is a bit of apples (cost of goods sold) to oranges (operating expenses). It betrays a poor understanding of business finance. The calculation of the true costs of taxes in many a think tank report is almost “back of the envelope” estimations which are uniformly applied to the fifty states and tax abatement in general. One frequent distortion found in these almost informal cost calculation ignores the variation among states in terms of their determination of what is property taxable and what is not. Projects vary wildy across states because different things are taxed at different rates by each of our fifty states. New York for example taxes manufacturing equipment but not personal property, and other states tax personal property but not manufacturing equipment. Little of this variation, and this is but the tip of the iceberg, is captured in these back of the envelope cost calculations. The practical effect of state and site variations in a site location decision are not even recognized, nevermind understood.
A variant of this “taxes are insignificant” critique is also levied against business climate strategies. In this instance is demonstrated that high cost, high tax states can effectively attract firms and enjoy economic growth. If so what’s the problem; high taxes don’t really impede economic growth. It is one more variant of the argument that taxes don’t really matter and so why abate them. Proponents of this view often assert that any taxes paid fund highly desired public services, infrastructure and enhance quality of life. President Obama recently got into a discussion involving this type of position.
But speaking as a professional economic developer whose career in several jurisdictions of New York, I hardly ever met a corporation who not asked me to reduce their taxes–they demanded it. If I refused to do so they were moving on down the road. Frequently, it was the local branch that pleaded for help against decisions made by their corporate “bean counting” headquarters. Opponents of tax abatement will be skeptical to the claims of a potentially mobile firm. It’s only a threat. But realistically how does this threat get “proven” or validated? Should we call “time out” and hire an academic to acquire the firm’s proprietary data. Skeptics, not understanding corporate accounting do not realize that firm costs do not break down costs based on location of component parts production. The only place the numbers can come from are the firm itself and it must reveal its nternal finance/budget numbers if a cost-benefit study is to occur? If a firm asks for a tax abatement, and one needs their internal numbers to justify it, you can bet your bottom dollar the numbers reported will justify the request for tax abatement. Threats from mobile firms cannot easily be assessed and evaluated. If the firm moves and you’re sitting in a classroom, it’s no big deal. If the same firm moves and you’re sitting in a mayor’s office, or your economic development office, it is a very big deal.
There are really serious practical obstacles which at which glib academics can throw ideologically laden comments and values. But these problems are very real when one has to make a decision. In real life ad hoc, request-specific cost-benefit studies are a ridiculous recommendation and a firm that leaves create families without jobs.
Anyway, the threat alone is usually enough to generate media articles, union, business community and employee pressure, and all sorts of email and letters to the editor. To question whether a firm’s threat is, in fact, sincere is valid but try to say as much to the newspaper reporter. See what happens if you do! The Curmudgeon will be the first to admit the threat is not always real – but to blame the economic developer, the who is the one being robbed, for the threat that the robber may use his gun is just wrong. The business firm has got the economic developer and the community over the barrel (there are a lot of mixed metaphors running around in this paragraph). Blame them!
The second answer to the critique that “taxes are low priority rests upon our squaring the circle caused by the previously-cited surveys of site selectors and firms that taxes rank low on their priority for site location?
The answer, I think, is that the firm location decision is a multi-level decision. Mobile firms are not indifferent as to where they want to go. Market, industry and company specific factors determine which parts of the globe and into which regions the firm should go if they are to sell products and services and make a high rate of return. Taxes do not figure prominently at that level. This is the macro element of a location decision. There is, however, a second level, the micro level, and this is the level economic developers enter the picture. The micro level decision involves selection of a specific site-a specific decision on a specific parcel of land in one community, but not another.
Within any given region there are lots and lots of specific sites–all more or less identical but each offering some combination of costs and benefits to the firm. A specific location for a firm can actually (and usually does) include a number of jurisdictions, each of which wants the firm to locate in its jurisdiction. Each jurisdiction can have sites which present their own strengths and weaknesses and which can result in costs and savings to the locating firm. Taxes matter at this level decision-making.
The site location decision is tax intensive; taxes differentiate sites and taxes are one of the few site location factors that can be changed by the jurisdiction itself. Communities do compete, neighboring communities compete intensely (as do real estate firms and landowners), and unilateral disarmament by any one community is not likely to generate tons of local support. Just saying “no” sounds great in a Hollywood movie, or in a lecture hall, but it doesn’t pay the grocery bills. And it doesn’t get you elected.
If you don’t want communities to compete in this way, go to the state legislature. They alone have the authority to stop sub-state tax competition (depending, of course, on the state constitution). The Curmudgeon dares an opponent of firm-specific tax abatement to try to get such a bill passed in a typical state legislature.
Also, firms and site selectors go out of their way to present the image, and often it is a reality, that other sites in other municipalities and states are competing. Why? To obtain as favorable a “deal” as possible. If firms (and their representatives the site selectors) don’t really want tax abatement, why do they go out of their way to set up deal-situations which require jurisdictions to compete, using whatever resources they have available. Why do they waste months of time, legal costs, public hearings, media and tax payer “input” for something so trivial as a tax abatement? Why do firms do this if they don’t value taxes very highly in their location decisions?
Taxes do matter in the struggle and competition among specific sites! Actions speak louder than surveys.
In any case, the reader should discern whether any survey distinguishes between the regional location decision and the site decision. Make the survey question specific to the sites of choice, rather than a general world-wide ordering of locational decision factors and the answer can change. Even if the answer doesn’t change, the firm’s behavior certainly does.
In his nearly twenty years of economic development, the Curmudgeon knows of few firms that just magically appeared in his jurisdiction and built their facility without first stopping by and saying “hi”. Many times there are specific problems and issues to solve, referrals to be made. But most times either the site selector is involved or the firm itself expects the community to be involved in his location decision. Involvement = tax abatement. Despite what survey’s say, and politically correct developers retort, the behavior of firms is clear. They expect and will not say no to a good tax abatement – it is part of the location decision package.
Despite what survey’s say, and politically correct developers retort, the behavior of firms is clear. They expect and will not say no to a good tax abatement – it is part of the location decision package.
Tax abatement seems to matter at least when it comes to the final decision in the site location process.
Not everybody on the Home Team wants you to use tax abatement.
So, property tax abatement is a very logical, almost sensible tool to manipulate jurisdictional economic growth and private firm behavior. The pervasiveness of property tax abatement makes it a part of the fabric of expectations a firm expects when it is dealing with the public sector. Yet, if firms expect some degree of jurisdictional cost-sharing in their locational decisions, there is no law which requires the community or the jurisdiction to like it. After all my tax abatement is an increase in your taxes. One may put up with a tax abatement to someone else if you think it’s necessary for the greatest good, but, fess up, you don’t like it and you are usually quick to watch that tax abatement is not abused. You can also be sure that your definition of the “greatest good” is as narrow as you can make it. The economic developer is in the middle of all this.
The economic developer has to justify to the community her decision to provide tax abatement–and that is easier said than done. Some folks in the community are just never predisposed to agree to a tax abatement for somebody else.
So tax abatement has a natural Luke Skywalker – Darth Vader schizoid dual nature. But how this dual nature actually plays out in our communities and jurisdictions is a bit convoluted and often creates some bewilderment among economic developers in the field. Part of the convoluted controversy of local property tax abatement arises from the mechanics of taxing and tax abatement and the different reactions of segments in the community to these mechanics. The two drivers which together determine the actual tax for any firm in a given year are, of course, tax rate and assessment value (which includes the percentage of market value that will be taxed). There is also a more or less silent third driver whose effects are seldom appreciated: the proportion of taxes to be raised by each class of property: residential and commercial/industrial will be the most relevant for our review, but other classes of property can be stipulated.
Economic developers abate the taxes of commercial and industrial firms. Unless the community decides to adjust the ratio among classes of properties (which is not typical and may not be within the power of the jurisdiction) economic development tax abatement would not figure in the internal calculations of residential taxes. Residents, therefore, would not feel any direct impact on tax abatements to firms other than invisible revenues not available to support services they desire. The media seldom appreciate this distinction and many residents don’t either. They still show up at the public hearings; but they also still apply for veterans, homestead abatement and manage to deduct their property taxes and mortgage interest payments from their income taxes which have more direct impacts on their residential taxes.
If there is to be a residential reaction to tax abatement, the reaction would be to demand services the municipality can’t afford because of forgone revenues. The link between residential demand for any service enhancement and tax abatement, however logical, is far from obvious for most residents and, given that residents divide themselves in their demand for services desired, no great revolution or riots by residential tax payers generally result from an economic development tax abatement. So, as far as residential tax payers are concerned, they largely see economic development tax abatement as an ideological or a job creation/retention issue–or don’t read the newspaper article reporting on the tax abatement in the first place–unless their school district bitches and that changes the complete picture.
The schools are a frequent connection between economic development tax abatement and residential unrest.
The schools are a frequent connection between economic development tax abatement and residential unrest. Schools have central finance and budget bureaucrats and these folks have a vested interest in keeping tabs on tax abatement. In their quest for every dime and quarter ever minted, school officials see the link between tax abatement and revenues for future services. The gap they foresee is in the commercial and industrial property class, but approaching the problem from that angle is silly. Instead, school officials mobilize residential tax payers. School officials have access to the media for issue awareness and the PTA to provide them bodies at public hearings. So residential tax payers who are indirectly hurt by future lost revenues rise up to demand adjustments in the commercial property class.
Opposition by school districts can be formidable and it raises the issue whether a taxing district’s taxes can be abated without consent of the school taxing district. It is now time for economic developers to squirm a bit.
But the burden of tax abatement would seemingly fall most directly on existing firms in the form of increases in tax rates or decline in assessment values. This creates a potential problem to which most economic developers appear unaware or insensitive. Economic development tax abatement could over time result in a serious impairment of the local business climate and exert a negative impact on their business retention programs.
Ok, but this raises the question as to why existing business firms infrequently publically voice their objections to tax abatement? Existing firms bear the brunt of any future cost from economic development tax abatement in the form of lowered assessments and correspondingly increased tax rates?
First, existing firms do complain but seldom publicly! Competitors or firms in the industry sector are the most likely to bitch. Try giving a tax abatement to a hotel? Or to a pizza palace. Small business and retail businesses, usually ineligible for most (but not all) forms of economic development tax abatement. Often such firms are the prime recipients of economic development zone-distressed area abatement programs which are surprisingly non controversial because “distressed areas” are politically correct. But office parks and malls contain these despised firms and they can often receive tax abatement. Despite the logic of their complaints and concerns, however, competitor complaints are often dismissed or devalued because of their obvious self- interest. Self-interested competitors are perceived as merely jealous and would take any tax abatement themselves if offered.
Secondly, many firms see a future opportunity for their firms in a tax abatement or they are suppliers, contractors, or just friends of the tax abatement recipient. These folks are reluctant to attack a fellow business who was bright enough to connive an abatement. So the competitor’s task mutates into the quest to figure out how they too can qualify for an abatement. And that’s how tax abatement becomes a component of a community’s business retention program. Tax abatement, it appears, is the gift that keeps on giving.
As for the taxing jurisdictions themselves? Again, the impact on the jurisdiction plays out in the future. Not this year’s budget. The present level of taxes is not affected, but, to be sure, the future increase in taxes is! To realistically understand the future impact of tax abatement, however, would seem to require the jurisdiction to amass figures for the cumulative loss of all similar tax abatement because with few instances excepting, the effects of any one tax abatement would not be significant. So the municipality must count future dollars it does not receive for all tax abatements and to arrive at final numbers it must make assumptions on costs and future assessments and tax rates. These are dangerous numbers to leave in a desk draw, filing cabinet or the computer server.
Any guestimation of higher future tax rates and assessments is not likely to be well-received by any segment of the community if they were aware of them and maybe it is better that they are not known or available to a FOIL request. On top of all this, the municipal bureaucracy which does all this (and their auditor presumably) number-crunching has little reason to embarrass their bosses. the chief elected officials who authorized the tax abatement in the first place. So…. most communities don’t keep track of the future cost of tax abatements. To be honest, nobody in the system really knows what the costs are. Unless one intends to stop making tax abatements, there is no need to have them around. The dark side of the force is very powerful.
What about the economic development agency itself. Does it keep track. Usually we track compliance and jobs promised. Jobs promised and compliance mean annual job surveys (with potential for claw backs). Annual job surveys are a minefield which always, always explodes in the face of the EDO.
Economic developers often keep their own numbers. Usually these numbers measure jobs created-retained and not taxes foregone. The obvious intent is to demonstrate the worth of the tax abatement to the community. The holes which most EDO annual job surveys contain are so wide a Boeing 747 could land on them. Annual job surveys are a minefield which always, always explodes in the face of the EDO. First, how one counts jobs is always subject to attack by someone. Privacy, the definition of a job to be counted, and the impact of time render the process a nightmare. Reporting such numbers are never a high priority for a firm and even if required, the firm usually has to be hounded and its methodology often defies description and audit–and embarrassingly they still often report fewer jobs than at time of original tax abatement. The threat of claw back only makes things worse.
Then the media get’s hold of the company specific annual jobs survey and the article(s) always focus on those firms which report deficiencies–not the 95% that grow jobs. Headline writers have a field day with large corporations that, for whatever reason, report lowered job counts. Let’s not even mention the impact of the normal business cycle on firm job counts. Companies love this wonderful media attention (can’t you recognize sarcasm when you read it?) and the lesson’s learned from it will play out in next year’s survey. The Curmudgeon could go on and on with annual job surveys. Their absence is a chief motivator for his retirement. There’s got to be a better way to measure benefits from tax abatement. I just don’t know what it is!
The Up To Now Futile Efforts of Academics to Understand Why Communities Provide Tax Abatement
Now it’s time to discuss the measurement issues associated with tax abatement.
Two very simple questions basic to understanding and evaluating tax abatement would be (1) does it work? and (2) which jurisdictions use tax abatement more than others and why? For answers, one would assume one could turn to one’s local academic community and think tanks. Not so.
First, Think tanks. Think tanks can be dangerous. One must be sensitive as to who pays their bills. Think Tanks are seldom truly neutral researchers. They are policy-driven institutions and policy usually goes hand in hand with ideology and/or the policies preferred by those who pay their bills. Think tanks will not respond to your request for assistance (unless you pay them, of course) and if they do they will conduct their own research and job counts–using their own methodology, time periods and job definitions. If they are studying the topic on their own ticket, it usually isn’t good news for an economic developer. Think tanks focus on exposing problems and devising policy solutions to those problems. That is not a helpful focus for an economic developer. Better give think tanks a wide berth and be out of town, if not the galaxy, when they release their report.
If Think Tanks are studying the tax abatement, it usually isn’t good news for an economic developer because think tanks focus on exposing problems and devising policy solutions corresponding to their ideology to those problems they discover. Usually that is not a helpful focus for an economic developer.
Next to be considered is academic literature which, on the subject of tax abatement, usually arises from the political science or public policy disciplines.
Academics, on the whole, have largely punted in their research on tax abatement. Why? Property tax abatement and its effects has been almost impossible to consistently measure. There are good reasons for this–and there are bad. First, the good reasons. Academics have tried but have NOT yet found an acceptable methodological approach capable of yielding real understanding as to why communities provide tax abatement or even which communities provide more or less abatement. On the contrary, over decades of attempts by maybe a hundred different researchers there has yet to emerge any consistent pattern. It is not unfair to suggest that this research has yielded a cacophony of findings, findings that often contradict each other.
Over decades no consistent, replicable pattern or basic approach to studying property and sales tax abatement has achieved consensus within a discipline. The lack of consensus does not mean that every month of the year, and twice in October, one researcher or another will report some finding, which in the usual course of events will not be supportive of tax abatement. That no really consistent pattern, methodology, or baseline estimates exist has not inhibited academics from picking and choosing articles and reviews which serve their general purposes and imply to these articles a consensus, a compatible methodology and a firmness which does not really exist. If one actually reads many of these articles, instead of merely quoting and citing them, they are apples to oranges, and in important ways incompatible.
Reputable researchers themselves recognize the limitations of their findings and the standard line at the conclusion of their research is that more research is needed in order to really answer the research question under investigation. Let’s take a quick look at some of the best academic tax abatement research (by my definition, of course) and see how it fares and see what issues such research exposes. Subsequent researchers, however, can be another matter. From time to time researcher have reviewed the literature and have offered insights into its strengths and weaknesses. For the next few paragraphs we will present a few solid insights gleaned from the literature.
Laura Reese, a first rate political scientist in an ancient article published in 1991 (“Municipal fiscal health and tax abatement policy: EDQ, Vol 5, pp. 23-32), reported that tax abatement in Michigan is positively correlated to median income– i.e. wealthy communities do more tax abating than less wealthy communities. Specifically her finding was that the total amount of tax dollars abated to firms is higher in wealthy communities than in poorer communities. Dr. Reese’s explanation was that wealthy communities can afford to abate more than poorer communities. So poorer communities tax abate less!
This finding was reviewed in Harold Wolman and David Spitzley,”The Politics of Local Economic Development” (EDQ, Vol 10, May 1996, pp 115-150, p. 127). They report that Reese’s measurement breaks down because a tax abatement in a wealthy community invariably given higher land costs are more costly than a poorer community, ie the tax abated is higher in a wealthy community than a poorer community and the difference has nothing to do with the costs to the poorer community. Simply, the same rate of tax abatement exists in both wealthy and poor communities, but because of land costs the dollar value of the abatement is higher in wealthy communities. So Wolman and Spitzley reject Reese’s finding.
Well , … the Curmudgeon chips into this “he said, she said” debate by adding that tax rates in the poorer communities may stress their populations more than tax rates in richer communities and while the aggregated tax dollars may be higher in richer communities, the stress induced by the tax abatement is more intense in the poorer community. Now which of these is correct?
All of us are technically correct, but which is really, really correct? Depends! And this is the point. The indicators and their interpretation do not yield consistent findings. Indeed, they invite conflicting interpretation. Instead of increasing our understanding of abatements and their variation among communities, research actually increases confusion and perpetuates cumulative misunderstanding as future researchers base their future studies on the conclusions and findings of past inconsistent studies.
To be fair, Wolman & Spitzley spend a pretty good chunk of their article trying to deal (cope with would be a better verb) with the different definitions and methodologies found in the pre-1996 literature associated with measuring economic development and economic development tools such as tax abatement. Wolman & Spitzley cite researchers who use indicators which don’t vaguely relate to the goals of the economic development program or simply make the argument that an indicator, however imperfect, is the best available. All produce faulty research and flawed findings. Also Wolman & Spitzley observe the impact of differing methodologies studying the identical phenomena and reporting differing conclusions. The end result is that no one is sure about anything.
In particular, Wolman & Spitzley call attention to one study of tax abatement, which using the identical indicator (per capita income) as a second study, arrives at a conflicting conclusions; the same indicator produced opposite conclusions. Why? The first study (Feiock and Clingermayer (1992) reported “statistically significant bivariate relationships”, while the second (Cable, Feiock & Kim, 1993) reported “statistically significant multivariate relationships”. Yes, the Feiock in both studies is the same guy (what a difference a year makes). [by the way Richard Feiock is one of the very best economic development researchers around–the issue is methodology. Different methodologies result in different findings].
Explain all this in your next interview with a TV or newspaper reporter. Or better still, toss it out in your presentation at your next public hearing or legislative caucus.
Things get a little wilder. Reese (the same Laura Reese as above) and Malmer (1994) arrive at the obvious conclusion that if a community is to use tax abatement in the first place, the state constitution has to permit its existence. This finding is so obvious, you would think that future researchers would automatically incorporate that most basic level conclusion into their methodologies? Not at all, it has been largely ignored by most studies which followed her research.
The Curmudgeon, after reviewing a fairly large number of studies, did not find one which either cited Reese’s article or made any adjustment in their cost-benefit analysis, estimates, or assumptions to reflect whether or not all states offered tax abatement, or even whether tax abatement was allowed at all. The normal methodology just makes an assumption, a calculation, an estimate and automatically extends it to all states. The findings, costs, estimates and benefits flow ever onward divorced from the simpliest of realities. And these faulty estimates are usually accepted without question by subsequent researchers. After all, the numbers are, what the numbers are. Faulty numbers and estimates have a half life greater than uranium in the academic literature.
The problem is that academic researchers either try to explain too much using aggregate data or the reader of such research too often applies-extends the finding without proof beyond the scope of the original research.
Another common problem is that academic researchers either try to explain too much using aggregate data or the reader of such research too often applies-extends the finding without proof beyond the scope of the original research. For instance, to lend support to the idea that what is really behind the use of tax abatement is politics, Reese (1991) reports a “significant negative relationship between a mayor’s margin of (electoral) victory and the value (total amount) of total abatement granted.
In English that means the closer the election, the more a mayor is inclined to use tax abatement, presumably to either appeal to the electorate or to avoid the perception he/she is firmly addressing the economic development needs of the community. (P128 W&S). Interesting, the Curmudgeon agrees that politics is key to understanding tax abatements and their use, but the Curmudgeon also wonders if this applies to city managers? Or County Executives?
The reader may think the Curmudgeon silly for making these distinctions, but, the reader should realize that a finding regarding one form of government should not be extended without proof to other forms of government, or to other levels of government. It is not common sense to automatically extend one research finding to other related phenomena; it must be proven first. The simple projection of a narrow finding derived from one form of government to all forms of government at all levels of government is commonplace in academic research on tax abatement. Any finding on one type of tax abatement automatically extends to all forms of tax abatement in every state. Indeed, findings applicable to tax abatement are extended to loans and grants. Hey, its all related isn’t it?
So much for the good reasons why academics have not been able to provide understanding of tax abatement–now onto the ugliest example of a research methodology which is constantly abused, distorted and turned into an ideological weapon: cost-benefit analysis.
a Curmudgeon Tangent-Blather on Cost-Benefit Analysis.
A goodly number of academics have employed a specific methodology to the issue of tax abatement. That methodology is cost-benefit analysis. This is bad because in the opinion of the Curmudgeon the cost-benefit methodology has been used as nothing less than a weapon in their ideological wars.
On a good day the cost-benefit methodology is horribly complex and imperfect. Cost-benefit analysis is usually rescued from a well-deserved oblivion largely because we have nothing better to replace it with (dangling participle). Cost-benefit analysis provides answers to questions we need to have answers for (another dangling participle). But, unfortunately, the methodology allows us to set up the answer to reflect the conclusions we want. It is this last problem that has bedeviled academics and tax abatement.
The critical problem of tax abatement (and cost-benefit analysis) is that it is relatively easy (until you actually do it, of course) to count costs, and it is damned near impossible to measure the benefits.
The critical problem of tax abatement (and cost-benefit analysis) is that it is relatively easy (until you actually do it, of course) to count costs, and it is damned near impossible to measure the benefits. In short, we are going to argue that a central problem underlying tax abatement is that knowing if it works is in essence UNKNOWABLE. Future benefits are known only in hindsight, and certainly unmeasurable in the present day. The future is calculated by means of rates and assumptions which provide ample opportunity for considerable distortion and outright manipulation–even if, sort of, unintended. Cost-benefit analysis is frought with danger when applied to tax abatement.
There is another huge problem with cost-benefit analysis. We have to agree on the goal-the underlying purpose of what it is we are to study. The goal determines which criteria we shall select with which to judge whether the activity works or not. If we do not agree on the goals, we are not likely to agree on the measurement criteria. And what if there are multiple goals (reasons we use tax abatement)? Sorry can’t do multiple goals. Choose one!
There is no real agreement as to why we use tax abatement. Worse, tax abatement comes in so many forms, each with their own set of alleged goals.What is it we are supposed to get out of a successful tax abatement to a firm: jobs? Ok , jobs! For whom–the poor and/minorities, the unemployed (both of which might not pay a lot of taxes), residents of the community, good paying, living wage jobs, high tech jobs to keep your kid in town after college graduation. Or if it’s not jobs is it more taxes for the tax base, revitalize the local economy, avoid further population decline, grow a new industry or cluster, rebuild a deteriorated building or redevelop an old now vacant brownfield, diversify your economic base? All of the above? Some of the above? The simple, uncomplicated reality is that someone in your community believes your tax abatement should be accomplishing one or some combination of the above. That’s what “letters to the editor” are for! How can cost-benefit analysis accommodate all these goals? Simple, assume just one goal and move on!
Or the academics can assume the root cause of tax abatement is crass politics and self interest. The best, most cynical, answer is political, the politician and bureaucrat gets to claim success and the former gets reelected and the latter gets to keep her paycheck. Maybe, the private campaign contributors talked the chief elected (devil made me do it, kind of argument) into it (with support of relevant labor union of course)? Somewhere in your community you can finds groups of people that believe each of these things to be true?
So cost-benefit analysis breaks down badly when you can’t define (1) what goal it is you seek to measure, (2) cannot agree on criteria (an measurable indicator) which is actually related to the goal to be measured, and (3) cannot find a consensus on what methodology to use to determine costs and benefits. It doesn’t help that benefits are not known until some time in the future (upon hindsight one may suggest) and that tax abatement programs seek to achieve multiple goals.
But one more final problem with academic research. Many academics hate tax abatement programs so much they have lost their ability to differentiate the many varieties and purposes of these programs in our states and communities. So, they put together databases containing all sorts of abatement programs, incentives and whatever else the cat left in the litter box. States or sets of communities are chosen usually because they are near home or eureka, an easy, already assembled database was found. Toss into the mix SPSS and correlation statistics and the article writes itself.
But unless we know what is in the database an r squared is essentially meaningless because we don’t really know why it’s all statistically significant. So we are free to attach our own reasons. Research on tax abatement must distinguish among the various types of tax abatement, their differing recipients, their varying goals. Composite or aggregate databases usually include all sorts of programs providing all sorts of benefits, from several levels of government, to different recipients, with different terms and conditions, for different purposes and impose varying restrictions. To arrive at a finding that reflects any one of these elements is very unlikely.
All the nitty gritty of understanding the variations and the conflicts within an aggregated database is, well, …., like, …. work to many an academic. To figure out if each of the individual pieces of data mean, what they are supposed to mean for each of the hundreds of cities in the databases, isn’t going to happen. The numbers are, what the numbers are. In their effort to be scientific, researchers must compare among a mass of municipalities in order to discern statistical associations and correlations–which for them gets an article published. A composite database is essential to the endeavor. A composite database, however, is full of contradictory apples, oranges, and pears which often defy any attempt at analysis.
So, please don’t use cost-benefit analysis and aggregate databases to evaluate tax abatement! One way or another the conclusion arrived at was usually predetermined.
But that hasn’t stopped anybody.
That cost-benefit doesn’t really work has not inhibited its use by a horde of academics. For them, cost-benefit is not a methodology–it is a weapon. A weapon to be wielded against the evil-weevils of the world: American capitalism and their hack supporters, economic developers.
So let’s see this weapon and how it is used.
Let’s Apply Our Observations to Specific Academic Research
So let’s select an academic article and see how it fits into our critique. [OMG! I must be the Wizard of Oz because I see a straw man coming down the yellow-brick road?]
Alan Peters & Peter Fisher’s, The Failures of Economic Development Incentives”, Journal of the American Planning Association, Vol.70, No 1, Winter 2004. Both Peters and Fisher (Graduate Program in Urban & Regional Planning, University of Iowa) have a distinguished record of relevant publications in the matter of incentive evaluation (co-authored, State Enterprise Zone Programs: Have They Worked?, W. E. Upjohn Institute Press, 2002) and Industrial Incentives: Competition Among American States and Cities, (W.E. Upjohn Press, 1998). Both authors should be considered experts and specialists in the area of tax abutments and economic development incentives.
In this article any reader ought to know pretty quickly where the authors stand on tax abatement and incentives. If the title does not suggest a predetermined conclusion, the opening paragraph sets the tone:
The provision of business incentives…, one of the mainstays of economic development policy…has been the target of the most intense criticism. Indeed, there are many prominent critics who believe that virtually all incentive programs should be banned. Nevertheless, indications are that spending on incentives has continued to expand. (P.27)
(By the way, this review started with much the same observations: tax abatement are pervasive and no one likes them–Oops! The Curmudgeon)
For Peters and Fisher (P&F) the “fundamental, yet unresolved question” regarding tax abatement/incentives is whether they “are a cost effective strategy for achieving economic growth” (P.27). Taken at their face value, the reader would think the issue at hand is whether relative to the benefits of tax abatement and incentives, are the costs excessive or not? The answer would seem require a cost-benefit analysis. This is only partially correct however.
To answer their overarching question, P&F construct the following evaluative criteria:
- Do incentives cause states and localities to grow more than they would have without incentives?
- Is the growth generated providing net gains to the poorer communities or poorer people or is it zero sum?
- How costly are incentives relative to other alternative economic development policies?
Each of the above “criteria” or question may be fine and wonderful, and deserve to be answered. But the reader could probably think of other “questions” as well. And … are these evaluative criteria for a cost-benefit study OR normative questions framed into the language of evaluative criteria. A safe and reasonable answer is “maybe” but it would seem each criteria or question requires it’s own individual cost-benefit analysis. That, however, is not to be.
In any case, the small matter as to whether all, or any, of the individual incentive/tax abatement programs was intended, for instance to create jobs more for poorer folk than more affluent people, is ignored. A tax abatement program might be trying to create manufacturing jobs, for instance, and be silent on who acquires such jobs. The possibility that we are judging, excuse me “evaluating”, these programs by substituting our “better” goals for the program’s “inferior” goals might be mentioned, but it is not.
But let’s move on. We have more fish to fry. The incentives included in P&F’s database are: property and sales tax abatement, and tax credits, tax increment financing, corporate income tax exemptions and credits, grants, public loans and loan guarantees. The key concept for inclusion as an incentive is that the benefits go to a business, not a worker or work seeker. P&F then estimate, that the total cost of this basket of incentives was $50 billion in 2002. That $50 billion will serve as the benchmark from which they will derive their conclusions.
Any economic developer worth their salt understands this is a real basket of “stuff”. Some individual programs are likely to be Federal, others State or local. TIF (which varies noticeably state by state) is it’s own can of worms. Loans (some of which presumably gets paid back) and guarantees which are paid out for any outstanding balance only if the loan defaults are not tax abatement at all. What P&F are really measuring are a selected basket of economic development program obligations for 2002–not tax abatements. They are linking incentives with tax abatement and not differentiating between the two. Tax abatement could be very cost effective, TIF less so, and incentives not at all. We will never know, however, because this is one big mulligan stew.
Can individual programs, designed in various ways, intended for different clients for all sorts of purposes/goals be simply collapsed into a one size fits all category called incentives?
Lumping all forms of incentive (especially grants and loans) into a large amorphous package labeled “Incentives” implies more coherence and internal logic than could possibly exist. All these forms of “monetary” incentives can be quite dissimilar not only in structure and eligibility, but also in purpose. Usually, since these programs are set up by each state, one should expect a considerable diversity of programs for specific purposes and clienteles, each operating in vastly dissimilar geographies and economies. Some may actually be justified in a decent cost/benefit analysis, but are doomed in this methodology to be lost in a mass of irrelevant data.
Somehow all this basket of programs comes out to a $50 billion dollar cost. How you ask? It seems another study (whose methodology is not provided or discussed) arrived at a $48.8 billion number in 1996. P&F updated this 1996 study in 2002 “using a variety of methods (unspecified) and using a conservative (?) definition of economic development (unspecified), we estimate a likely top-end annual state and local number of around $50 billion” (P.28). By the way, the reader should infer that P&F are estimating the total 2002 state and local incentive costs nationally.
Cost/Benefit Analysis: Whose Side is It On?
The Curmudgeon would never say this, but the methodology, despite a its numbers,arithmetic, and occasional statistics, might be labeled by someone more irresponsible than he, as little more than “a back of the envelope” calculation (P&F would certainly disagree with this phrasing). And, since $50 billion would seem a lot of money in 2002 (not so today, we throw around trillions nowadays) one might wonder (again, not the Curmudgeon) that a number like this, reached on good faith and trust, might be a bit high and set the bar so high the final results are … perhaps … predetermined?
Finally, there is no thought that the individual programs themselves could actually be built around their own terms and conditions, eligibility, duration, and, as alluded to earlier purposes or goals. Not to worry, an incentive is an incentive is an incentive-they all somehow average out. The thought that these programs could not only overlap, but actually conflict with each other, and that the variation among states and communities (remember Reese above) could enter into the cost calculations (and benefit, of course) is nowhere to be found. The Curmudgeon believes, fallacy of composition notwithstanding, that while the basket of “stuff” as a whole may not prove “cost effective”, that finding of not being cost effective could not automatically be applied to any individual program within the basket. Rather, it can only suggest that as a whole, they did not achieve financial break even. Each individual program is automatically tarred with the inevitable research conclusion, however.
The astute reader (astute being defined as a reader that agrees with the Curmudgeon) might realize that previous to any of these three “criteria” or questions being answered or in any way addressed that the cost-benefit analysis that is to follow will arrive at a conclusion not too favorable to incentives and tax abatement.
Yet we do know that in order to arrive at cost/benefit’s monetary/mathematical conclusions, any researcher must make assumptions (interest rates, discount rates, rates of growth, etc.) and must also calculate future costs and benefits, all of which is obviously a risky enterprise in and of itself. Given our earlier observation (non-neutrality) one might be wary as to how objective and fair these assumptions utilized may be and whether or not they are fully disclosed. In any case, culling from literature P&F select several and in effect incorporate the findings of these selected studies as the basis of their assumptions employed in this article’s cost/benefit calculations. I must say that while reading this article’s literature/assumption section, several very loud warning bells rang in the ever beclouded brain of the Curmudgeon.
In Any Case, Let’s Cease this opinionated blather and resume the P&F review
As stated earlier, P&F posit three questions which would serve as criteria for determining whether or not the incentives/abatement are cost effective.
These three questions or criteria are themselves culled from P&F’s “meta-review” (“a review of the reviews”) of pertinent literature they deem relevant to the topic. This meta-review works well enough, they feel, for the first question, but bogs down for the second question, and collapses completely for the third question (P.29). So their research method for discerning their three criteria has to be considered sketchy at best. But not to worry (again), P&F will instead of meta-review for the second and third questions, the authors will “focus on broader theoretical arguments and again some of our own recent findings, some previously published and some not.”(P.29) Say it in the Curmudgeon’s language “these criteria are what we think is important”!
In regards to the first question (do incentives create jobs or investment), P&F, after the better part of three pages of often conflicting conclusions, finally wind up questioning the utility of their own database. types of incentives, and methodologies of various studies they have selected and, with frustration, arrive at the following conclusion:
The upshot of all this is that on this most basic question of all – whether incentives induce significant new investment or jobs – we simply do not know the answer. Since these programs probably cost about $40-$50 billion a year, one would expect some clear and undisputed evidence of their success. This is not the case. In fact, there are very good reasons – theoretical, empirical and practical – to believe that economic development incentives have little or no impact on firm location and investment decisions. (P.32)
This paragraph in the Curmudgeon’s language is a mere assertion to the true believers reading this article. P&F are in effect saying “Incentives and abatement are just wrong and while we not satisfied with the evidence that proves it’s wrong, we all know it’s wrong all the same”! “So let’s move on”.
This paragraph in the Curmudgeon’s language is a mere assertion to the true believers reading this article. P&F are in effect saying “Incentives and abatement are just wrong! Although we could not uncover any proof or support for our position, we all know our position is correct. You, the reader, know it. So let’s go on”.
The above quote is so outrageous it deserves to be said again so the reader fully appreciates that P&F could not find sufficient support in the literature to justify their hypothesis.
In the Curmudgeon’s words, P&F’s conclusion regarding the first criteria translates into: “we could not find conclusive evidence that such incentives are effective or ineffective. While we selected the literature ourselves and constructed the benchmark ourselves, we still could not arrive at a conclusion. But not to worry, we really all know that since our finding is inconclusive, this in fact proves our case. The inconclusiveness of our finding is in fact a condemnation of incentives because if incentives were actually successful and effective, our literature review would have been conclusive. It was not. So therefore, the literature indicates incentives are not effective in job and investment creation, but also ineffective for a new, additional factor that we have not discussed at all but we toss in arbitrarily at this point: firm location.”
[EDITOR injects: that by this point in the article $50 billion annual cost is treated as a fact, not an almost informal estimate, and also notice a twenty per cent range in the $50B is injected for no apparent reason.]
A good summary of this line of reasoning, we might suggest, is that incentives and abatement are just wrong! We know it, you know it – who really needs proof.
Moving on to the remaining questions, perhaps surprisingly, the literature reviews which the researchers compile conclude similarly as they did for the first question: “The empirical literature on these questions is fairly skimpy” and “the results have been mixed”(P.32). Their conclusion regarding the second question (is growth targeted to poorer people or geographies?), for instance, is particularly cumbersome:
Let us summarize our argument so far. In most states some portion of a state’s economic development funding will be targeted at distressed areas; some (small) portion of that funding may actually be effective in inducing investment and jobs in those areas; some fraction, and probably not a large one, of those induced jobs (if there are any) will actually go to residents of that area; and some of those newly employed residents may actually be the poor or unemployed we were trying to help. And even this doubtful level of policy effectiveness may be difficult to sustain. (P.34)
What can the reader take away from that summary/conclusion just presented? We are not sure, but somehow it supports their final observations contained in their conclusion presented below:
On the three major questions – Do economic development incentives create new jobs? Are those jobs taken by targeted populations in targeted places? Are incentives, at worst, only moderately revenue negative? – traditional economic development incentives do not fare well. It is possible that incentives do induce significant new growth, that the beneficiaries of that growth are mainly those who have the greatest difficulty in the labor market, and that both states and local governments benefit fiscally from that growth. But after decades of policy experimentation and literally hundreds of scholarly studies, none of these claims is clearly substantiated. Indeed, as we have argued in this article, there is a good chance that all of these claims are false … It seems to us that there is a need for a radical transformation of policy ideas on how we achieve local economic growth. (P.35)
We couldn’t have said it better. Incentives provided to business are wrong and we ought to stop them immediately, even if we can’t provide conclusive evidence.
More of the Same: Just Different
The P&F article is both characteristics of much of the academic literature on tax abatement, and is regarded by many as one of the more important review of tax abatement literature. The reader is urged to review and read (reread) P&F for themselves and make their own judgment as to the accuracy of our comments.
Anyway, let’s wrap all this up. How can we summarize this longer than usual review? First, our starting point is that property tax abatement can work. It can achieve its desired ends–if we could only agree consensually what those desired ends are. We don’t usually agree so property tax abatement is roundly criticized. Nevertheless, it is our belief that property tax abatement is not only widely believed to be pervasive, and growing in use, precisely because those who actually abate the taxes believe it works and that it achieves their end purposes. Some of the user end purposes are noble, and others are not. To be a serial tax abater one is usually both saint and sinner simultaneously.
Whatever the purposes of those who provide the tax abatement and those who receive them, it is also clear that property tax abatement is a tool which invites controversy and even outrage. Property tax abatement is, at its core, redistributive. It creates winners and losers and losers don’t like to lose, and winners are ingrates. What is more property tax abatement crosses a Grand Canyon-like ideological chasm (as we see in P&F) and into this chasm, the serial tax abater, much like Wiley Coyote, plummets inevitably to the bottom. There is no escaping the plummet. Controversy is built into this economic development tool, and that is why the economic developer gets paid the big bucks. So, you economic developers who use property tax abatement (or really any form of tax abatement), stop your whining. And above all, forget about this cost-benefit stuff.
As to the ideological chasm. Both sides of the canyon will use tax abatement if the recipient is “ideologically correct”. The real issue in the ideological wars is who gets the tax abatement–not tax abatement as a legitimate economic development tool. The critic who attacks a tax abatement to a specific firm that is lured into your community will be the first to provide tax abatement to start a cluster or augment an existing one. A property tax abatement for a headquarters office building will be soundly attacked, but a tax abatement for green jobs, life sciences, eds and meds expansion, or alternative energy will be applauded. Don’t expect logic and consistency. An economic developer is not paid to be naive. She is paid to be brave. She is paid to make decisions in which she is both sinner and saint. You do your best and move on.
The best thing that can be said about cost-benefit studies concerning property tax abatement is that if done right it can only be done in hindsight. The choice in the setting of “assumptions” so essential to cost-benefit are unknown when the property tax abatement is made. Requiring cost-benefit assessment previous to a decision is to invite abuse. The goals associated with property tax abatement are many, and there is, as stated above, no community-wide consensus as to what they should be. Future consequences and benefits (and costs) are fictional guesses no matter how elaborate or sophisticated the methodology. Cost-benefit studies are a weapon whose conclusions, at least in the property tax abatement arena, are predetermined. Play that game, use that weapon at your own risk.
Those who would employ property tax abatement should recognize they are in for a fight from the start. Know what it is you seek to achieve and make it clear. If you can’t tell the truth why you are providing an abatement, then probably it shouldn’t be done. The effects, or the proof that your decision is/was correct will usually be murky and will last for only a short to an intermediate time period. Property tax abatement are not a forever thing. Times change and firms grow and lose jobs as one moves from one business cycle to another. Be wary of trying to accomplish too much with any specific tax abatement. If you use a tax abatement to keep a firm from moving, don’t require it to create “green” or “living wage” or “jobs for residents only” on top of your original purpose. Keep it simple, as few moving parts as possible. Social agendas on top of job creation is a recipe for failure–even if you succeed in one goal, the non-attainment of others will justify criticism.
The thing is–property tax abatement can work. Just don’t expect applause. And don’t expect any success you achieve by means of tax abatement to be long-lasting. It will work for awhile, but in a world of what have you done for me lately, don’t be surprised if things change.