Executive Summary

Lessons from the Past for Urban Policy in the Era of Trump

The stunning election of Donald Trump as president throws the future of urban policy into doubt. During the campaign he promised to bring new jobs and improved infrastructure to the inner cities, but so far he has furnished no details. Some of the strategies carried out by cities and states in the past may offer the incoming administration some guidance.



Confessions of a Serial Tax Abater

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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 and 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 (not the only one by any means) is that for one reason or another they allege tax abatement just doesn't work. The problem, however, is despite the "facts" that tax abatement is so very, very wrong, and never, never works, it's critics generally acknowledge that tax abatement's use is expanding each and every year since the 1960's. How do we explain the multi-decade increase of tax abatement programs which are immoral and ineffective? The Curmudgeon is a self-confessed tax abater. 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 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. 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. Moreover, tax abatement crosses the ideological divide. Progressives and business conservatives scream at each other regarding tax abatement to firms preferred by one or the other's ideology. But both sides continuously provide tax abatement to the "right" firm compatible with their ideology. Much of the academic and think tank literature has no problem with tax abatement itself, except that it goes to firms they don't think should get it. A good starting point is whether or not the private firms actually want and seek a tax abatement in the first place. A not uncommon critique is that economic developers  hawk abatement to firms that not only don't need them, but are not actively looking for them. In effect, we are just throwing tax dollars at firms for no real purpose other than to justify our sad existence. A frequent source of this critique of tax abatement often follows from one or another academic,  site selector or trade association magazine who surveys firms to ask how important taxes are in location decisions and dutifully reports that taxes ranks low in the criteria for firm location decisions. By extension, then, tax abatement becomes unnecessary.Another frequent attack observes that taxes are a very low percentage of a a firm's cost of production - taxes are no where as costly as steel or labor in making a car so firms should be indifferent to tax abatement in that it is an insignificant cost. The answer to these critiques 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 which regions they firm should go. Taxes do not figure prominently at that level. This is not very controversial, it almost seems logical, and there are many studies that carve up the overall location decision into a more "regional or state" location and a second "site-specific" decision. The local economic developer faces the latter most directly. Within a given nation or 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. 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, 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.
Anyone who wants to play in the property tax abatement game ought to be sensitive that 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 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. How these drivers are affected by the mechanics of tax abatement can shape the response you get from different elements of your community. The article goes into some detail as to how these mechanics play out and who responds to them. In the next section of the article, the Curmudgeon begins an extended discussion as to how tax abatement is treated by the academic and think tank community. For the most part these folks are very, very unfriendly toward tax abatement. If they are studying the topic, it usually isn't good news for an economic developer because think tanks focus on exposing problems and devising policy solutions to those problems. That is not a helpful focus for an economic developer. Academics, on the whole, have largely punted in their research on tax abatement. Why? Property tax abatement has defied meaningful analysis by the academic community. 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. Having said that on the whole, over decades of research no consistent, replicable finding or pattern regarding jurisdictional property and sales tax abatement has been agreed to, does not mean that every month of the year, and twice in October, one researcher or another will report some finding which is generally not supportive of tax abatement. The problem arises when one takes these individual findings and patterns and compare them to last month's findings, they either differ, conflict or use varying and incompatible methodologies and statistical analyses. They don't say the same things about similar programs and their methodologies are quite limited and yield different findings. Several prominent research articles are acidly synthesized by a none too sympathetic Curmudgeon. The chief article reviewed and critiqued is Alan Peters & Peter Fisher’s, The Failures of Economic Development Incentives”, Journal of the American Planning Association, Vol.70, No 1, Winter 2004. This important article has, in the opinion of the Curmudgeon, several crippling deficiencies, deficiencies which in no way have impeded this article from being cited as one of the most important on the academic literature on tax abatement. Having been cranked up by these deficiencies, the Curmudgeon then vents his wrath on cost-benefit analysis and how it is used in the tax abatement literature. He is not happy about either. Finally, after bludgeoning Peters & Fisher and cost-benefit studies, the Curmudgeon offers both some summary statements on how economic developers best approach the use of property tax abatement and some character-building advice on the need for broad shoulders in the responsible use of this valuable economic development tool.

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