How Effective Are Property Tax Abatements? The Case of Michigan

Abstract

In this paper we examine the effects of industrial property tax abatements on industrial property value growth using data from a panel of 152 communities in the five counties surrounding Detroit in southeast Michigan over the period 1983 to 2002. We use a spatially lagged X model to account for potential fiscal spillover effects of competitor policy changes on one’s own industrial property value growth. We account for local government competition in the region by using migration patterns as a basis for determining competitor communities opposed to the traditional approaches that use distance or population size. We find that localities that offer tax abatements yield statistically significant positive impacts on industrial property value growth and the impacts are larger in high tax than in low tax communities. However, the benefits of tax abatements are quite small as compared to the cost of offering tax abatements. Also, tax abatements offered in competitor communities do not appear to influence own industrial property value growth. Finally, we find that changes in property tax rates are important for industrial property value growth.