Property Tax Abatements Research Articles

Making the students pay? The gross cost of property tax abatement for U.S. school districts

ABSTRACT In the U.S., local property taxes fund public education more than any other source, but the revenue cost of property tax abatements for school districts has long eluded capture. This paper finds that at least $2.4 billion was diverted in 2019 to fund tax incentives from just the small percentage of school districts that disclosed out of the 10,370 financial statements reviewed. School board authority in the award process is limited or absent in most cases. Given the cost-inefficiency and cost-ineffectiveness of many awards, the long period of time before profits come in, and the critical need for closing the funding gap in public education, more judicious use of tax incentives is called for. Specifically, we recommend that all states establish independent agencies for reviewing incented projects regularly and rigorously, impose benefit reduction or clawback on underlivering recipients, enable institutions for multiscalar collective action, and maintain oversight of tax abatement reporting by local governments.

The Determinants of Tax-Based Incentives: An Empirical Analysis of State Governments

To determine why state governments often use tax-based incentives, this study focuses on five major tax-based incentives: job creation tax credits, investment tax credits, R&D credits, property tax abatements, and customized job training subsidies. The statistical results indicate that a state government’s prevailing political ideology influences the choice of economic development activities. Accordingly, a more liberal state is less likely to use property tax abatements and customized job-training subsidies, and more likely to use job creation tax credits and R&D tax credits. Further, competition does not operate to trigger tax-based incentives. State economic conditions are not significantly related to the use of incentives. This result could imply the prevalence of political factors in the use of incentives.

Value Creation, Capture, and Destruction

Problem, research strategy, and findings Municipalities relying on tax increment financing (TIF) to underwrite large-scale infrastructure and development projects assume that tax revenues from the increase in property values will be sufficient in the short run to cover capital expenses (i.e., that projects are self-financing). By examining a case of TIF in action, we move beyond expectations about how TIF should work in theory. Hudson Yards on the far West Side of Manhattan is one of the largest TIF projects in the United States in recent years and the first one implemented in New York City. We refined the conventional fiscal impact analysis approach by tracking costs and revenue flows of the project between 2005 and 2020 and comparing rents, assessed values, property tax appeals, abatements, and land prices across relevant submarkets. Through this exercise and critical reading of the literature, we developed a framework for analyzing TIF that treats property values as extrinsic and determined by the political arrangements and calculative negotiations that create, capture, and destroy them. Interactions between private property markets and governing bodies cause costs to fluctuate, responsibility for different expenditures and claims on new revenues to shift, and the location and magnitude of spillover effects to change over time. The flexibility of property values in Hudson Yards allowed the taxes to be used at cross-purposes, jeopardizing the payback streams and inflating risks shouldered by the public sector. Takeaway for practice Although our findings are limited by the single case study approach, the creation–capture–destruction heuristic we developed can help planners modify their expectations of the future and spend economic development dollars more effectively in the present. We suggest that municipalities claw back subsidies upon a property’s sale through a local capital gains tax and restrict the use of appeals and abatements in TIF districts to limit the potential for value destruction.

“The Answer My Friend is Blowin’ in the Wind”: A stochastic assessment of wind farms financial feasibility and economic efficiency

Two financial incentives that have spurred the growth of renewable energy including wind farms are Production Tax Credits (PTC) and Property Tax Abatement (PTA). PTC provides a tax credit of 1¢–2¢ per kilowatt-hour for the first 10 years of electricity generation for utility-scale wind, and PTA is a rebate provided by the local governments to wind farms in the U.S. Midwestern states. Past researches suggest that the breaking-even of renewable energy projects can partly be attributed to PTC. However, in cognizance of the irregular availability of such incentives, there seems to exist a need for financial feasibility analysis of the wind farms. The study uses a stochastic method and a scenario approach to address this research question. The analysis considers the capital and operating costs, interest payments, local and federal taxes, and production of wind energy and sales revenues, and inherent uncertainties in key parameters. The results shed some light on the impacts of PTC and PTA on the financial feasibility of wind farms in the U.S. Midwestern states. It is observed that PTC is a more effective instrument compared to PTA. The paper concludes by discussing policy implications of local government rebates and federal incentives.

Aging, Property Taxes, and Housing Adjustments: Lessons From the Health and Retirement Study

ABSTRACT The U.S. housing market is being reshaped by the housing decisions of seniors aged 65 and older. This study examines the reasons why senior homeowners choose to move, downsize, and transition out of homeownership, placing particular emphasis on the role of property taxes and property tax abatement programs. Our findings suggest that although rising property taxes increase the probability that senior homeowners will become renters or downsize, property tax abatement programs seem to have largely failed to help low-income senior homeowners remain in their homes. High-income seniors receive a modest transfer from property tax abatement programs and continue owning their homes when moving, whereas low-income seniors transition from owning to renting when moving, even in places with generous property tax abatement programs. The U.S. senior population will grow significantly over the next several decades, and policymakers will need to design effective policies to create stable, affordable housing environments for seniors aged 65 and older. Our findings provide evidence to inform this effort.

Is Tax Competition Strategic? Spatial Distributions of Business Property Tax Abatements in the Chicago Suburbs

The authors analyze the locations of property tax abatements awarded to businesses in Cook County, Illinois from 2012 to 2014 to explore their spatial distribution and to examine local government motivations for awarding incentives. The authors’ analysis, which controls for the spatial distribution of businesses, reveals a clustering of abatements at intramunicipal geographic scales. They also find amplified probabilities that abatements are awarded to businesses located near tax increment financing districts or enterprise zones. These patterns suggest that local governments use abatements in a strategic fashion to advance policy goals. The authors use the same data to develop three indices of the degree of abatement clustering at the municipal scale for each of the 64 municipalities in Cook County that awarded five or more abatements. Most of the Chicago suburbs exhibit a pattern consistent with the strategic award of business tax incentives.

The Effects of Property Tax Abatements on School District Property Tax Bases and Rates

The authors analyze the effects of property tax abatement on the property tax base and rates of school districts within a municipality offering the abatement using data from Franklin County, Ohio, one of the most populous counties in the United States. An increase in a school district’s Community Reinvestment Area abatement intensity correlates with (a) a decrease in the mill rate for real property, (b) a decrease in effective residential and nonresidential property tax rates, and (c) an increase in total market value of property. While these effects are small, they indicate that a municipality’s decision to abate has generated enough growth in property values, either through improvements to physical property or positive capitalization for existing property values, to offset the negative effects of an abatement. The reason for this may be that the restrictions and oversight used in this abatement program are greater than in most other places.

Impact of Property Tax Abatement on Employment Growth

Property tax abatement incentives, used by 70% (35 states) of the states in the United States, redirect property tax revenue from the local community to firms in hopes that inducing these firms to relocate will bring economic development benefits to the local community. However, if unsuccessful, property tax abatement incentives might uniquely concentrate the costs of a failed economic incentive strategy within a single community. Using a sample of 45 industries in 43 cities, the authors examined the employment impact of property tax abatement incentives. Property tax abatement incentives were positively associated with employment growth, but only in the early years when the abatement policies were still new. The authors also explored heterogeneity in these results among industries. Property tax abatements targeting service industries, which are less likely to benefit from automation improvements, were associated with larger employment gains.

Do local governments use business tax incentives to compensate for high business property taxes?

Why do municipalities set business property taxes higher than the costs of business services when, in competitive markets, this would result in the inefficient provision of public goods? Statutory tax rates may be set artificially high to allow selective reductions for targeted firms through incentives. We examine the nearly 2500 tax codes—sub-municipal geographic areas—that host business locations in 134 municipalities in Cook County, Illinois. We explain spatial variation in tax incentives as a function of the relative competitiveness of tax codes. Our findings suggest that municipalities apply property tax abatements to offset their own relatively uncompetitive tax rates but use Tax Increment Financing (TIF) incentives to engage in vertical competition in order to capture revenue from overlapping governments.

Measuring the Efficiency, Equity, and Success of Philadelphia’s Residential Property Tax Abatement

Philadelphia’s 10-year property tax abatement program is a tax expenditure meant to stimulate economic development through residential construction and renovation. In an era when many cities appear to be experiencing renewed growth after the urban decline of the late 20th century, it may be time to reevaluate these sorts of economic development policies. This article explores three possible ways to evaluate Philadelphia’s tax abatement as a case study for other cities with similar programs and asks whether it is the appropriate time to either restrict or end the program. The article assesses the abatement for its efficiency and equity, but most importantly, for whether and how well it achieved its goals. Based on this evaluation, Philadelphia’s policy does not hold up well against the efficiency and equity criteria and its goals are either too broad to measure, or impossible to evaluate without a similar city to compare against. As a part of the analysis, the author considers the key questions of how much of the city’s real estate comeback is directly due to the abatement and how to best reshape the policy to target Philadelphia’s goals in 2018. The article also presents examples of abatement policies from other cities as models of how to shape such programs to fit a local context. The author finds that Philadelphia and cities with similar policies should look to other cities’ targeted abatement programs and evaluate local priorities for growth when considering restrictions or terminations of their programs.

Tax Increment Financing: A Propensity Score Approach

This study examines the effect of tax increment financing (TIF) on economic growth in Indiana. TIF areas are designated with the intent of spurring economic development characterized primarily by growth in assessed value and in employment within the TIF area. We examined property-level data from 2004 to 2013 and found that the average property in a TIF area may display higher assessed values than the average property in a similarly situated non-TIF area. While both TIF and non-TIF properties tended to grow over time, the average property in a TIF area may grow by slightly more than its non-TIF counterpart. We also found that TIF does not statistically significantly affect employment or employment growth over time. While there does not appear to be a multiplicative effect of the presence of enterprise zones and TIF on employment, TIF works with property tax abatements in incentivizing job creation. Our analysis of the effect of TIF on economic development outcomes informs policy makers of the likelihood that a given area will adopt TIF in the context of the “but-for” question.

The Fiscal Impact of Local Property Tax Abatement in Indiana

Property tax abatement is widely used by local governments in the U.S. with the goal of attracting and retaining businesses. This analysis examines the efficacy of such abatement using data on Indiana counties from 2002 through 2011. The analysis suggests that local tax abatement tends to be correlated with higher effective tax rates in a county. These correlations exist in the absolute size of abated property relative to the existing assessed value of property taxes and in the frequency of use of tax abatements. In addition, there is not a strong relationship between abatement and the growth of assessed value over time. The implication is that, on average, the use of abatements as a tool for growing a property tax base is not particularly effective. These findings cast doubt on the ability of Indiana’s system of property tax abatements to increase the tax base or control property tax rates.

“Nothing but Net Profit”

This article presents a history of property taxation at the United Center, which opened in 1994 as the home arena of the Chicago Bulls of the National Basketball Association. While boosters billed the arena as a private endeavor, owners benefited from property tax abatements that allowed them to recoup much of the facility's initial cost. This study confirms that stadium development in the neoliberal era has been characterized in large part by the evaporation of public rights to revenues generated by taxpayer-funded facilities. It also suggests that this shift stemmed not just from the monopoly powers unique to the sports business but also from policy makers' increasing embrace of unconditional corporate welfare for firms throughout the economy. In addition, the article reveals the involvement of the sports business in expanded efforts within corporate America to use philanthropy to cultivate facades of “social responsibility” that have deflected public scrutiny and government regulation.

Do Industrial Tax Abatements Spur Property Value Growth?

AbstractDespite ongoing debate regarding the effectiveness of tax abatements, Michigan's Industrial Facilities Tax (IFT) abatement program has been widely and extensively used to boost local economic development. In this article, we estimate the effects of industrial property tax abatements on industrial, residential, and commercial property value growth in the context of regional competition for a panel of 152 communities in the five counties surrounding Detroit from 1983 through 2002. We find that: (1) offering tax abatements yields statistically significant positive impacts on industrial property value growth; (2) the impacts are larger in high tax than in low tax communities; (3) there are positive spillover effects of industrial tax abatements on residential and commercial property value growth; (4) tax abatements offered in competitor communities do not appear to influence own industrial property value growth; and (5) changes in the own as well as competitor property tax rates are important determinants of industrial property value growth. However, the fiscal benefits of tax abatements are quite small as compared with the costs of offering abatements even when spillover benefits to residential and commercial properties are considered.

Property Tax Abatement as Tax Expenditure?

Tax expenditures are revenue losses resulting from provisions in tax law that allow a special exclusion, exemption, or deduction from normal payment. Property tax abatement is a full or partial reduction in the normal property tax liability owed to a state or local jurisdiction. Accordingly, a calculation of annual tax expenditures for a state or locality should include some accounting for annual property tax abatement. The traditional manner of doing this is to sum the annual value of property tax revenue foregone through abatement. The intent of this paper is to question this simple approach. Offered here are specific characteristics to look for in property tax abatement programs that make it more reasonable to count all abatement as tax expenditure. Included also are examples of how to do this for three states. A refinement of how abatement translates into tax expenditure is a positive step forward in developing the tools needed to evaluate the desirability of property tax abatement.

The Political Economy of State-Provided Targeted Benefits

The governments of American states often attempt to incentivize businesses to locate within their borders by offering targeted benefits to particular industries and companies. These benefits come in many forms, including business tax credits for investments, property tax abatements, and reductions in the sales tax. Despite good intentions, policymakers often overlook the unseen and unintended negative consequences of targeted-benefit policies. This paper analyzes two major downsides of these policies: (1) they lead to a misallocation of resources, and (2) they encourage rent-seeking and thus cronyism. We argue that these costs, which are often longer-term and not readily observable at the time the targeted benefits are granted, may very well outweigh any possible short-term economic benefits.

How Effective Are Property Tax Abatements? The Case of Michigan

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.

Green growth machines, LEED ratings and value free development: the case of the Philadelphia property tax abatement

In this paper we examine an attempt in Philadelphia in 2009 to alter a popular and longstanding city property tax abatement program by connecting it to LEED building standards. We argue that the attempt to change the property tax abatement was an attempt by an insurgent growth coalition – what we call a ‘green growth machine' – to capture a greater proportion of the returns from land investment from the city's traditional growth machine. LEED was an important tool in the green growth machine's strategy, because the rating system has become a means by which growth machines have established green building as a component of the ideology of value free development. The attempt to alter the property tax abatement limited the extent to which LEED could be used as a tool in the construction of an ideology of value free development, which suggests both the limits to the power of that ideology, and how components of that ideology might be used to challenge a traditional growth machine.

The Struggle Between Man and Nature—Agriculture, Nonpoint Source Pollution, and Clean Water: How to Implement the State of Vermont's Phosphorous TMDL Within the Lake Champlain Basin

This article provides an overview of the CWA and Section 303(d) of the U.S. Clean Water Act, examines case law interpreting the respective roles of the EPA and states in performing and implementing Total Maximum Daily Loads (TMDLs) for impaired waters, reviews other efforts and potential approaches for restoring impaired waterways, and suggests ways the State of Vermont can reduce pollutant loads identified by scientifically-based TMDL studies, specifically focusing on the Lake Champlain Basin. However, as illustrated in state political debates regarding approval and implementation of the State’s Phosphorus TMDL for Lake Champlain, there are few easy solutions to these problems.Part I of the article discusses nonpoint source pollution control under the CWA as applied within our federalist system of governance. Part II reviews Vermont’s Phosphorus TMDL for Lake Champlain (the Lake) approved by the EPA in 2002, evaluates the State’s efforts to implement the TMDL, and identifies existing agricultural nonpoint sources which continue to contribute heavily to the Lake’s impaired water quality, as well as current State regulations and programs related to agricultural nonpoint source pollution control. Part III evaluates legal mechanisms and systems of governance utilized, established, or contemplated by other states and local authorities, which could be adopted or used to further enhance existing State programs to address the continued agricultural nonpoint source (NPS) pollution within the Lake’s watershed. These programs include state and local land use planning and zoning measures; watershed-based natural resources planning, management, and regulation; mandatory agricultural best management practices, and whole farm conservation plans; taxation of agricultural inputs and byproducts which contribute to NPS pollution and property tax abatement for well-managed farmlands; and watershed-based pollution trading. Part IV provides final suggestions and remarks on ways that the State of Vermont and its citizens can successfully implement the 2002 Phosphorus TMDL to restore and maintain the Lake’s water quality.

Residential Property Tax Abatements and Rebuilding in Cleveland, Ohio

In the late 1980s the city of Cleveland began offering residential property tax abatements in an effort to (1) reduce blight, (2) attract home owners, and (3) build upon the momentum established by the construction of several downtown attractions. When Cleveland’s legislation authorizing part of the abatement program was to be renewed in 2005, a new mayor asked for an assessment of the program’s status and its fiscal effects. Utilizing property tax and assessment files and a survey of individuals who had purchased a home that received the property tax abatement, this study finds that Cleveland’s investment through forgone property taxes will likely result in overall fiscal gains for the city. Despite this success, property tax abatements, even coupled with the building of an impressive set of cultural amenities, have yet to reverse the demographic and economic trends that have plagued Cleveland for more than fifty years.