Chasing a Dream: The Use of Tax Abatements to Spur Urban Economic Development

Abstract

In this paper I develop a systematic framework for assessing the effectiveness of granting tax abatements to encourage urban economic development. This approach focuses upon the abatement's effect upon the firm's decision to invest and the impact of the investment upon the community. Current policy fails to take these considerations into account adequately. I use this framework to evaluate the potential revenue gain to the City of Detroit of offering variable abatement awards, and suggest a set of proposals to improve program performance.

The Nature of Property Tax Abatement Awards

“…In earlier work on this subject it was suggested that there are two factors that should be considered when deciding how generous awards should be (Wolkoff 1982a). The first involves the sensitivity of the investment decision of the f i r m to the reduction in the price of capital.…”

“…In New York City, the amount of abated tax dollars now totals, after four years, over $400,000,000 (New York Times 1981).6 Detroit also runs an extremely active program. By 1980 over $20,000,000 in property tax revenue had been forgone due to tax abatements (Wolkoff 1982a). At the state level, it is estimated that in the past five years virtually all of the major industrial investment in Michigan (over two thousand projects) has been subsidized through tax abatements although there is little evidence that the incentive was crucial to the investment decision (Wolkoff 1982b).…”

The Limits of Local Initiatives: A Reassessment of Urban Entrepreneurialism for Urban Development

“…Urban political economists have argued that the type of public sector entrepreneurialism practiced in most cities of the United States has contributed to the depoliticization of the urban development process (Gottdiener, 1987;Smith, 1988); they have been critical of the level of risk assumed by local governments and the expanded exploitation of urban land for private accumulation; and they have pointed out inequities in the distribution of power between public and private sectors, and of the costs and benefits of city deal-making for different social groups and areas within the city (Cummings, 1988;Fainstein, Fainstein, Hill, Judd, and Smith, 1983;Hartman, 1984;Jones and Bachelor, 1986;Judd and Ready, 1986;Kirby, 1985;Leitner, 1990; Logan and Molotch, 1987;Smith and Feagin, 1987;Squires, 1989b; Stone and Sanders, 1987;Swanstrom, 1985). Finally, they have attempted to document the limited effectiveness of incentives as tools for attracting private investment (Pascarella and Raymond, 1982;Wolkoff, 1985).…”

Financing Facilities 101

“…Abatement programs exist in approximately two-thirds of the states (Severn, 1992). Typically, they are awarded whenever they are requested (Wolkoff, 1985); therefore, they often are part of a city's incentive package in negotiations with professional franchises (Howard & Crompton, 2004). Tax abatement will exempt an organization's assets from property taxation for a given period of time.…”