Property tax breaks to lure businesses largely ineffective, report says

Lincoln Institute research urges alternatives for economic development

CAMBRIDGE, Mass., June 26, 2012 /PRNewswire-USNewswire/ -- There is little evidence that property tax incentives to lure businesses to locate in cities and towns have much of an effect, either in the decision-making process or in terms of promised economic activity or new jobs, according to new research published by the Lincoln Institute of Land Policy.

Despite the poor record, doling out tax breaks is costing state and local governments up to $10 billion each year in forgone revenue, researchers Daphne Kenyon and Adam Langley conclude in Rethinking Property Tax Incentives for Business, the Lincoln Institute's latest Policy Focus Report. The policy deserves closer scrutiny because there is so much money at stake and so little evidence of impact, they say.

The report found that:
-- Property tax incentives are unlikely to have a significant impact on a firm's profitability since property taxes are a small part of the total costs for most businesses-averaging much less than 1 percent of total costs for the U.S. manufacturing sector.
-- Tax breaks are sometimes given to businesses that would have chosen the same location even without the incentives. When this happens, property tax incentives merely deplete the tax base without promoting economic development.
-- Widespread use of incentives within a metropolitan area reduces their effectiveness, because when firms can obtain similar tax breaks in most jurisdictions, incentives are less likely to affect business location decisions.

Over the course of nearly two years, the researchers analyzed five types of property tax incentives and examined their characteristics, costs, and effectiveness: property tax abatement programs; tax increment finance; enterprise zones; firm-specific property tax incentives; and property tax exemptions in connection with issuance of industrial development bonds.

The goal of promoting economic development is laudable, the report says. Attracting new businesses to a jurisdiction can increase income or employment, expand the tax base, and revitalize distressed urban areas. In a best case scenario, attracting a large facility can increase worker productivity and draw related firms to the area, creating a positive feedback loop.

Municipalities should first consider alternatives to property tax incentives to achieve these economic development goals, such as customized job training, labor market intermediaries, and business support services. In addition, state and local governments also can pursue a policy of broad-based taxes with low tax rates or adopt split-rate property taxation with lower taxes on buildings than land.

If property tax incentives continue to be used as part of the economic development toolkit, the report recommends that they be fine-tuned and more closely scrutinized. State government can restrict the use of incentives to certain geographic areas or certain types of facilities; publish information on the use of property tax incentives; conduct studies on their effectiveness; and reduce destructive local tax competition by not reimbursing local governments for revenue they forgo when they award property tax incentives.

Local government officials should set clear standards for avoiding the use of incentives when costs exceed benefits. Localities should set clear criteria for the types of projects eligible for incentives; limit tax breaks to mobile facilities that export goods or services out of the region; involve tax administrators and other stakeholders in decisions to grant incentives; cooperate on economic development with other jurisdictions in the area; and be clear from the outset that not all businesses that ask for an incentive will receive one.

The Lincoln Institute of Land Policy is a leading resource for key issues concerning the use, regulation, and taxation of land. Providing high-quality education and research, the Institute strives to improve public dialogue and decisions about land policy.

Organization website: http://www.lincolninst.edu

SOURCE Lincoln Institute of Land Policy