Meet John Doe: Tax abatements are not effective tools for long-term economic growth

March 26, 2014
Paul Gorski

Paul Gorski

By Paul Gorski

Local governments offer tax abatements to businesses with the hope of stimulating economic growth. Most tax abatements reduce or defer the amount of property taxes owed by a business to a local government in an attempt to retain or attract a business to an area. However, most academic studies of tax abatements reveal these tax reductions offered by local government at best offer only short-term economic growth.

A recent study by researchers at Ball State University found tax abatements offered by local governments in Indiana were not very effective, costing up to “$30,000 per manufacturing job created.” A summary of that study with a link to the original work is at http://cms.bsu.edu/news/articles/2013/11/state-tax-incentives-effective.

Michigan researchers found that while tax abatements in Michigan might work for some industries in some high-tax rate areas, that “net tax abatements result in a net cost to the local government.” In other words, the tax reductions cost the local governments more than the promised economic benefit. Read that study at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2251185. Locally, Winnebago County Board Member Steve Schultz, R-3, addressed a similar issue in “Guest Column: County would pay twice if it approves abatement for Meijer developments,” March 19, 2014.

When I served on the county board, the board was asked to vote on a multi-year tax abatement for a business for which we did not know the name, the nature of the manufacturing, or how many jobs the business would have created. Minimally, we should know how many jobs are being created and the wages for those jobs. Even then, these are just promises of jobs, not guarantees. It is still a gamble.

Tax abatements for “industrial” development might spur some growth and provide a positive return on investment, but even that evidence can be hard to find. To the contrary, some communities are still suffering following factory shutdowns by industrial heavyweight General Motors (GM); this after these communities spent millions of taxpayer dollars to keep GM in their communities. See “As Companies Seek Tax Deals, Governments Pay High Price” by Louise Story, New York Times, Dec. 1, 2012.

I still see the potential value of offering tax abatements to a new manufacturer or an established local manufacturer requesting a tax incentive to expand, as long we investigate each request on its own merits. Depending on which government is offering the abatement, we could have less money for roads, schools and more. Therefore, we need to consider each tax abatement carefully and to document the potential risks and benefits.

Not unlike TIF (tax increment financing) districts, which I addressed in “TIF districts are not working for us,” online March 18, 2014, the best way to use local tax abatements is to offer them sparingly, and only to those industrial businesses that offer a high probability of creating living-wage jobs and/or improving and developing blighted areas.

Paul Gorski (paul@paulgorski.com) is a Cherry Valley Township resident who also authors the Tech-Friendly column seen in this newspaper. Read “Tech-Friendly” at: http://rockrivertimes.com/?s=tech-friendly.

From the March 26-April 1, 2014, issue

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