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 in Cambridge.
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. 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.
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, the report said. 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.
