Dr. Daphne Kenyon: Rethinking Property Tax Incentives for Business

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April 2016 | Lourdes German
Daphne A. Kenyon, Ph.D.
Philadelphia, Pennsylvania
April 27, 2016
Rethinking Property Tax
Incentives for Business

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Outline
I. Introduction
II. Property Tax Incentive Pitfalls
III. Alternatives to Property Tax Incentives

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Property Tax Incentives Allowed in a
Growing Number Of States
Source: Lincoln Institute of Land Policy, Significant Features of the Property Tax

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AP photo

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• Granting incentives that don't affect
location decisions
• Granting incentives when costs exceed
benefits
• Allowing proliferation of incentives and
engaging in destructive bidding wars
Property Tax Incentive Pitfalls

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Granting incentives that don't
affect location decisions
• Policy makers may assume tax incentives
are decisive
• Yet evidence suggests that firms
sometimes lobby for tax incentives after
they have chosen their location
• Policy makers have limited information
about whether an incentive will be decisive
or simply a tax giveaway

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Do tax incentives tip
firm location decisions?
Yes No
• Firm would have located
elsewhere without tax breaks
• Create jobs; Boost incomes
• Some property tax revenue is
better than none
• Firm would have chosen
same location without tax
breaks
• Incentives deplete tax base
without promoting economic
development

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Peters and Fisher (2004)
“The best case is that incentives work
about 10% of the time and are simply a
waste of money the other 90%.”

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Granting incentives when
costs exceed benefits

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Benefit-Cost Framework for Tax Incentives
• Benefits
–Revenue gain from expanded economic
activity attributable to tax incentive
–Jobs
–Increase in property values

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Benefit-Cost Framework for Tax Incentives
Sources: Bartik 2005; Kenyon, Langley, and Paquin 2012
• Costs
–Revenue loss from tax incentive
–Increase in public service costs
–Environmental and congestion costs

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Case Study: Providence and 38 Studios
• Curt Schilling relocated his
video game company to
Providence after
Massachusetts declined to
match a tax incentive
package
• Following the company’s high profile collapse,
Rhode Island taxpayers were left on the hook for
about $100 million in bonds and interest

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Allowing proliferation of incentives and
engaging in destructive bidding wars
• Inter-local competition can leave a metro
area worse off as a whole.
• Incentive wars often shift jobs within a
metro area rather than creating new jobs
• Tax incentive competition can lead to a
reduction in the tax base with no
corresponding economic benefit

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• Lower Overall Taxes
• Cooperate rather than compete
• Back to basics - be business friendly
without emphasizing tax incentives
Alternatives to Property Tax Incentives

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Lower Overall Taxes
• Aim for broad tax base with low rates
• Doesn’t discriminate against existing
businesses
• No requirement for governments to pick
winners

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Example: New Hampshire
• No broad-based sales or income taxes
• Ranked 7th for best business tax climate in
2016 by the Tax Foundation
• Minimal use of tax incentives

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Dover, New Hampshire
City of Dover, New Hampshire

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Cooperate rather than compete
• The economic benefits of a new firm in
one community accrue to the entire area
since the firm is likely to hire workers from
throughout the region and contract with
firms in neighboring communities
• Instead of competing, municipalities
should collaborate in their attempts to spur
economic development in a metro area

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Example: Nashville
• Nashville has a long history of regionalism
dating back to 1963 when the city merged
with Davidson County

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Example: Nashville
• Partnership 2020 is a regional, public-
private economic development initiative that
involves all 10 counties in the metro area
• Planning officials are currently drafting
Partnership 2040, the latest incarnation of
the metro area economic development plan

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Back to basics - be business friendly without
emphasizing tax incentives

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Example: San Jose, California
• San Jose has attracted economic
development by turning the zoning code
and building permit process from a barrier
into an advantage
• The city has made a concerted effort to
streamline its approval process, and
guarantees a schedule for firms it is
interested in attracting

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Samsung, San Jose, California

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113 BRATTLE STREET CAMBRIDGE, MA 02138 @LANDPOLICY LINCOLNINST.EDU
DATE | PRESENTER | TITLE
Contact
Daphne A. Kenyon, Ph.D.
Lincoln Institute of Land Policy
dkenyon@lincolninst.edu

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Dr. Daphne Kenyon: Rethinking Property Tax Incentives for Business