Analysis of the Use of Tax Abatement Policy to Stimulate Urban Economic Development

摘要

This thesis analyzes the use of property tax abatements to induce urban economic development. It presents a decision model for making tax abatement awards and tests how the set of decisions emerging from this model differs from the way abatements are usually granted. Tax abatements effectively lower the price of capital to investing firms by exempting new investment from property taxation for a fixed period of time. These incentives have become increasingly popular with local economic development officials despite research findings that indicate that local property taxation has little impact on the firm's location decision. However, if abatements are awarded to only those firms whose behavior is changed by the incentive effects, they could make a valuable contribution to the local firm. Local officials should award abatements on the basis of the expected net revenue stream generated by a project. Abatement awards should be tailored to the individual applicant firm. The decision model developed incorporates the probability that the firm would have invested without the abatement. To compare decisions emerging from the model with the manner in which abatements are traditionally awarded, the report simulates decision outcomes using a sample of firms that were actually awarded tax abatements in an ongoing program in Detroit, Mich., (1974 - 78). The simulations show that unless decisionmakers are given the flexibility to vary the size of the abatement award, decisions will be suboptimal in terms of the stated criteria. However, because of the limited impact even full abatement has on firm investment decisions, property tax abatements are an ineffective way of spurring urban economic development. Suggestions for improving abatement policy, a discussion of Federal and State interests in tax abatement policy, and comments on avenues for further research are included. Footnotes, figures, data tables, and over 100 references are provided. (Author abstract modified).