------- Forwarded Message Follows -------
Date: Wed, 13 Nov 1996 07:48:52 -0500 (EST)
To: cenet@agvax2.ag.ohio-state.edu
From: Dave Kraybill <dkraybil@pop.service.ohio-state.edu>
Reply-to: Dave Kraybill <dkraybil@pop.service.ohio-state.edu>
Subject: Tax Abatements in Economic Development
CENETers: Tax abatements are a controversial issue in Ohio and many other
states. Below is a short write-up I prepared on this topic for a
"MacNeil-Lehrer" style panel discussion last week at the annual conference
of the Ohio Development Association. Since the five panel members were each
guaranteed only a few minutes at the beginning and a few minutes at the end
of a two hour give-and-take session, I tried to summarize my thinking in
this handout. Do you agree, disagree, or possibly wish to re-frame the
issue in a different way? If you have thoughts on the topic, please "have
at it" and post your comments to all of us on this list.
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Tax Abatement Principles and Solutions
David S. Kraybill, Ohio State University
Principle #1 - Localities that adopt tax abatements early in the game may
achieve additional employment growth but subsequent gains disappear as other
localities begin to play the game.
Economic development programs spread quickly from one state or locality to
another. There are few development programs that spread more quickly than
tax abatements because they require no "up-front" public money. Analogy: a
man stands in the bleachers of a football stadium to gain a better view.
Soon everyone is standing and his initial advantage is lost. By the end of
the game, spectators have tired legs but viewing was no better than before.
Everyone had to stand because everyone else stood, yet all would have been
better off if they had reached agreement to remain sitting.
Principle #2 - Firms and households look for a fiscal bargain not just low
taxes.
Businesses and residents pay taxes (which deter growth) and in return
receive public goods and services (which stimulate growth). Business and
household location decisions are based on the entire fiscal bargain(i.e.,
how much benefit they expect to receive, in terms of public services and
quality of life, in exchange for the taxes they would pay). Most firms and
households do not expect to get "something for nothing" and are willing to
pay taxes in exchange for good public services, high quality of life, and a
good business climate. As firms and households compare states and
localities, their location decisions are influenced by the relative fiscal
bargain not just by relative tax rates.
Principle #3 - Tax reform is a more effective way of spurring economic
growth than tax abatements.
Most economists agree that taxes have some effect on regional growth, though
they disagree on how much. Many Ohio economic developers feel that a few
particular taxes, such as the tangible personal property tax on inventories,
put the state at a disadvantage. If Ohio does indeed have certain taxes
that inhibit growth, then higher growth rates could be generated by fixing
the "problem taxes" for all firms rather than for just a select few. It is
costly and inefficient for government to set up and administer, first, a tax
code and, then, a system that shelters a small number of businesses from
this tax code. (While reform of a few particular taxes may increase Ohio's
economic growth rate, the state's overall tax burden is about average for
the American states, as ranked by the Ohio Public Expenditure Council.)
Principle #4 - Tax abatements divert attention from the most important
factors affecting growth.
The tax abatement game diverts the attention of economic developers,
politicians, and citizens away from the most important growth factors:
skills and attitudes of the labor force, quality of primary and secondary
education, quality of health care facilities, highways and other types of
infrastructure, energy costs, and other factors.
Principle #5 - Tax abatements divert attention from existing businesses, the
largest source of new jobs.
Proponents of tax abatements portray the economic development competition
among states and localities as a war in which tax abatements are necessary
weapons. The war-and-weaponry view of economic development puts pressure on
state and local officials to "win the war" by attracting outside businesses
rather than by improving the business climate for existing businesses
(warriors receive more acclaim for offense than for defense). In recent
research on the Ohio economy, I found that 75-80 percent of new jobs created
in the state on an annual basis are generated by existing businesses, yet
economic development efforts remain heavily focused on business attraction.
Principle #6 - Tax abatements exacerbate the competitive disadvantage of
depressed areas over time.
Tax abatement laws, when first enacted in a state, often restrict this
economic development tool to economically depressed areas, but within a
short time political pressures make it available everywhere. When this
happens, no locality gains an advantage simply because it offers a tax
abatement. Failing to give a tax abatement would put a locality at a
disadvantage, but giving a tax abatement no longer gives it an advantage
over other localities. Economically depressed areas then have fewer
revenues for schools, roads, hospitals, and other public goods and services
essential for a good business and residential climate.
Solutions
Short-Term Solutions that Can be Implemented Now
1. Monitor tax abatements offered by other states so that Ohio's abatement
offers are not higher than
necessary and yet not too low compared to other areas.
2. Do a careful cost-benefit analysis of every tax abatement case.
3. Set performance criteria (such as the number of new jobs created) for
firms receiving tax
abatements, monitor performance rigorously, and recoup foregone
taxes when criteria are not met.
Longer-Term Solutions that Can be Started Now
1. Reform the tax code. Chapter 9 in the 1994 report of the Commission to
Study the Ohio Economy and
Tax Structure provides a useful starting point for tax reform to
spur economic growth.
2. Lobby for all states and regions to sign a nonaggression pact regarding
tax abatements.
Solutions that Apply in Both the Short and Long Run
1. Focus economic development activities on the fundamentals of growth:
schools, worker training, roads,
hospitals, quality of life, and efficient provision of government
services.
2. Make existing businesses the most-valued customers of economic
development agencies and governments;
the word will spread, demands for tax abatements will diminish, and
new firms will be attracted by
the reputation of responsive government and a pro-business public.
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David S. Kraybill 2120 Fyffe Road *
Associate Professor Columbus, Ohio 43210 *
Ohio State University Phone: 614-292-8721 *
Dept of Ag. Economics Fax: 614-292-0078 *
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Associate Professor
Dept. of Ag. Economics & Rural Soc.
University of Idaho
Moscow, ID 83843
http://www.uidaho.edu/~scooke/onepercent
208-885-7170 (phone)
208-885-5759 (fax)