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Last modified: Wednesday, May 11, 2005

National review of tax abatement programs finds generosity and a lack of focus

BLOOMINGTON, Ind. -- The majority of tax abatement programs offered by local and state governments to stimulate economic growth are overly generous, according to a new study by faculty in Indiana University's School of Public and Environmental Affairs. This inclination towards generosity often leads to costs outweighing benefits to communities.

In the May issue of Economic Development Quarterly, IU professors John L. Mikesell and C. Kurt Zorn and Esteban G. Dalehite, an IU alumnus now on the faculty of Florida International University, present the results of the most comprehensive national database on the diversity of such abatements, which are offered in 35 of the 50 states.

Property tax abatements -- full or partial relief from tax liability for certain parcels -- constitute an integral component of many state and local economic development programs.

"Our review of the different structural elements of abatement programs across states has found that a good portion of states lean toward those features that are most generous," they wrote. "For instance, 16 of 35 states abate land even if it results in a tax break on a preexisting property.

"Abatement programs make the most economic sense when offered improvements to land, not land itself," they added. "The data ... confirm that most states do, in fact, abate improvements but also show that a hefty portion of states abate land as well. This should be cause for concern."

The study reported that 24 of 35 states abate personal property, which they believe warrant special attention, "given that personal property is movable and has a shorter life, compared to real property." Twenty-nine of 35 states abate commercial property, which may not have an impact on the tax base.

Only 15 of the states target specific areas.

Dalehite, Mikesell and Zorn found a large amount of variation among states. Fifteen states operate a single program while the remaining 20 states have two or more programs. Four states -- Connecticut, New York, Oregon and Rhode Island -- have three programs, and Illinois and Michigan have four. Topping the list with the most programs were Minnesota with six and Maryland with seven. Indiana is one of 12 states with two programs.

Purposes and special conditions for the awards also varied. All states with stand-alone property tax abatement programs (SAPTAP) required the construction or expansion of improvements to land in order receive tax benefits, but standards and conditions which trigger benefits differed. Job retention was a required condition in just two states and a threshold increase in jobs or payroll was a condition in only eight states. A threshold increase in investment or value was a requirement in just more than half, or 18, of the states.

By far, the most popular method of granting abatements -- in 34 states -- was the discretionary award process, in which local or state authorities have the flexibility to decide on a case-by-case basis.

In looking at how states punish enterprises that fail to live up to promises they made to receive an abatement, the IU report said only 14 states have claw-back provisions, which terminate the abatement and require beneficiaries to return the previously acquired tax benefits. In some states, they note, this clause might not be enforced.

Before their study, there had been no attention given to the differing structures of abatement programs across states. The authors hope they can help policymakers who are designing new abatement programs or revising an existing one.

To receive a copy of the study or speak with Mikesell or Zorn, contact Steve Hinnefeld at 812-856-3488 or