Tax abatements: Fuel for local economies, or welfare for businesses?
Tax abatements are often granted by communities to lure business, or to retain business, in hope of building local economies and creating jobs. When a company receives property tax abatement, its taxes are reduced by a certain percentage for however long the agreement specifies. This kind of incentive for economic development comes with potential advantages, but can also come with accompanying risks for communities.
Local governments often justify these decisions by arguing that abated taxes are not lost revenue, since the money would not have been collected had the development not occurred. Helping to create jobs is beneficial, but local officials must beware of giving too much for too little in return. They must determine if a development project will generate enough economic and fiscal benefits to offset its costs to the community of which there are two kinds—loss of taxes abated and, in many cases, increased costs for expanded public services.
To be clear, when new businesses move in, they require municipal services, but when their taxes are forgiven, the increased cost for the services they consume (highway maintenance and street lighting, for example, or garbage pickup, water and sewer operations) is born collectively by the rest of the taxpayers, at least until the tax abatement period expires. Many opponents condemn abatements as tax giveaways to profitable businesses, urging that the money instead be spent to fuel economic development in other ways—by improving education, transportation and other public services that contribute to the community’s greater good for citizens and businesses alike.
Currently, several towns in the Upper Delaware region are facing the question of whether to grant property tax abatements for specific business projects. Although there are differences between Pennsylvania and New York regarding how tax abatements are granted (and by whom), the three towns involved in current discussions are Hawley Borough and Shohola Township, PA and the Town of Hancock, NY.
Local officials often are in a tough position. Their governments, already struggling financially, need the taxes, but the pressure to bring in jobs for their citizens is intense, and they worry that if they don’t grant the abatement, some other town or county will win the project. It’s a process that creates winners and losers, and companies asking for abatements know this; it gives them a powerful bargaining tool.
To avoid some of the pitfalls of making bad deals, or deals likely to fail, a careful reading of a 2006 study by the New York State comptroller (www.osc.state.ny.us/localgov/pubs/research/idabackground.pdf) is in order for local officials as they consider these kinds of tax breaks.
The study’s recommendations include:
- Have clearly defined criteria for selection;
- Evaluate data and make selections objectively;
- Treat different projects uniformly and consistently;
- Require developers to show sound financial management practices;
- Require developers to furnish specific information about job creation data;
- Enact agreements to allow governments to recoup funds if job creation/job retention goals or other terms of the agreements are not met; and
- Encourage citizen participation in the approval process, as citizens have a right to know the value of the forgiven taxes, because, for a time, they and other businesses will share the burden.
Tax abatements should not be entered into lightly. Some companies, even those that can easily afford the taxes, ask just because they can, not because they necessarily are deserving. The above recommendations are a good starting point for officials. Agreements must be monitored and enforced vigorously. They must have safeguards to protect taxpayers if businesses fail to live up to their promises. Finally, the community at large must understand and support the project because, as taxpayers, they are being called upon to help pay for it.