What is a Tax Abatement?
By Timothy Bristol
https://www.linkedin.com/in/tim-bristol/
Recently there was a discussion by Town Councilman Greg Cann about the town revising its Tax incentive program also known as a tax abatement program. The proposed changes to the program include “(a) removing all exemptions for personal property ie machinery, furniture (b) removing the 10-year abatement leaving a max of 6 years, and (c) adding provision to allow abatement for “municipal parking”. Let’s take a minute to talk about Tax Abatements and the positive or negative effects they have on municipalities.
Many cities in Connecticut Like Stratford use tax breaks and other incentives to stimulate their economies and grow their tax base. But what is the effect of these programs on the municipality’s economy and their bottom line? Do these tax breaks for businesses and developers have the desired outcome that the municipality is looking for or do they hurt the finances and community of that municipality?
These programs more commonly known as tax abatements, are an incentive package meant to bring in companies or developers, and the jobs they bring. The idea is that these companies will bring in good jobs and employ people in the municipality as well as bring in new residents into the community. These programs can also have a negative effect on the residential tax base and the municipality’s bottom line if they are implemented hastily or without necessary research on how the policy will affect the municipality’s budget.
These incentives can include but are not limited to Investment tax credits, Job creation tax credits, sales tax exemption, grants, loans, loan subsidies, tax increment financing to enterprise zones, empowerment zones, and public-private partnerships. The idea is to use these programs to make it cheaper for businesses to come in and stay. They also want companies to be able to grow inside the municipality and be able to afford hiring workers and to spend money on expanding.
Tax abatements ideally spur both commercial and residential growth in urban centers. They do have drawbacks, however. According to Dr. Jonathan Wharton, A Professor of Urban Politics at Southern Connecticut State University, municipalities are often left on the hook for expenses that businesses bring in with them. Expenses like building infrastructure and municipality services around the business and the growth in population that business would bring in, with no extra income from that business in the form of taxes.
Many cities in Connecticut must balance the tax incentives with the tax rate for their property taxes. One article, from the CT Mirror, about Connecticut towns and their tax abatement programs has a town official from Bloomfield commenting, “It’s a delicate balancing act, the town’s obligation to residents to collect all fees and property-tax revenue to which they are entitled to pave roads, upgrade facilities, pay down debt, and provide cultural-education programming to residents.”[1]
According to Dr. Wharton’s Research, little is known about the financial feasibility of tax abatements because they distort municipality budgets. There is not much research or publicly available data on how these programs operate and their approval process. Many of these programs either indirectly or directly create a public-private partnership between the companies that receive the incentives and the cities that award them. These partnerships, for the most part, do not require much input from the residents of the municipality and often leave them out of the process altogether. This can lead to disapproval, in the communities that companies or developers are going to move into. [2]
Dr. Wharton’s Research illustrated this point as he explained that the early years of the tax abatement strategies in Jersey City created financial and political tensions as the abatements created political and class divisions within the city. Jersey City was also not very diligent at analyzing or providing oversight for its tax abatements. The residents would question abatements in council meetings as city officials were not aware of the data from the programs or even if they had expired. Jersey City officials soon realized they had a problem, they needed to restrict the abatements to avert a total financial crisis but could not restrict them too much as to stunt economic growth in the city. [3]
Dr. Wharton’s research stated that Jersey City had an abatement addiction. He asked, “At what point does a municipality realize they have become too dependent on tax abatements for urban revitalization?” and “At what point does it end?” for developers. He commented that tax abatements should be used as a last resort and in a feasible manner. They should not be used to favor developers or businesses that can otherwise afford the taxes. [4]
In summary, tax abatements are a trick policy tool. They can be very helpful in spurring development, but they also have the potential for enormous downsides. Municipalities must also monitor them closely to analyze if the tax abatements are having the desired effect or if they are just throwing money down the drain.
[1] Bordonaro, Greg. “Some Cities and Towns See Tax-Break Deals as Key to Economic Growth.” The CT Mirror, 12 Aug. 2019, ctmirror.org/2019/08/12/some-cities-and-towns-see-tax-break-deals-as-key-to-economic-growth/.
[2] Wharton, Jonathan L. Abatement Addiction: A Case Study of Jersey City’s Municipal Tax Abatements, Urban Gentrification, and Politics of Rights. American Political Science Association, Sept. 2011.
[3] Wharton
[4] Wharton
