Tax abatements can be defined as either the forgiving of taxes by government or their deferral to a later predetermined date. The amount of abatement is typically determined as a percentage of tax payable or as a dollar amount of the tax attributable to the particular parcel receiving the abatement. The length of abatements can vary, though most state laws set a limit of 10 or 12 years as the maximum time taxes can be forgiven or deferred. Abatements can be given to businesses for a variety of purposes, including economic development (the increasing of jobs or the area tax base), and the resulting benefits from businesses that come to an area as a result of such tax incentives can includes construction of public facilities and infrastructure (such as streets and roads), and the redevelopment of blighted areas.1Tax abatements have become a common, almost standard tool for cities to attract businesses to their area. When one city chooses to use tax abatements as a method to lure business, however, it puts increasing pressure on neighboring cities to do the same or else risk losing valued business and jobs as firms flock to where they can procure the most benefits. Thus the decision of where businesses will locate can become a game not of where a business would best operate and function but of where a business can receive the most free handouts.
There are two main tax abatement laws in Michigan . P.A. 198 (1974) allows for local municipalities to issue abatements for industrial property taxes. Up to 50% of property taxes (taxes on buildings, machinery, and equipment) can be reduced for the new construction of facilities, while the renovation of obsolete facilities are eligible for reduction of up to 100% of property taxes on the value of improvements made to a facility. Industrial Property tax abatements have a maximum life span of 12 years.
P.A. 328 (1998) allows for the provision of tax abatements for personal property, though these abatements are only available in certain designated areas of eligible distressed communities. All new personal property taxes may be abated in these areas, and examples of such projects include manufacturing, mining, research and development, and wholesale trade.2
Tax abatements are for the most part given out by local municipalities, though the Michigan Economic Growth Authority (MEGA), an agency established in 1995 with the purpose of both retaining companies within Michigan as well as attracting new business to the state, also has the power to issue tax credits and abatements to companies that relocate to or expand within Michigan.
Factors that influence whether or not a company receives tax abatements from MEGA include: 3
MEGA is made up of an eight-member board that includes the CEO of the Jobs Commission, State Treasurer, Director of Management and Budget, Director of Transportation, and four additional private sector members that are appointed by the Governor.
A common criticism of the use of tax abatements is that they are handed out indiscriminately. The “but for” principle, in which tax incentives would only be given to those business that would not have settled in a particular area “but for” the given tax incentives, has been criticized for how easily it can be manipulated. Now that tax incentives have become such a widespread tool used to lure businesses to an area, business can play cities off against one another in order to receive the most benefits. It is often very hard (if not impossible) for a city to know the extent to which a firm is seriously looking at another city to move its business to, or if the firm is just trying to realize the most gain that it can. For cities it is often a zero sum game, where on the micro scale cities, in their competition with one another, drive deals so far down that the only real beneficiaries are the companies. Meanwhile, on the macro level few effects (positive or negative) can be seen.
MEGA is often criticized for giving abatements to large Michigan-based corporations (such as Dow Chemical and Delphi Automotive) when it remained questionable to many whether or not these large multinational companies would really leave. It is also often the large corporations that receive the most lucrative tax incentives, a situation that has led to what some critics term “corporate welfare.”
Another criticism of tax abatements is their ineffectiveness. It is hard to gauge the success of such tax incentives given the inability to know the counterfactual—what the alternative situation would have been had the incentives not been given. Meanwhile, billions of dollars of tax awards have been given out that could've potentially been used for state infrastructure, health, and education improvements. By handing out tax breaks to already wealthy corporations, the tax burden in a locality is then made heavier and shifted to local residents and area businesses. It is also often said that the provision of tax abatements creates an unfair playing field for other businesses, as these government subsidies favor some businesses (often corporate) over others (often smaller and local). Instead of providing tax incentives to a very small portion of businesses, many critics instead advocate for broad-based tax reductions for all businesses.
The provision of government subsidies also goes against normal market forces; instead of firms deciding on locations based on where they could realize maximum productivity, they instead might be enticed to a location where the financial benefits (in the form of various government subsidies such as tax abatements) are high enough to offset the functional deficiencies of the site. These cases become especially risky for cities when they expect such businesses to set up and stay within their locale past the expiration of the given abatements, while the companies plan only to remain for the length of their subsidy. Thus truly little is given back to the community in the form of important public services such as infrastructure and education.
Accountability is also a problem. In Michigan , one of MEGA's provisions is that companies that receive abatements must be financially sound. Yet a significant number of abatements have been given to companies that have gone out of business or that weren't able to produce the minimum number of jobs stipulated in their agreement. Thus for some, millions of dollars in abatements have been wasted on these unproductive firms. One solution to this problem is the use of clawbacks and recisions, whereby if a company doesn't meet the stipulated requirements, the State is allowed to rescind and reclaim its benefits. In this way companies can be held accountable.
There have been many theories put forth as to why the use of tax abatements seems to be growing, not shrinking, despite the perceived ineffectiveness of these programs by many researchers. One reason is path dependency—state and city officials have grown so used to using tax incentives as a method for economic development that they have become an established tool. Also, since the use of tax incentives has become so widespread, if a city chooses to refrain from using such incentives they risk losing valuable jobs and tax dollars. A lack of viable alternatives also plagues many state and city officials, as they feel they must do something but are limited in the range of options available. Thus they choose action over inaction, even though that action may ultimately be unproductive.
Though city officials may acknowledge the ineffectiveness of tax abatements, they often cite the use of such incentives as a means to promote the city—it shows a favorable business climate, as potential businesses can see that the city is willing to work with new businesses and keeps their interests in mind. Providing tax abatements in an effort to attract or retain area businesses is also a tangible action that city officials can point to and use as evidence to their electorate that they tried to help the community.
Tax abatements are a well-established tool for area economic development. Though they may ultimately be ineffective, they show that a city is pro-business and at least actively trying to spur economic development. The chances of their fading are slim and not likely to occur until a viable alternative emerges in their place. As long as one city offers them, others will follow suit in an attempt to remain competitive.
Flint and Genesee County Commerce Center
Michigan Economic Development Council
Michigan Economic Development Corporation
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Hornbeck, Mark. “Tax Breaks Shortchange State.” Detroit News . Available online: http://www.detnews.com/2003/business/0309/02/a01-260595.htm .
LaFaive, Michael D. “ Michigan 's Business Succeeds Without State Aid.” Mackinac Center for Public Policy—Economic Development. April 5, 2002. Available online:
Middleton, Luke. “Literature Review: Tax Abatements and Economic Development Initiatives.” The University of Kansas Center for Economic and Business Analysis Policy Research Institute Technical Report Series. January 2001, Report No. 49. Available online: http://www.ku.edu/pri/resrep/pdf/r49.pdf .
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