Mayors these days do more than fill chuckholes and provide police and fire protection. They direct highly sophisticated economic development efforts, based on the recognition that a healthy economy is critically important to a healthy and successful city.
Mayors these days do more than fill chuckholes and provide police and fire protection. They direct highly sophisticated economic development efforts, based on the recognition that a healthy economy is critically important to a healthy and successful city.
Among the economic tools available to our next Mayor are tax abatement and tax increment financing. Contrary to popular misunderstanding, tax abatement does not forgive taxes on existing property–it allows a "phasing in" of the taxes attributable to new construction. With Tax Increment Financing, the full amount of the tax is paid immediately, but the amount attributable to the improvement–the new construction–is diverted into a special fund to pay off bonds that have been issued to provide some benefit to the property. Both mechanisms allow the city to offer financial incentives to businesses to locate here and thus, if judiciously employed, can contribute to an increased tax base in the long run.
Because it can be more costly to do business in an urban area, tax abatements were originally a way to "level the playing field" and allow cities to compete with rural and suburban venues for jobs and businesses. The goal was to encourage businesses to locate in areas where the infrastructure was already in place, so that tax dollars need not be spent for new roads and sewers, or for the extension of police and fire protection.
Unfortunately, abatements have become a "zero sum" game, available virtually anywhere in the state to businesses with the savvy to bargain for them. Other criticisms of abatements and TIFs have emerged: they tend to benefit those who are new to the city over those who are already here paying taxes. (Worse, they are often used to recruit–and lower the costs of–competitors to such existing businesses.) TIFs divert tax revenues that would otherwise be available to fund government services, notably public schools, and when boundaries aren’t drawn to follow benefits, shift tax burdens unfairly. Both mechanisms are subsidies (a recent series in Time called them "corporate welfare"), but because they are indirect, it is difficult to know how much they really cost.
These criticisms apply even when abatements and TIFs are carefully targeted. More troubling is the award of abatements to those who cannot pass the "but-for" test: i.e., but for the existence of these incentives, the facility would not be built. Most of us would agree that taxpayers ought not subsidize businesses that would expand or relocate to Indianapolis even without the subsidies. If abatements and TIFs were restricted to redevelopment areas, a "but-for" test would be less important, because there is a substantial public purpose to be served by luring enterprises into such areas. Without geographic restrictions, however, the test is necessary to prevent abuse.
Our next Mayor must construct an incentives strategy that will minimize the loss of tax revenues, increase accountability, and avoid conferring competitive advantage–all while stimulating job creation and economic growth. It won’t be easy.