Policy Research

Do Industrial Tax Abatements Spur Property Value Growth

Sung Hoon Kang, Laura Reese, Mark Skidmore

Summary

The article examines industrial tax abatement programs in Michigan in an attempt to determine the effectiveness both as a form of attracting business to a region and at increasing property values. The study examines industrial, commercial, and residential property values in 5 counties in southeast Michigan over time and compares the effects of a variety of tax abatement programs. The article finds that offering tax abatement in a locality significantly increased industrial investment and the effect was larger in areas with higher property tax rates. Further, the study found that offering the abatements increased industrial property values and also had positive spillover effects on commercial and residential properties. Despite the positive gains, however, the study ultimately concluded that the forgone tax revenue was too large making abatement programs a cost-inefficient method of attracting economic growth. Additionally, a city offering a tax abatement incentive has negative effects on surrounding cities property values and investment levels.

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Policy Implications

This article can be used in attempting to create cost effective tax incentives for local growth. The study noted that currently in Michigan tax abatements are distributed too liberally, and that in order to have a cost-effective abatement incentive, cities need to be more selective in issuing them. Further, only cities with high property tax rates should be employing tax abatements as an investment strategy. Possible suggestions of limiting cities ability to issue abatement were suggested.