Study: Re-Think Traditional Targets

(Image Courtesy of Ball State University)

Ball State University economist Mike Hicks says a new study detailing tax revenue associated with economic development projects could serve as a "decision support tool" for local governments. The Center for Business and Economic Research policy brief breaks down how much tax revenue is brought in over time through various types of commercial and residential developments. Hicks says the results suggest some traditional activities, such as providing incentives for a manufacturer to locate or expand, may not always deliver the tax impact once thought.

For example, the research suggests health care providers offer twice the local property tax impact as large-scale manufacturers. A reason for this is tax breaks, such as abatement and other commonly-offered incentives, knock off a "significant" chunk of what the companies would pay over time. The findings add that taxes generated by a new, 160-180-household residential development are higher than the abated value of the property owned by a $100 million business.

Hicks says "Attracting Jobs or Attracting People: A miscrosimulation of the local tax revenue impact of new businesses and households on Hoosier communities" demonstrates that households are "footloose." He says "many workers live in one community and commute to another for work. Local income tax revenue, school funding and wheel taxes accrue to the location where workers live, not where they work. So, depending on the commuting patterns of workers, a community may receive only a portion of tax revenue associated with new jobs."

The analysis offers additional insight, including:

• A health care provider would pay nearly 20 times the taxes over a five-year period than would a manufacturing firm enjoying tax abatements but with the same annual sales revenue.
• Different types of local governments receive different distributions with the largest share going to schools under every scenario, except for tax increment financing (TIF) districts in which 100 percent of new tax revenues remains in the TIF.
• Firms that receive tax abatements pay much lower tax rates.

Hicks says the findings suggest attracting quality residential developments and more high capital projects should be considered and "close scrutiny of abatements is warranted for communities that desire additional tax revenues with new business development." He adds boosting school funding is also beneficial for population growth and residential property values.