Since the mid-1980s, there has been a growing sense of collective anxiety about the world’s diminishing supply of nonrenewable energy and inability to support, for the long term, the growing affluence of developed and developing nations. Sustainable economic development—providing incentives at the community level to promote ecofriendly growth by shifting production to renewable resources—
has gained adherents in some cities, especially in North America.1 At its most basic level, sustainability is a resource allocation issue: “meeting the needs of the present without compromising the ability of future generations to meet their own needs.”2 Some local governments have modified their economic development policies to attract ecofriendly industries and provide incentives for existing industries to convert to more resource-efficient technology.
Sustainable economic development uses many of the conventional tools described in this chapter but targets them for sustainable purposes. For example, sustain-able tax incentives would target new development that promotes in-filling (using vacant land within a city’s core area), the production of locally grown food, the creation of cooperative ventures, or the financing of a microen-terprise loan program. Alternatively, incentives may be used for research and development of new ecofriendly technology. Whatever approaches are taken, citizens will increasingly look to their local government to encourage innovation and experimentation through tax incentives.
Managers have recognized that in communities prone to natural or technological disasters, the goals of sustainability are closely aligned with those of disaster resiliency.3 Resiliency means the ability to anticipate, withstand, and recover from the consequences of a disaster so as to reduce its cost and the disruption to normal activity that it may cause.4
Sustainable economic development and disaster resil-iency share a common goal of adapting communities and their economies to their natural environments. In both cases, budget issues, and specifically local revenue issues, should be part of the planning and decision-making pro-cesses. Although each community’s vulnerability to natural and technological disasters is unique, including policies that promote budget resilience in a comprehensive emergency plan will mitigate the long-term effects of those events on the local economy and its capacity to return to normal.5 Like businesses, a local government needs to have a plan in place for maintaining and financing continuity of operations.
Even after their communities have been destroyed by natural or man-made forces, people have a curious habit of returning to rebuild their homes—what might be called
the “anthill phenomenon.” This pattern of redevelopment raises interesting questions for city leaders engaged in a discussion of sustainable economic development. Eco-nomic growth cannot be sustained forever. Cities reach build-out and have no further available space for expan-sion. Should they try to recreate themselves as they age?
Venice, Italy, was once a glorious center of culture and trade. But no amount of investment can stop the inevi-table demise of this once glorious jewel of Europe as it slowly sinks into the Adriatic Sea. Should sustainable eco-nomic development accept the inevitability of change?
While federal and, to a lesser extent, state aid help to offset the cost of responding to and recovering from a di-saster, much of that cost goes uncompensated. A major se-ries of disasters, such as the multiple hurricanes that hit the Gulf Coast in 2005, impose long-term costs on local gov-ernments that must be absorbed locally through delayed growth and ultimately higher state and local tax burdens.
Thus, when assessing the city’s or county’s disaster resiliency, the manager should consider the following questions:
• Is our insurance coverage sufficient for large-scale losses of city or county property?
• What impact would the most likely types of disasters or emergencies have on the property tax base? Sales tax base? Water and wastewater service charges?
Other major revenue sources?
• What level of budget reserves is appropriate given our community’s vulnerability to particular types of disasters or emergencies?
• What protection should be available to cover debt service costs in the event of a disaster?
• What is the cost and what procedures should be followed to restore collections and enforcement of revenues in the event of a disaster?
• Do mutual aid agreements include assistance with revenue administration in the event of a disaster?
• What agreements should be in place with local nonprofits whose mission is to assist households and businesses in times of disaster?
• Under what conditions can the local government incur short-term debt to cover the operating costs associated with an emergency or disaster?
• What loans or grants are available from the state or federal government to ensure continuity in operations for the local government?
• What tax relief options should be considered for households and businesses in the event of a disaster?
1 Susan M. Opp and Jeffery L. Osgood Jr., Local Economic Development and the Environment (Boca Raton, Fla.: Taylor &
Francis Group, 2013).
2 World Commission on Environment and Development, Our Common Future (New York: United Nations, April 1987).
3 Steven D. Stehr, “The Political Economy of Disaster Assistance,” Urban Affairs Review 41 (March 2006): 492–500.
4 Philip Berke and Gavin Smith, “Hazard Mitigation, Planning, and Disaster Resiliency: Challenges and Strategic Choices for the 21st Century,” in Sustainable Development and Disaster Resiliency (Amsterdam, The Netherlands: IOS Press, 2009).
5 Shayne Kavanagh, Building a Financially Resilient Government through Long-Term Financial Planning (Chicago: Govern-ment Finance Officers Association, circa 2011).
Accumulated evidence from several tax limitation initiatives suggests that their full impact is often delayed by several years—in the case of Proposition 13, even decades—
but that their effects become cumulative and most apparent in recessions. It was during the recession of 2001 that Californians began to experience the cumulative effects and drag on economic growth from Proposition 13, effects that built up to a crisis level during the Great Recession of 2007–09. A study of the property tax cap in Illinois found that in the first few years following its adoption, the cap slowed the growth in property tax revenues for municipalities and school districts, an effect that was even more pronounced ten years later.35
Finally, tax limitations, while providing relief to some fortunate taxpayers, shift the burden to other, often less equitable and economically efficient revenue sources—in particular, more narrow-based excise taxes. Most disconcerting is their long-term impact on state and local government capacity to pursue countercyclical measures.
Casual observation suggests that recessions are steeper and more protracted in states with limited tax and spending options. TELs make it more difficult for state and local governments to take preemptive action to restore economic stability and strengthen employment opportunities.
Conclusion
Local government tax policy pursues two strategies: (1) providing tax incentives to busi-nesses to advance economic prosperity and (2) providing tax relief to residents to curry political favor. Both place heavy demands on local budgets in forgone revenues.
When making locational decisions, businesses are most influenced by business oppor-tunities—the cost of land and labor, the availability of transportation networks, and the presence of agglomeration economies—especially in manufacturing and warehousing.
Once they have narrowed their locational choices, especially to a regional or metropol-itan area, taxes become an increasingly important factor. At the margin, a local govern-ment’s tax burden does affect business investment decisions.
And it is at the margin, where a firm is otherwise indifferent to the choice between two or more possible locations, that locally financed tax incentives, such as tax abatements and TIF, are economically most justified. Among local governments, TIF is the most widely used tax incentive; while it is more complex to administer, it creates the least ineq-uities with existing businesses. But studies on the effectiveness of tax incentives, especially TIF, show that while they may increase property values within the redevelopment district, citywide property values do not show any change that can be attributed to TIF.
Similarly, although public subsidies for professional sports and artistic venues have assumed overbearing influence in some large-city budgets, studies consistently find that these venues also add nothing to the local economy (no net increase in jobs or house-hold income). In this case, however, the subsidies are justified because these venues provide intangible benefits: civic pride, symbolic tributes to a community’s artistic and athletic accomplishments, and, not unimportantly, tributes to the elected leaders who pushed them through.
While much attention has been focused on strategically using tax incentives to promote economic growth at the state and local levels, taxpayers have intensified their demands for tax relief. Much of the relief has targeted taxes paid by individuals, partic-ularly owners of single-family residences. But because tax relief to citizens shifts more of the local burden onto businesses, it has the potential to undo any gains made through tax incentives designed to attract business investment. Thus, the local manager must find an acceptable balance between the political need to grant tax relief to households and the economic need to attract, encourage, and retain successful business ventures.
Although advocates of TELs contend that reductions in state and local taxes will increase economic growth, a number of studies have found that TELs in fact lower eco-nomic activity, especially at the local level, and that their adverse effects accumulate over time. Limits on the property tax in particular cause local governments to shift to other resources and lead to greater dependence on state aid, increasing their vulnerability to budget reductions in recessions.
For cities and counties with vibrant economies and a stable to moderately growing population, the best approach to promoting economic development strategy is to maintain their property tax and utility rates at competitive levels. Tax incentives are no substitute for prudent budget policies that promote responsible financial management practices.
Notes
1 Daphne A. Kenyon, Adam H. Langley, and Bethany P.
Paquin, Rethinking Property Tax Incentives for Business (Cambridge, Mass.: Lincoln Institute of Land Policy, 2012), 29, lincolninst.edu/pubs/dl/2024_1423_
Rethinking%20Property%20Tax%20Incentives%20 for%20Business.pdf.
2 William H. Oakland and William A. Testa, “The Benefit Principle as a Preferred Approach to Taxing Business in the Midwest,” Economic Development Quarterly 14 (May 2000): 154–164.
3 Ronald C. Fisher, State & Local Public Finance, 3rd ed. (Mason, Ohio: Thomson South-Western, 2007), 664–665.
4 Kenyon, Langley, and Paquin, Rethinking Property Tax Incentives, 5.
5 Ibid., 5.
6 Ibid., 37.
7 Gerald A. Carlino, “Three Keys to the City: Resources, Agglomeration Economies, and Sorting,” Business Review (2011): 1–13, philadelphiafed.org/research-and-data/publications/business-review/2011/q3/
brq311_three-keys-to-the-city.pdf.
8 Rachel Weber, Saurav Dev Bhatta, and David Merriman, “Does Tax Increment Financing Raise Urban Industrial Property Values?,” Urban Studies 40 (September 2003): 2001–2021.
9 David F. Merriman, Mark L. Skidmore, and Russ D. Kashian, “Do Tax Increment Finance Districts Stimulate Growth in Real Estate Values?,” Real Estate Economics 39 (2011): 221–250.
10 Richard F. Dye and David F. Merriman, “Tax Increment Financing: A Tool for Economic Development,” Land Lines 18 (2006): 2–7, lincolninst .edu/pubs/1078_Tax-Increment-Financing.
11 Robert W. Wassmer, “Property Tax Abatement as a Means of Promoting State and Local Economic Activity,” in Erosion of the Property Tax Base: Trends, Causes, and Consequences, ed. Nancy Y. Augustine et al. (Cambridge, Mass.: Lincoln Institute of Land Policy, 2009): 237.
12 Kenyon, Langley, and Paquin, Rethinking Property Tax Incentives, 12.
13 Ibid., 8.
14 Gary Sands and Laura A. Reese, Money for Nothing:
Industrial Tax Abatements and Economic Development (Lanham, Md.: Lexington Books, 2012).
15 “List of Major League Baseball Stadiums,” MLB.com.
16 “List of Current National Football League Stadiums,” NFL.com.
17 Americans for the Arts, Local Arts Agency Programs (2012), artsusa.org/pdf/get_involved/advocacy/
research/2012/localartsagencies12.pdf.
18 Geoffrey Propheter, “Are Basketball Arenas Catalysts of Economic Development?,” Journal of Urban Affairs 34 (2012): 441–459; Andrew Zimbalist, May the Best Team Win: Baseball Economics and Public Policy (Washington, D.C.: Brookings Institution Press: 2003); David Swindell and Mark S. Rosentraub, “Who Benefits from the Presence of Professional Sports Teams? The Implications for Public Funding of Stadiums and Arenas,” Public Administration Review 58 (January/February 1998):
11–20; Judith Grant Long, Public/Private Partnerships for Major League Sports Facilities (New York:
Routledge, 2013).
19 Swindell and Rosentraub, “Who Benefits from the Presence of Professional Sports Teams?,” 16.
20 Charles A. Santo, “Beyond the Economic Catalyst Debate: Can Public Consumption Benefits Justify a Municipal Stadium Investment?,” Journal of Urban Affairs 29 (2007): 455–479.
21 Zimbalist, May the Best Team Win, 125.
22 See, e.g., Gerald A. Carlino and N. Edward Coulson, “Should Cities Be Ready for Some Football? Assessing the Social Benefits of Hosting an NFL Team,” Business Review (2004): 7–17;
Santo, “Beyond the Economic Catalyst Debate”;
Zimbalist, May the Best Team Win.
23 Zimbalist, May the Best Team Win, 126.
24 Carlino and Coulson, “Should Cities Be Ready for Some Football?”
25 Skip Krueger, Christopher V. Hawkins, and Robert W. Walker, “The Cost of Boosterism: Development, Growth Management, and Municipal Bond Ratings,” Municipal Finance Journal 31 (2010): 51–75.
26 Bing Yuan et al., “Tax Expenditure Limits and Their Effects on Local Public Finances” (technical report, The George Washington University, August 30, 2007), 10–11, gwu.edu/~gwipp/lincoln/Yuan_
Cordes_Brunori_Bell.pdf.
27 Ibid.
28 Robert L. Bland and Phanit Laosirirat, “Tax Limitations to Reduce Municipal Property Taxes:
Truth in Taxation in Texas,” Journal of Urban Affairs 19 (Spring 1997): 47.
29 Job D. Springer et al., “An Evaluation of Alternative Tax and Expenditure Policies on Kansas Local Governments,” Public Budgeting & Finance 29 (Summer 2009): 48–70.
30 Ibid., 68.
31 Therese J. McGuire and Kim S. Rueben, “The Colorado Revenue Limit: The Economic Effects of TABOR,” Economic Policy Institute Briefing Paper (March 21, 2006): 2, urban.org/
uploadedpdf/1000940_TABOR.pdf.
32 Suho Bae, Seong-gin Moon, and Changhoon Jung, “Economic Effects of State-Level Tax and Expenditure Limitations,” Public Administration Review 72 (September/October 2012): 649–658.
33 Steven Deller, Judith I. Stallmann, and Lindsay Amiel,
“The Impact of State and Local Tax and Expenditure Limitations on State Economic Growth,” Growth and Change 43 (March 2012): 56–84.
34 Mathew D. McCubbins and Ellen Moule, “Making Mountains of Debt out of Molehills: The Pro-Cyclical Implications of Tax and Expenditure Limitations,” National Tax Journal 63 (September 2010): 603–622; Travis St. Clair, “The Effect of Tax and Expenditure Limitations on Revenue Volatility:
Evidence from Colorado,” Public Budgeting & Finance 32 (Fall 2012): 61–78.
35 Richard F. Dye, Therese J. McGuire, and Daniel P.
McMillen, “Are Property Tax Limitations More Binding over Time?” National Tax Journal 58 (June 2005): 215–225.
1. The continued constriction of local government budgets has prompted a number of cities around the country to look at their tax expenditures—the exemptions or other tax relief measures provided to businesses, individuals, and nonprofits. What is the justification for exempting nonprofits from paying local property taxes? From paying state and local sales taxes? What are the long-term effects to the property tax base of exempting nonprofits from the property tax? Several local governments have begun demanding payments in lieu of taxes (PILOTs) from large private universities and hospitals. Should all nonprofits be required to pay PILOTs? Why or why not?
2. Another tax expenditure receiving increased scrutiny is tax incentives to businesses. When are tax incentives justified? What are the most common sources of problems (political and economic) that arise from local governments’ use of tax incentives? What measures should public administrators take to minimize the occurrence of these problems?
3. A number of local governments have taken an aggressive approach to the use of tax incentives to promote economic development. Not surprisingly, the use of these incentives has been accompanied by considerable debate among managers, local and state lawmakers, and taxpayers as to their efficacy, especially in rapidly growing regions of the country.
a. What effect do tax incentives, such as tax abatements and tax increment financing, have on equity? On tax neutrality?
b. According to the research, what effect do tax incentives have on economic development at the local level? Under what circumstances should tax incentives be used?
c. Briefly summarize the policies and procedures that a local government should have in place before using tax incentives.
4. All of the following are evidence of intergovernmental tax competition except a. Offering tax incentives to attract business investment
b. Locking in voter approval on general obligation bonds before overlapping local governments have the opportunity to do so
c. Tax exportation
d. Agglomeration economies e. Tax base sharing.
5. The border-city/border-county/border-state effect a. Occurs in a federal system of government b. Reduces tax neutrality
c. Occurs as tax rates vary across jurisdictions
d. Adds to the administrative cost of collection and enforcement.
e. All of the above.
f. All but D.
6. Tax incentives offered by local governments make the most sense a. For commercial and residential development
b. For industrial and technology development c. When agglomeration economies are present
d. For relatively small jurisdictions in metropolitan areas.