Morton J. Marcus is an economist formerly with the Kelley School of Business, Indiana University. His column appears in Indiana newspapers.
Most communities entice businesses with subsidies or “incentives” to locate in their jurisdiction versus another. It’s seen as a necessary measure of competition. But now, even the oft-irrelevant Indiana General Assembly is looking into these practices.
A conservative, pro-business friend of mine writes a blog in which he points out the duplicity, hypocrisy and foolishness of various deals between governments and businesses. Look it up: www.indytaxdollars.typepad.com Although this blog focuses on Indianapolis, the issues are the same in your town.
Consider property tax abatement. Localities may postpone collecting property taxes on new or expanding businesses. It is the city or county council that grants approval, without weighing the consequences for the school or library districts. Normally, taxes on the property would rise as new structures are built or new equipment installed.
Taxes received by local governments do not go down, but rise slowly over five or ten years. However, the demands on public services might rise immediately; if new jobs mean more school children, local taxes to support the schools do not rise.
Politicians will tell you that new and expanding businesses mean more jobs. That’s a fine idea, if there is serious local unemployment and if the people hired come from that community. But new employees may live elsewhere and commute, contributing little to the local tax base.
In the interest of fairness, why not consider universal tax abatement. If you add a room to your house, your assessment rises and your property taxes increase. Why shouldn’t you, a homeowner, get tax abatement just like businesses get for increasing the tax base?
Now, look at Tax Increment Financing (TIF) districts. Imagine someone comes to your town to build on vacant land, but there is no water supply, sewers, or roads to the property. The local government may organize a TIF that includes the property in question and nearby properties likely to enjoy economic advantages from the new enterprise.
Then, the government may issue bonds to finance the needed infrastructure and dedicate the increased tax revenue from properties in the district to pay off those bonds. The direct beneficiaries of this spending are the land owner and the firm using the land. The rest of the properties in the district are indirect or potential (imaginary?) beneficiaries.
Notice how different this practice is from traditional infrastructure investment. In an equitable world, we build to benefit all, not one or a few properties. A road is for the use of all along its route, not to serve a specific land owner. Waterlines and sewers are installed to open an area for development, not to meet the requirements of one firm.
TIF districts often have indefinite lives plus expandable, gerrymandered boundaries. For a revealing eyeful on this topic see the study of TIFs by the Center for Business and Economic Research (CBER) at Ball State.
If Indiana wants to be a leader, reconsidering abatements and TIFs and other business subsidies is the place to start. Increasing the base, what we call economic development, should provide services that benefit everyone.