Public economic development entities routinely use grants, loans, loan guarantees and “free” infrastructure to induce industry to locate in their jurisdictions. Abatement of and/or manipulation of property taxes is widely used to lure industry.
Property taxes provide a whole host of creative ways for government to provide tax breaks only available to very few privileged property owners. They include outright abatement, kick backs of property taxes (Tax Increment Financing – “TIF”), and creation of Economic Enterprise Zones (EEZ). The EEZ’s abate property taxes for those whose property falls in the zone provided they meet established criteria.
Economic development entities realize that property taxes are a significant impediment to economic growth and business prosperity. In North Dakota the average property tax imposition is 1.42% of assessed property value. For many businesses, property taxes can exceed the profit the business generates. Thus, property tax strips the business owner of necessary capital needed to maintain a viable business and grow.
For example a building in Minot valued at $5.8 million dollars is assessed more than $100,000 annually in property tax. While the tax may enhance the local jurisdiction’s revenue, it makes it difficult for that business to fund growth. Property taxes are assessed regardless of whether or not the business makes a profit.
Because of the harsh financial impact of property tax on business, government bodies realized reducing or abating them has a positive influence on business viability and success. Most exemptions, whether abatements, TIF kickbacks or Enterprise Zones, last for only short periods - usually in the 3 to 7 year range. Some are shorter and some longer.
We now have extensive history showing the impact of these economic development programs. The conclusions are sobering. In the short term they attract business activity. Over the longer term the positive impacts are limited and short lived. A significant number of businesses attracted by these incentives either fail or once the incentives end, move to the next community offering incentives. Instead of creating viable jobs these programs create incentive seekers or more accurately welfare addicted business.
For those serious about attracting and retaining thriving, prosperous and growing businesses, there are some valuable lessons to be learned:
1. Temporary incentives provide temporary economic impacts.
2. Temporary incentives increase the tax burden on all other properties, negatively impacting the ability of home owners to retain the capital needed to remain successful and/or grow.
Economic development corporations have attempted to attract business by offering incentives. Property tax relief and outright grants have proven the most potent inducements. Property tax relief is particularly effective for encouraging business to invest in property improvement and upkeep.
However, temporary relief provides only temporary benefits and only to those receiving them. All other taxpayers are negatively impacted. Often, once the incentives end the recipients either fail or move on.
Abolition of property tax is the most potent way to keep capital in the hands of those who create jobs. Likewise, property taxes are the surest way to starve business of the capital necessary to grow and remain viable.
Permanent abolition of property taxes for everyone will not only stimulate growth it will stabilize the long-term viability of our communities.