Over the years, Detroit has relied heavily on the use of tax abatement programs to spur economic development. Earlier this year, Bedrock was granted a $60 million tax abatement for the Hudson site development. Some Detroiters were unhappy with this decision because abated taxes are dollars not available to fund vital public services.
Just this week, Olympia Development requested state and city incentives for the $1.5 billion District Detroit development. Both examples highlight the city’s active role using tax incentives to attract developers and businesses.
Local governments utilize tax incentives to subsidize development to create jobs, grow the tax base, and generally promote economic growth. However, as with many economic development programs, it is difficult to determine how much economic growth would have occurred in the absence of the tax breaks.
Tax abatement programs are an attractive option for a few reasons. First, state and local governments are able to determine the menu of tax incentives they are able to provide businesses to attract investment. This provides a level of control for taxes they choose to forego. Second, they are politically easier to implement because they do not directly require cuts or diversions in spending from other programs. Finally, it is hard for communities to abstain from using incentives when their neighbors use them to attract investment.
Detroit, like other communities with high unemployment and/or declining population, utilizes these programs to capture and/or redirect business investment as a means to bolster employment and grow the population. While the city might forego tax revenues with these incentives, the businesses and jobs the city attracts serve as a benefit through increased city income tax from new jobs as well as any spin-off effects from new or improved developments.
Cities like Detroit also tend to have underutilized infrastructure, so business investments in these areas are less likely to require new infrastructure that may be costly. In addition, business tax breaks are meant to partially offset the increased business costs such as higher property taxes, lower public services, and higher crime rates associated with locating in poorer areas of a city.
However, there are potential obstacles to achieving development goals of tax abatement programs. Property taxes are a small part of total operating costs for businesses and sometimes tax breaks are provided to businesses that would have chosen the same location without incentives. The widespread use of incentives may also reduce their effectiveness. Thus, governments must be strategic in providing business tax incentives.
Michigan law offers many types of tax abatements for local governments to foster economic development. A strength of Michigan’s tax abatement landscape is the variety – abatements are available to targeted blighted areas and contaminated sites as well as high tech investment and job creation.
Between 2017 and 2021, Detroit used 13 different residential and business programs.
Between 2017 and 2021, the city opted to forego an average of about $20 million per year in property taxes through the business tax abatement programs. Renaissance Zones comprised the largest share ($7 million or 34 percent) of the total abated business taxes. The average annual property tax revenue generated over the same period equaled about $121 million. Thus, tax abatements account for 16.8 percent of the average annual property tax revenue generated between 2017 and 2021.
The use of these programs may help to attract jobs and investment, but it leaves the city with foregone revenue which can negatively affect public services like public safety and libraries that rely on local taxes.
To further understand the city’s use of these programs, we benchmark Detroit to four peer cities as a way to better understand how heavily the city leans on these programs and compare the foregone revenue caused by economic development tax breaks.
Four peer cities similar in size and economic conditions were selected for this comparative analysis: Cleveland, Columbus, Memphis, and Milwaukee. They were selected based on population, land area, population density, median household income, and percentage of the population below poverty level. Columbus, Memphis, and Milwaukee, like Detroit, are considered high-tax cities when assessing effective tax rates on homestead and commercial properties.
The chart below shows the average annual per-resident foregone revenue of business tax abatements across the five cities over the five-year period, FY2017 to FY2021.
Average Per Capita Foregone Revenue, FY2017 to FY2021
Detroit ranks the highest among these peer cities in average annual per capita foregone revenue at about $31 per resident with Memphis ranking second at about $21 per resident. The average annual per capita foregone revenue of the four peer cities was $16, meaning Detroit is providing nearly twice the business tax incentives via tax abatements as the comparison cities.
In addition to leading the pack with forgone tax revenue, Detroit used the most (nine) business tax abatement programs compared to its four peer cities. Most others used fewer than five.
It is important to note that when looking at these numbers, it can be hard to provide an apples-to-apples comparison of the impact tax abatement programs have on local governments based on the gross foregone revenue of each city. There are several dimensions at which tax abatement programs can differ between states and the number of programs a state makes available to its municipalities also differs.
One of the main features of using tax abatement programs to incentivize business investment is to create and retain jobs in the city. Over the last decade, Detroit’s unemployment rate has trended down while the municipal income tax has trended up. While it is hard to quantify how much of that trend is due to the tax abatement programs the city has used, it is certainly a good sign for the city.
The verdict on tax abatement programs is still unclear. Research shows a generally poor record of these programs promoting economic development, but incentives can be helpful in some cases. For cities like Detroit that have struggled to retain population and business, economic development tools like abatement programs were made to alleviate that.
When incentives attract new businesses to a jurisdiction they can increase income or employment, expand the tax base, and help to revitalize distressed urban areas. But these programs must be used prescriptively. Tax abatement programs tend to lose their effectiveness if used abundantly and Detroit must be aware of that as it moves forward trying to spur its economic growth.
Read the full CRC report here.