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dissertation entitled

A Study on Relationship Between Local Utilization
of Manufacturing Property Tax Abatement and
Local Conditions in Michigan Cities

presented by

Hyunsung Lee

has been accepted towards fulﬁllment
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ﬁlm W.“

 

A STUDY ON RELATIONSHIP BETWEEN LOCAL UTILIZATION
OF MANUFACTURING PROPERTY TAX ABATEMENT AND
LOCAL CONDITIONS IN MICHIGAN CITIES

By

Hyunsung Lee

A DISSERTATION

Submitted to
Michigan State University
in partial fulﬁllment of the requirement
for the degree of

DOCTOR OF PHILOSOPHY

Urban and Regional Planning Program
College of Social Science

1999

ABSTRACT

A Study on the Relationship between Local Utilization of Manufacturing
Property Tax Abatement and Local Conditions in Michigan Cities

By

Hyunsung Lee

This dissertation focuses on an evaluation of the property tax abatement system as
a planning tool, one of the most widely practiced tax instruments designed to stimulate
economic development and productive land use. These tax abatements are especially
prevalent in large central cities and some suburban communities that surround them.
Local officials hope to reverse their city’s relative ﬁscal decline by exerting a measurable
inﬂuence on a ﬁrm’s location. Tax abatements reduce the price of land and capital for
industry and thereby make investment opportunities in urban areas more attractive.

The purpose of this study is to discover the relationships between the use of
property tax abatements and local ﬁscal and economic conditions. Given signiﬁcant
variation among cities in levels of economic development, it is reasonable to examine the
use of tax abatement across a wide group of municipalities. Previous studies examining
the tax abatement policy and its effectiveness have offered little discussion about why
communities choose certain economic development policies over others and at what
levels. In this study, I examine the relationship between local utilization of property tax
abatement and local ﬁscal and economic conditions in Michigan cities. I also analyze the
relationship of such factors as governmental structure, spatial variation, local policy, and

social and structure conditions on local utilization of property tax abatement. This study

uses a multiple regression model to determine how local ﬁscal and economic
performance levels relate to the utilization of property tax abatements in Michigan cities.
A panel data set is used because a single cross-section of Michigan cities results in too
small of a data set. The panel consists of four pooled cross sections beginning in 1977
and continuing in ﬁve-year increments up to 1992.

In the model, the dependent variable is the degree of local utilization of property
tax abatement, which is measured in two ways: 1) per capita amount of cumulative real
market value of manufacturing property tax base abated away (KTAP) and 2) numbers of
manufacturing property tax abatement issued (TANO). Independent variables include
local ﬁscal condition variables, local economic condition variables, and other
environmental variables surrounding local governments.

The results of the empirical analysis show that communities with the greater
revenue and tax base tend to use more the property tax abatement program whereas tax
burden and reliance on property tax, which represent ﬁscal distress, is negatively related
to the local utilization of property tax abatement. While communities with higher rates of
median income change tend to grant property tax abatement more, cities with cycling as
well as structural unemployment have difﬁculty utilizing the property tax abatement
program. These empirical results imply that property tax abatement policy can create
locational distortions and have undesirable equity consequences. Thus, it needs to control
the property tax abatement policy to insure that local governments only offer abatements

that are necessary to overcome local ﬁscal and economic needs.

© Copyright by
Hyunsung Lee

1 999

dedicated to

my father, my mother,
wife and my children

ACKNOWLEDGEMENTS

This dissertation would not have been possible without the assistance and
corporation of many people. Special appreciation is extended to Professor Roger B.
Hamlin, my doctoral committee chair, for his critical examination and methodical
guidance throughout the development and completion of this study. Special thanks are
also extended to the other members of my doctoral committee: Professor Frank Zinn,
Professor Richard Hula and Prof. Scott Gates. For their encouragement and constructive
criticism of the manuscript. I should express my appreciation to Professor Gill-Chin Lim,
MSU endowment professor and my doctoral committee member, for his continuous
enlightening ideas, and scholarly guidance.

Finally, very special thanks are extended to my wife, Yeonjwa, and my mother for
their encouragement and endless love. Without their patience and constant support none
of this would have been possible.

In many ways, I consider the achievement represented by this volume to be theirs

as well as my own.

vi

TABLE OF CONTENTS

LIST OF TABLES
LIST OF FIGURES
CHAPTER
I INTRODUCTION ............................................................ 1
1.1. Statement of the Problem ............................................... 1
1.2. Purpose of the Study .................................................... 2
1.3. Organization of the Study .............................................. 3
II. BACKGROUND OF PROPERTY TAX ABATEMENT PROGRAMS . 6

III.

2.1. The Uncertain Role of Federal Policy ................................ 6
2.2. Tax Abatement Policy in the United States ......................... 9
2.3. Tax Abatement Policy in Michigan .................................. 15

2.3.1. The Public Act 198 of 1974 .............................. 15

2.3.2. Program Content ........................................... 16
A REVIEW OF LITERATURE ........................................... 19
3.1. Overview ............................................................... 19
3.2. Local Tax and Expenditure Policy and Firm's Location .......... 20
3.3. Political Economy Approach ........................................ 34

vii

IV

3.3.1. Political Rationale of Local Utilization of Property Tax
Abatement ................................................ 33

3.3.2. Determinants of Local Economic Development Policy 36

3.4. Local Fiscal Stress Measurement ................................... 41

CONCEPTUAL FRAMEWORK OF LOCAL UTILIZATION OF

PROPERTY TAX ABATEMENT POLICY ............................ 44
4.1. Overview ............................................................... 44
4.2. Procedures for Local Utilization of Manufacturing Property Tax
Abatement Policy in Michigan ....................................... 45
4.3. Conceptual Framework of Local Utilization of Property Tax
Abatement Policy ..................................................... 49
4.3.1. Local Context ............................................. 49

4.3.2. Development of Local Fiscal and Economic Performance
Measure .................................................... 51

4.3.3. Relation between Local Fiscal and Economic Performance
and Local Utilization of Property Tax Abatement 55

4.3.4. Local Environmental Factors in Utilizing Property Tax

Abatement ................................................. 65
EMPIRICAL ANALYSIS ................................................ 68
5.1. Overview .............................................................. 68
5.2. Hypotheses .......................................................... 68
5.3. Analytical Model .................................................... 72
5.4. Data and Variables ................................................. 86
5.5. Results of Empirical Analysis ..................................... 93

viii

5.5.1. Regression Results ...................................... 93

5.5.2. Summary of Findings .................................. 110

VI SUMMARY AND CONCLUSIONS ................................. 112

6.1. Summary ............................................................ 112

6.2. Policy Implications ................................................. 115

6.3. Limitations and Recommendations .............................. 117
BIBLIOGRAPHY ........................................................................... l 19

ix

Table 2.1.

Table 2.2.

Table 2.3.

Table 2.4.

Table 5.1.

Table 5.2.

Table 5.3.

Table 5 .4.

Table 5.5.

Table 5.6.

Table 5.7.

Table 5.8.

Table 5.9.

LIST OF TABLES

No. of State Offering Selected Industrial Incentive Programs in Selected
Years ......................................................................... 11

States with Manufacturing Property Tax Abatement Programs 12

Availability of Property Tax Abatement on Land and Machinery, 50

states, 1995 ................................................................. 13
Availability of Property Tax Abatement and Right-to-Work, 50 states,

1995 .......................................................................... 14
Dubin —- Watson d test: Decision rules .................................... 80
Correlation Coefﬁcients Among Independent Variables ............... 83
Variables and Deﬁnitions .................................................. 88
Variable Derivation and Sources ......................................... 89

Determinants of Local Utilization of Property Tax Abatement (KTAP) 96
Determinants of Local Utilization of Property Tax Abatement (TANO)101

Determinants of Local Utilization of Property Tax Abatement
:Reduced Model (KTAP and TANO) .................................... 106

Determinants of Local Utilization of Property Tax Abatement

: Reduced Model (KTAP) by Years .................................... 107
Determinants of Local Utilization of Property Tax Abatement
: Reduced Model (TANO) by Years .................................... 108

Figure 4.1.

Figure 4.2.

Figure 4.3.

Figure 4.4.

Figure 5.].

LIST OF FIGURES

Procedures for Local Utilization of Manufacturing Property Tax
Abatement in Michigan ...................................................

Classiﬁcation of Communities Types by Fiscal and Economic
Performance ...............................................................

Numbers of Cities in Communities Types by Each Year
(By relative level of ﬁscal and economic performance) ............

Numbers of Cities in Communities Types by Each Year
(By unemployment rate and budget deﬁcit) ............

Dubin-Watson (1 test: Decision rules ..................................

xi

CHAPTER I

INTRODUCTION

1.1. Statement of the Problem

Competition among state and local governments to attract industrial and
commercial developments has become increasingly intense in recent years. This trend of
interstate and interlocal competition may be partially due to the absence of a coherent
spatial development policy at the national level. However, the effectiveness and impacts
of these instruments on local communities and the nation as a whole are not clearly
understood. Also, the increased use of local incentives has occurred with little or no
empirical test of their effectiveness.

My dissertation focuses on an evaluation of the property tax abatement system as
a planning tool, one of the most widely practiced tax instruments designed to stimulate
economic development and productive land use. These tax abatements are especially
prevalent in large central cities and some of the suburban communities that surround
them. This can be attributed to local officials hoping to reverse their city’s relative ﬁscal
decline by exerting a measurable inﬂuence on intrametropolitan ﬁrm location. Tax
abatements reduce the price of land and capital for industry and thereby make investment
opportunities in urban areas more attractive.

The effectiveness of tax abatement policy is questionable. Recently local
government officers, decision-makers, and researchers have questioned these tax

incentives and tax abatements as visible strategies for promoting the local economy.

Despite research ﬁndings that question the sensitivity of ﬁrms’ location decisions to local
tax differentials, the use of tax abatement programs has expanded. In certain regions of
the country, the availability of tax incentives has become so extensive that little
development activity is conducted without them. Since the tax burden is one of the few
factors in the ﬁrm's investment decisions that is under the locality's direct control, the
development ofﬁcials who seek to inﬂuence private investment behavior may well
choose abating property taxes as the “only game in town.” (Wolkoff, 1980)

The success of this tax abatement policy depends upon the impact of the incentive
on ﬁrm behavior. Existing research suggests that state and local tax differentials are
unlikely to have major effects upon the location decisions of investing ﬁrms (Due, 1963).
Tax abatement policy might be useful to inﬂuence private investment at the margin. Yet,
sophisticated econometric modeling, which attempted to include both demand and supply
side factors inﬂuencing intrametropoltan location decisions, has found weak evidence
linking ﬁscal factors to the jurisdiction’s employment share and tax base (Chamey, 1983;
Fox, 1980: Wasylenko, 1980).

For the ﬁrm that is ready to move, has equal access to both input and output
markets, and faces comparable public service packages, local property tax abatement may

be important.

1.2. Purpose of the Study

The purpose of this study is to discover the relationships between the use of

property tax abatements at the local level and local ﬁscal and economic conditions.

A signiﬁcant variation among cities in levels of economic development allows
one to examine the use of tax abatement across a wide group of municipalities. Previous
studies examining tax abatement policy and its effectiveness have offered little discussion
about why some communities choose certain economic development policies over others
and at what levels. In light of questions of the efﬁcacy of tax abatements, it is important
to understand why some communities rely heavily on tax abatement policy while others
are willing to forgo it, and what community characteristics determine the level of tax
abated. In this study, I will examine the relationship between local ﬁscal and economic
conditions of Michigan cities and the degree of local utilization of property tax
abatement. I also analyze the relationship between political and environmental factors

and tax abatement policy.

1.3. Organization of Study

This study is divided into six chapters. After this introduction, Chapter II
discusses various aspects of federal ﬁscal policies as they affect urban development
patterns. This serves as a background for understanding the growth of localized tax
instruments for planning purposes. The chapter then surveys the extent to which tax
abatement programs are used throughout the United States. Since this dissertation
focuses on one speciﬁc program, the use of property tax abatements in Michigan cities,
the Michigan State tax abatement law, PA. 198, is examined.

Chapter III discusses the current literature that has implications for local

utilization of property tax abatements. This literature review includes three subjects for

the research: 1) studies on the relationship between local tax and expenditure policy and a
ﬁrm’s location choice; 2) studies on local economic development politics; 3) the
literature related to measuring local ﬁscal stress. The implications from the review are the
basis for the theoretical and empirical analysis presented in Chapter IV and Chapter V.

Chapter IV investigates the relative ﬁscal and economic performance of cities.
Based on the data and literature review, Chapter IV describes a proposed ﬁscal and
economic indicator, which attempts to measure the relative ﬁscal and economic
performance of cities. Chapter IV also develops a conceptual framework for analyzing
the relationship between local ﬁscal and economic conditions and the level of property
tax abated.

Chapter V provides an empirical analysis of the level of property tax abated. This
chapter presents hypotheses concerning the impact of local ﬁscal and economic variables
on the local utilization of property tax abatement. The analytical method of this study is a
statistical analysis using multiple regression models that identify the determinants of
local utilization of tax abatements. The multiple regression models use panel data from
50 Michigan cities with population greater than 25,000. The panel consists of four pooled
cross sections beginning in 1977 and continuing in ﬁve-year increments up to 1992.
Dependent variables are the degree of the local utilization of property tax abatement,
which is measured by l) per capita amount of cumulative real market value of
manufacturing property tax base abated away and numbers of manufacturing property tax
abatement issued. Independent variables include local ﬁscal variables, local economic
variables, and other environmental variables. This chapter explains the relationship

between the level of local ﬁscal and economic performances of cities and the level of

property tax abatement based on regression results. This chapter also identiﬁes other
potential determinants of local property tax abatement policy.
Chapter VI will provide a summary of the study's major ﬁndings and discuss

policy implications and future research directions.

CHAPTER II

BACKGROUND OF PROPERTY TAX ABATEMENT PROGRAMS

In this chapter, I will ﬁrst examine various aspects of federal ﬁscal policies as
they affect urban development patterns. This discussion serves as a background to discuss
the growth of localized tax instruments for planning purposes. Then I will survey the
extent to which tax abatement programs are used throughout the United States. Since this
dissertation focuses on one speciﬁc program, the use of property tax abatements in
Michigan cities, I will examine PA. 198 of the laws of Michigan of 1974, which allows

property tax abatement programs in Michigan cities.

2.1. The Uncertain Role of the Federal Policy

In this section, the impact of the federal policy on spatial development is brieﬂy
outlined. The purpose of this discussion is to understand the bias and inconsistency of the
federal tax and expenditure policies, which have tended to encourage tax competition
among states and localities.

Federal tax policy as part of ﬁscal instruments is intended to control aggregate
demand and the level of economic activities. Therefore, the explicit concern of personal
and business tax systems is conﬁned to the performance of the macro-economy.
However, the current federal tax policy also contains an “implicit urban policy” due to
differential tax beneﬁts to individuals and business establishments having different

locations. Thus federal tax policy enters into individual and business decisions as one of

the most important factors affecting locational choice. As shown below, several aspects
of the federal tax policy have resulted in a strong bias against older cities.

First, personal income tax provisions regarding homeownership have signiﬁcantly
affected the spatial structure of cities. Under the current federal tax system, homeowners
are allowed to deduct mortgage interest payments and state and local property taxes from
their income. Furthermore, the amount of imputed rent is not added to the income of
homeowners for tax purposes. Various studies have shown that homeowners gain roughly
10 percent of the housing price as annual return on their investment, and that they also
reduce a substantial portion of their housing costs because of the tax beneﬁt (Hayes and
Puryear, 1980). The apparent beneﬁts to homeowners provided by the federal tax policy
have created strong incentives for individuals to become owner-occupants. An analysis of
the post-World War II data suggests that about 25 percent of the increase in the
proportion of homeowners is attributable to the federal tax system allowing beneﬁts to
owner-occupants (Rosen and Rosen, 1980).

American cities typically have a relatively higher proportion of rental housing
units in the form of multi-family structures in older central cities. Historically, most new
construction of owner-occupied single family housing units has taken place in the
periphery of metropolitan areas. This pattern of urban development, together with the
federal personal income tax policy, has substantially contributed to the decline of older
central cities.

A second example of the federal tax policy creating a bias against older cities is
the investment tax credit. The investment tax credit is intended to encourage new capital

formation by allowing favorable tax concessions to business establishments making

investments. Before 1978, this credit was allowed only for new investments in
equipment, thus giving additional incentives to businesses to close down old plants, and
move to the suburbs and the newly developing areas. This bias against rehabilitation was
corrected by the Revenue Act of 1978, which extended the investment tax credit to
rehabilitation of business structures which are at least 29 years old. Despite this change,
the overall impact of this investment tax credit seems to be in favor of newly growing
area (Bahl and Puryear, 1978: Hayes and Puryear, 1980).

It is also important to note the combined effects of the two aspects of the federal
tax policy on urban development. Business location is affected by the location of the
labor force, while residential location decisions are dependent upon employment location.
The interdependency between employment and population location, coupled with the
federal bias have probably furthered the decline older cities.

The federal expenditure policy and some of the federal regulatory mechanisms
have also inﬂuenced uneven spatial development. For example, the construction of the
interstate highway system, the mortgage insurance and guarantee by the Federal Housing
Administration and the Veteran’s Administration, and the control of the oil price, to name
of few, have tended to work in favor of the suburbs and newly developing areas.

Various forms of intergovernmental transfer programs have been introduced to
correct ﬁscal imbalances among state and local governments. Available empirical
evidence suggests tremendous regional variations in the allocation of federal grants.
Currently, the Northeast and the West receive greater amounts of per capita federal
grants, with the Midwest lagging substantially behind (Vehom, 1977). Central cities in

general appear to receive the greatest amount of federal aid per capita. Among different

regions, central cities in the Northeast receive the greatest amount, and those in the
Midwest the least. However, according to Vehorn (1977), suburban areas of the Western
region seem to get more than the central cities of their own and of the Southern and
Midwestern regions.

To summarize the above discussion, the current federal policy is an odd mixture
of intra- and inter-regional bias and inconsistency with respect to urban development and
growth. The bias of some policies is quiet apparent, while impacts of some others seem
indeterminate. Of course, the uneven spatial development observed in the United States is
not solely due to the federal policies. An important point is that the bias and
inconsistency inherent in the federal policy and the lack of a coherent national spatial
policy have tended to encourage a widespread practice of decentralized tax instruments

by state and local governments.

2.2. Background of Tax Abatements Program in the United States

The use of tax concessions as incentives to stimulate economic activities by state
governments dates back to the eighteenth century. Alyea (1967) reports on examples of
tax abatements. In 1783, Connecticut granted a ten-year tax exemption for the purpose of
creating jobs for the poor to those ﬁrms that would manufacture oil from ﬂax seed. After
the Civil War, South Carolina offered inducements to industry that explicitly linked to tax
abatements with industrial subsidies. “Anyone who employed capital in the manufacture
of cotton, wool, or paper fabrics, iron, lime, or agricultural implements was entitled to

receive, from the state treasury, a subsidy equal to his total state taxes for a period of 10

10

years” (Alyea, 1967, p. 141). As early as 1791, the State of New Jersey allowed tax
exemptions to a new business ﬁrm and its employees (Dorfman, 1947). New Jersey
discontinues this practice in 1800, but during the nineteenth century other states
established tax exemption systems to attract industries. The measure was originally a
Southern phenomenon, but recently, it has been adopted by the majority of states in other
parts of the country.

Tax abatement programs take a variety of forms, depending on the item of taxes
exempted or reduced, the duration, target areas, the amount of concessions, and target
activities. Exemptions or abatements are applied to property taxes, income taxes, and/or
sales taxes. Various surveys suggest that abatements of property taxes are one of most
commonly used forms of tax incentives (Hellman, Wassell, and F alk, 1976). In terms of
duration abatements are granted usually up to twenty years. For example, New Jersey
allows abatements up to ﬁfteen years, while Ohio twenty. Geographical targeting also
varies. In some states, tax abatements are granted only to legally deﬁned “blighted”
areas. In some other states, however, tax abatements are also varies among little
geographical restrictions. The amount of tax abatement also varies among states, usually
taking a certain proportion of gross rentals or total project costs. Finally, the target
activities also come in a variety of forms. While some states and local jurisdictions allow
tax concessions only to industrial and commercial activities, others have granted tax
abatements to residential projects. For example, under its administrative code, the city of
New York has practiced tax abatement and exemption programs to encourage

rehabilitation of multiple residential structures.

11

An indication of the growing popularity of these programs can be gleaned from
Table 2.1. Tax abatements have been used by an increasing number of jurisdictions.
Since 1970 the number of states offering property tax abatements has more than doubled.
While no clear geographic pattern characterizes the use of this tool, Northeastern and
Great Lakes states show the greatest level of tax abatement activity. Table 2.2 gives a
complete listing of the 44 states conducting tax abatement programs. At this point, the
frequency of use of tax abatements approaches that of a number of other more traditional
economic development programs. One reason is that industrial development bonds have
become a less attractive form of incentive because Federal tax exemption was limited to
bond issues of $1 million or less in 1968 (except for pollution control bonds). This has
increased the relative attractiveness of property tax abatement as an incentive for

investments exceeding the bonding cap.

Table 2.1. No. of States Offering Selected Industrial Incentive Programs in

 

 

 

 

 

 

 

 

Selected Years
1970 1975 1980 1985 1990 1995

Corporate Income Tax 28 34 36
Exemption
Personal Income Tax Exemption 20 19 20 22 32 32
Tax Exemption or Moratorium 17 21 29 32 3 5 37
on Land, Capital Improvements
Tax Exemption or Moratorium 21 27 31 32 41 42
on Equipment Machinery
City /County Revenue bond 42 43 46 50 49 49
Financing
State Right to Work Law 19 19 20 2O 22 22

 

 

 

 

 

 

 

Compiled from Industrial Development and Site Selection Handbook, selected issues.

 

12

Table 2.2. States with Property Tax Abatement Programs

 

1. Tax Exemption or Moratorium on Land, Capital Improvements and
Personal Property (Equipment and Machinery): 35 States

Alabama Arizona Arkansas California Connecticut
Delaware Florida Georgia Illinois Indiana

Iowa Kansas Kentucky Louisiana Maryland
Massachusetts Michigan Minnesota Mississippi Missouri
Montana Nebraska New Mexico New York North Dakota
Ohio Oklahoma Oregon Pennsylvania Rhode Island
South Carolina South Dakota Tennessee Texas Virginia

2. Tax Exemption or Moratorium only on Land, Capital Improvements:
2 States

Alaska New Jersey

3. Tax Exemption or Moratorium only on Personal Property (Equipment and
Machinery): 7 States

Colorado Hawaii Idaho Main New Hampshire
Utah Wisconsin

 

Source: Industrial Development and Site Selection Handbook, October 1995.

In order for a locality to abate property taxes, it must ﬁrst receive state enablement. The
decision by state and local governments to use tax policy to inﬂuence economic
development does indicate that the jurisdiction is willing to attract development by all
possible means. Tables 2.3 and 2.4 show that it is possible to distinguish groups of states
by their choice of economic development tool. Most state that choose to allow localities
to offer tax abatements do so on all forms of property; only eight states selectively
encourage development of real or personal property. But states that permit tax abatements
tend not to interfere with labor-management relationships. Table 2.4 shows that only 22
states agree in their dual assessment of usefulness of right to work laws and tax
abatements. Nineteen states ﬁnd both programs to be useful and three states ﬁnd neither
of much use; the remaining states have chosen to use one incentive or the other. There is
little disagreement over the use of revenue bond ﬁnancing as an economic development
tool. Virtually all states offer revenue bond opportunities to business. Since it is the

Federal Treasury that bears the cost of these bonds, their widespread use is no surprise.

Table 2.3. Availability of Property Tax Abatement on Land and Machinery, 50
states, 1995

 

Source: Industrial Development and Site Selection Handbook, October 1995.

14

Table 2.4. Availability of Property Tax Abatement and Right-to-Work, 50 states,
1995

State R1 to W Law
Property Tax A No
es 5

0

 

Source: Industrial Development and Site Selection Handbook, October 1995.

In recent years tax abatements have played major roles in the redevelopment plans
of northeastern and midwestem cities. Yet despite differing economic conditions between
industrial and non-industrial regions, cities and suburbs, and north and south, the content
of tax abatement programs is similar. With few exemptions industrial development is
awarded tax advantages irrespective of the impact of the tax incentive on the investment
or the impact of the development upon the community. Abatements are typically given
for a ﬁxed number of years at a ﬁxed abatement rate. For example, Michigan
communities may abate 100 percent of property taxes on the increase in value from
rehabilitation and 50 percent on new investment. Missouri’s law is similar but covers a
longer period of time. Of the 42 states that offer property tax abatements, only Vermont,
Ohio and Michigan make provision for altering the terms of the reward and in practice
this is virtually never done.

Despite evidence of increased use, what the data do not tell us is whether tax
incentive programs have been successful in inducing new development. The pattern of

tax award is such that localities may be taking defensive measures to maintain relative tax

15

differentials with their neighbors. If this is the case, taxes are lowered to industrial ﬁrms

at all locations.

2.3. Tax Abatement Policy in Michigan

2.3.1. PA. 198 of 1974

The RA. 198 Tax exemption program of 1974 is designed to create and retain
jobs in the state. Public Act 198 provides signiﬁcant tax incentives to industry in order to
encourage renovation and expansion of existing plants and construction of new plants.
Qualiﬁed local governments are authorized to establish Plant Rehabilitation Districts
and/or industrial Districts at their discretion as the initial step toward enabling ﬁrms to
apply for Industrial Facilities Exemption Certiﬁcates.

Under the provisions of the Act, a local governmental unit (city, village or
township) in which the total property tax levy is at least 30 mills, or in which a city
income tax levied, may establish plant districts and industrial development districts and
offer industrial ﬁrms certain property tax incentives.

The granting of property tax incentives under the Act is a local option left to the
discretion of the legislative body of the local government unit. An application is ﬁled
with the local government, reviewed, and if approved, ﬁled with the State Tax
Commission and the Michigan Department of Commerce. Final approval is granted by
the State Tax Commission. This mechanism entitles the ﬁrm to apply an Industrial

Facility Tax in lieu of property tax1 for a period up to 12 years. In the case of a plant

 

' The property tax is referred to as an “ad valorem” tax, because it is an annual tax levied as a percentage of
the market value of property.

l6

rehabilitation, the industrial facility tax is based on the state equalized value (SEV) of the
property before renovation. The new SEV equals one-half of the investment for
rehabilitation and is the amount exempted for up to 12 years. The SEV for a new facility
is one-half the investment. The industrial facility tax paid by a certiﬁcate holder equals

half the actual tax for a period up to 12 years.

3.2. Program Content

Public Act 198 grants local communities the authority to award property tax
abatements to new manufacturing ﬁrms and to ﬁrms that substantially rehabilitate
obsolete facilities. The process requires two distinct steps. First, the local legislative body
establishes a plant rehabilitation district or an industrial development district on behalf of
the ﬁrm that request it. Once the district is established the ﬁrm may apply for and be
issued an Industrial Facilities Exemption Certiﬁcate. This certiﬁcate entitles the facility
to be exempted from tax on real and personal property but requires that another tax be
paid in lieu of property taxes. A new ﬁrm needs only pay half of the total mills levied as
ad valorem taxes for that year by all taxing units within which the facility is located. In
the case of a rehabilitation project all accretion in value to the site as a consequence of
the reinvestment is exempt from property taxes. The exemption may be extended up to a
maximum of 12 years although in practice virtually every abatement offered in Michigan
has been issued for the maximum length of time.

The use of PA. 198 is restricted to only those Michigan cities, villages, and
townships which levy income taxes or where total millage levied within the jurisdiction

exceeds 30 mills. The Act deﬁnes what categories of investment are eligible for property

tax abatement. In order to insure that tax relief is not going to those ﬁrms whose
investments consist solely of capital maintenance, the law requires that industrial
property improvements exceed 10 percent of the true cash value of the site prior to the
improvement. This creates an incentive for investing ﬁrms to add at least 10 percent to
their capital stock in order to qualify for the abatement, whether they need to or not.

Although the legislation makes no attempt to interfere with local autonomy by
specifying how to make the trade-off between reward and incentive, it identiﬁes a
number of issues that must be considered before an abatement is approved. The state is
concerned about jurisdictions competing with each other over ﬁrm location decisions. It
also wants the locality to consider the revenue cost of tax abatement. PA. 198 establishes
guidelines in these areas but does not bind the local decision process. In particular,
Section 9 of the law enumerates a set of criteria that must be considered before the local
governmental legislature issues a resolution approving an application for the Industrial
Facilities Exemption Certiﬁcate. The extent to which each of these criteria is instrumental
in shaping local decisions varies.

The local jurisdiction is required to make a separate ﬁnding that the ﬁscal
capacity of the taxing jurisdiction is not impaired by the abatement. The State Tax
Commission must be notiﬁed when the exempt portion of state equalized valuation
exceeds 5 percent of the total state equalized valuation of the jurisdiction. This provision
is meant to force the locality to consider the impact of the abatement upon the local ﬁscal
capacity. The 5 percent guideline probably makes little sense to local ofﬁcials. They
regard the revenues foregone due to tax abatement as uncollectible without the incentive.

Further, due to underutilized capacity and previously established infrastructure, new

18

developments do not impose major increase in serving costs in urbanized areas. In the
case of school districts, property taxes lost through abatement are compensated by higher
grants from the state school ﬁnance formula.2 Therefore, few circumstances exist where
local ofﬁcial would value a judgment that the ﬁnancial soundness of the taxing unit
would be impaired.

Fiscal capacity is not the only criteria identiﬁed in Section 9; local employment
impacts must be considered as well:

Completion of the facility is calculated to, and will at the time of issuance of he

certiﬁcate have the reasonable likelihood to create employment, retain

employment, or prevent a loss employment in the community in which the facility

is situated. (Section 9c)
If Section 9c is interpreted narrowly, then any facility that was not fully automated could
satisfy this requirement. Informed decision making necessitates a much more
sophisticated regulation; one that recognizes the complex environment that exists. The
decision-maker must assess how likely investment would be without the incentive in
order to lend meaning to the "reasonable likelihood" requirement. Also, local ofﬁcials
must still be concerned with the ﬁscal impairment criterion outlined in Section 9.1.

Deciding how much employment is necessary to make up for lost tax revenue or what

size abatement is necessary to induce investment is left to local discretion.

 

2 School districts that levy up to 30 mills do not forgo any revenues due to tax abatement since they are
compensated by the state school aid formula if they qualify for coverage. Districts levying over 30mills are
not compensated for the portion over 30 mills.

CHAPTER III

A REVIEW OF THE LITERATURE

3.1. Overview

The purpose of this chapter is to provide a theoretical and empirical review of
current literature relating to local utilization of the property tax abatement policy. Much
debate, but little theoretical modeling and empirical analysis surrounds on the tax
abatement programs as an economic development policy. Previous studies examining tax
abatement policy have offered little discussion about why some communities choose
certain economic development policies over others and at what levels. Among a number
of potential topics, three subjects for research are important to understand local utilization
of property tax abatement policy. They are described below.

First, studies on the relationship between local tax and expenditure policy and a
ﬁrm's location choice may provide economic rationale for local utilization of the tax
abatement policy. In economic term, local utilization of the property tax abatement can
be viewed as an interaction between a ﬁrm's proﬁt maximizing behavior when making
locational choices and a community's welfare maximizing behavior. This interaction
illustrates how a community and its ﬁscal policy theoretically inﬂuence a ﬁrm's
locational choice. Economists have naturally questioned whether this inﬂuence should be
of any concern to state and local policy makers.

Second, studies on local economic development politics provide political rationale

and political factors affecting local utilization of the tax abatement policy. A political

20

economy approach shows how the actions and behaviors of key institutions and actors are
responsible for determining local economic development policy choices. A political
economy perspective has broader implications for governmental intervention and
directions for public policy.

Third, the local ﬁscal and economic condition is a crucial factor affecting local
utilization of the tax abatement policy. Severe substantial differences exist among
different localities in ﬁscal and economic conditions. Part of the reason for these
differences in employment and income among areas may be the ﬁscal policies - taxes and
expenditures- carried out by the governments in those places. Also economic conditions
inﬂuence the demand for state-local government services. Moreover, differences in
economic and ﬁscal conditions among localities may themselves inﬂuence business
investment and a ﬁrm's location decisions. Thus, the literature related to measuring local
ﬁscal stress may be important to understand the factors related to the local utilization of

property tax abatement policy.

3.2. Local Tax and Expenditure Policy and Firm’s Location

Most of the early theories on ﬁrm's location decisions emphasized that a ﬁrm’s
location is determined or selected to maximize its proﬁt or minimize its costs. Costs in
classical theory were classiﬁed generally as those of raw materials, transportation, and
labor ( Alonso, 1964; Losch, 1954; Schmenner, 197 8). This classical location theory held
that taxes did not play a signiﬁcant role in industrial locations. Taxes have been receiving

increased attention as a location factor in recent location choice literature.

21

Floyd (1952) addressed this issue by separating a manufacturing ﬁrm’s location
decision into two separate stages. In the “market stage,” a ﬁrm chooses to locate in a
region of a country, or a region of a state, based on its market characteristics. In the “site
stage,” a ﬁrm chooses a unique site to serve its predetermined market at these highest
proﬁts to the ﬁrm. Floyd contended that ﬁscal differences are usually too small to
inﬂuence a manufacturing ﬁrm’s market selection. In market selection, non-ﬁscal
characteristics overwhelm the inﬂuence state and local taxation and expenditure have on
expected proﬁt. Floyd theorized that ﬁscal policy exerts its strongest inﬂuence during site
selection. During site selection, non-ﬁscal characteristics that had overwhelmed the
effects of local ﬁscal policy are largely constant.

The Advisory Commission on Intergovernmental Relations (1967, p.78) related
Floyd's reasoning in the following statement:

The relative importance of the tax differential factor in industrial location

decisions appears to increase as the location decision narrows down to a particular

jurisdiction within a general region. Among local governments within a state and
especially within a metropolitan area, tax differentials exert discernable plant
location pull. In almost every metropolitan area, wide local property tax
differentials become a "swing" factor in the ﬁnal selection of a particular plant
location.
Due (1961) presented the review of studies relating to state and local tax inﬂuence on
location industry. Due reports no statistically signiﬁcant link between industrial growth
rates and relative tax burdens. He concluded that tax effects are of no major importance
to interstate manufacturing location. However, Due (p171) stated that
“ in some instances the tax element plays the deciding role in determining the optimum

location, since other factors balance. This is most likely to be the case in the selection of

a precise site in a metropolitan area.” Due based this statement on informal observation.

22

He called for a detailed investigation of the inﬂuence taxes have on intrastate ﬁrm
location.

White (1975) and F ischel (1975) provided similar theoretical models of the
inﬂuence communities have on intrametropolitan ﬁrm location. White and F ischel’s
models were both attempts to address problems with Tiebout’s (1956) seminal model of
local public service provision and residential location choice.

In Tiebout’s model, consumers reveal their preference for congestible local
services by settling in a community whose population and size allow the community to
provide the desired level of public services most efﬁciently. Under Tiebout’s
assumptions, the outcome of this “voting with the feet” can be a Pareto efﬁcient
provision of local public goods. Tiebout implicitly assumed that beneﬁt charges ﬁnance
local public services. In reality, local property taxation cannot be considered a beneﬁt
charge for local public services.

Hamilton (1975) addressed this problem by adding to Tiebout’s model the
assumptions that communities raise their revenue through property taxes and use “neutral
ﬁscal zoning.” Neutral ﬁscal zoning requires that each community set standards for
residential entry such that property tax revenue from a new resident’s home covers the
cost of providing additional local service to it. With neutral ﬁscal zoning, the local
property tax is transformed into a beneﬁts pricing system. Both Tiebout and Hamilton
assumed that communities are composed only of residents. However, White and Fischel
extended the Tiebout and Hamilton assumptions to a system in which both residents and

ﬁrms locate in communities.

23

White demonstrated that if communities use a form of ﬁscal zoning, the
introduction of ﬁrms into the Tiebout-Hamilton model does not destroy its stability or
efﬁciency. White developed a model of a community’s willingness to supply ﬁrm sites.
Communities are considered to have equal populations and are in a metropolitan region
that sits on a plain without a central city. A ﬁrm desiring a site in this region chooses its
location based on differences in local tax rates.

In White’s model, residential and industrial property are taxed at the same rate.
Communities offer an equal level of locally provided services to ﬁrms in any one
industry. Industries desiring intrametropolitan location vary, but ﬁrms in an industry are
homogenous. F irrns operate in “footloose” competitive industries. Residents are the ﬁrst
to locate in a community. With Tiebout-Hamilton equilibrium, residents demand a
uniform level of housing and local public service. A community’s property tax rate
equals the uniform value of residential public service provided per household divided by
the zoned uniform value of housing. Firm entry is allowed only after residential
equilibrium is established. Without ﬁrm extemalities, a community using neutral ﬁscal
zoning requires an entering ﬁrm to use a minimum amount of taxable property. The
minimum property requirement is equal to the value of local services provided to the ﬁrm
divided by the property tax rate.

Firms produce output by employing land, local public services, and capital. Firms
choose an intrametropolitan site based on the proﬁt maximization of an industry—constant
Cobb-Douglas production function. A ﬁrm locates in a community whose residentially-
determined tax rate is as close as possible to a calculated ratio of the production

function’s public service exponent. All ﬁrms in an industry subsequently seek a

24

community with the same tax rate. Firms in an industry are expected to cluster in one
city.

White accounted for negative ﬁrm extemalities by “pollution zoning.” Pollution
zoning consists of a community’s zoning board calculating a social welfare function that
guages the median voter’s willingness to trade a loss in environmental quality for a gain
in “pollution-compensating transfers.” Pollution compensating transfers are property tax
payments above the amount necessary to cover locally provided public services. By
increasing the pollution compensating transfer a community receives per unit of
environmental loss, White’s offer curve represented an increase in local ﬁrm sites
(pollution level) as pollution compensating transfers increase. The intersection of a
community’s positively sloping ﬁrm’s demand curve for a community’s sites, yields the
combination of ﬁrms and property taxes a community seeks.

Communities use this combination to set a schedule of required property use
levels for ﬁrms in each industry. Because White only allowed ﬁrms to pay pollution
compensating transfers in the form of property taxes, required property consumption
levels are the only way community receives its desired pollution compensating transfer.
Required ﬁrm property consumption levels are equal to the sum of local service provided
to the ﬁrm plus the industry speciﬁc pollution compensation transfer, divided by the
property rate. A community offers to supply sites to all ﬁrms that meet their minimum
property consumption levels.

If demand for environmental quality is income elastic, wealthy residential
communities require a larger compensating transfer per unit of pollution. Wealthy

residential communities offer a smaller and more inelastic supply of sites to

 

 

25

environmentally damaging ﬁrms, then do poor residential communities. In White’s
system of pollution zoning, wealthier communities set a higher minimum ﬁrm property
requirement. This level may be enough to effectively zone out some or all frrrns.

The theoretical models of White and F ischel revealed that communities rationally
restrict their supply of sites to ﬁrms. Empirical research that followed these theoretical
models has only begun to fully incorporated this implication.

Fox (1981) began with the premise that an empirical analysis of a ﬁrm response to
local ﬁscal policy should not include localities that zone out industry. According to Fox,
previous researchers had attempted to estimate the demand for an average metropolitan
community’s ﬁrm sites. These regressions used a data set that contained observations on
every community within a metropolitan area. Supply-side theory suggests that a
community’s property tax may encourage a larger than optimal number of ﬁrms to enter
the community. To prevent this, communities zone out some ﬁrms and a community’s
observed property tax rate and corresponding level of ﬁrm activity represents supply
conditions. It should not be used to estimate a demand equation. Fox applied his
reasoning to a regression analysis involving 43 cities in the Cleveland Metropolitan Area.
Twenty cities that had less than one percent of their property tax base devoted to
manufacturing were considered to be effectively zoning it out. Using the remaining 23
cities, Fox regressed the percentage of a community’s property tax base devoted to
manufacturing against local property tax rate, land price, locally-provided ﬁrm services,
highway and rail dummies, manufacturing capital-to-land ratio, and population density.
He recognized that tax rate, land price, local business services, and capital to land ratio

are endogenous to his model and appropriately used a two stage estimation technique. He

26

points out that his interpretation of the regression results are only accurate if the
communities are in long-run location equilibrium. For the sample of 23 communities that
were believed to not zone out manufacturing, property tax rates and business service
levels exerted a statistically signiﬁcant inﬂuence on manufacturing activity.

Fox found that a 1 per cent increase in a community’s effective property tax rates in the
Cleveland area reduced the long-run industrial percentage of city’s property tax base by
4.43 per cent. A 1 percent increase in local business services in the Cleveland area
increased the same percentage by 2.78 per cent.

Charney (1983) examines the role that ﬁscal factors play in the intra metropolitan
location decisions of manufacturing ﬁrms. Her regression study modeled the supply of
community sites in a slightly different manner. Charney assumed that a proﬁt -
maximizing manufacturing ﬁrm makes an intrametropolitan location choice by
calculating its expected proﬁt level in each community. It then chooses the community
that offers the highest expected proﬁt. In Charney’s model, all ﬁrms have the same
production function and consequently wish to locate in the same community. This net of
tax price of manufacturing land is bid up in some communities and bid down in others.
This process continues until a manufacturing ﬁrm’s expected proﬁt levels are equal
across all metropolitan communities. In Charney’s model, the net of tax price of
manufacturing land is a function of variables that inﬂuence demand for a community’s
manufacturing sites. Charney assumed that a community’s supply of manufacturing sites
is a function of the bid price by manufacturer, zoning restrictions, and determinants of
other possible users’ bids for land use. Charney calculated a supply price function by

inverting her supply function. A community’s manufacturing site market is considered in

27

equilibrium when demand price equals supply price. Charney obtained the equilibrium
level of community manufacturing sites by setting the two price functions equal and
solving for the reduced form. In Charney’s model, no equilibrium exists if other users are
willing to pay more than manufacturers, or if communities zoned out manufacturing
ﬁrms.

Charney estimated her reduced form function. Her sample came from 110 out of a
possible 126 zip code areas in the Metropolitan Detroit Area. The number of
manufacturing ﬁrms that moved into a locality from 1970 to 1975 divided by the
locality’s land area was regressed against a vector of explanatory variables taken from
1970. The explanatory ﬁscal variables were the local property tax rate, local income tax
rate, and local sanitation provision. The local property tax rate exerted a signiﬁcant
negative inﬂuence on location, while the local income tax rate and sanitation provision
exerted no signiﬁcant inﬂuence. The elasticity of ﬁrm location in regard to local property
tax rates was -2.52. Dividing her sample between ﬁrms with a small, medium, and large
number of employees, Charney found signiﬁcant location elasticities with respect to local
property tax rates of -.29, -1.77, and -2.22. These rising elasticities were attributed to a
complementary between labor and capital use by ﬁrms. The greater amount of capital a
ﬁrm employs, the greater its sensitivity to intrametropolitan property tax rate
differentials.

McHone (1986) attempted to econometrically estimate separate structural supply
and demand equations. MaHone’s theoretical model of a community’s willingness to
supply ﬁrm sites was similar to White’s and Fichel’s model. McHone's theoretical model

of demand for a community’s manufacturing sites was based on proﬁt maximizing ﬁrms

28

choosing intrametropolitan locations to minimize costs. McHone's data set consisted of a
1970 cross-section of suburban Philadelphia communities. Manufacturing employment
per capita was regressed against a vector of explanatory demand variables and a vector of
supply variables. Because of the endogeniety of property tax rates, McHone used a two-
stage estimation technique.

McHone’s regression results showed that transportation availability, distance to
central city, and police/ﬁre expenditures exerted a statistically signiﬁcant positive
inﬂuence on manufacturing ﬁrm’s demand for community sites. Property taxes and
library/park expenditures exerted a signiﬁcant negative inﬂuence on demand. MaHone
also found that property taxes and total public expenditure exerted a signiﬁcant positive
inﬂuence on a community’s willingness to supply ﬁrm sites. Median family income,
residential tax base, and population density exerted a signiﬁcant negative inﬂuence on
site supply. MaHone calculated the property tax elasticity of a community’s supply of
manufacturing sites and the manufacturing ﬁrrns’ demand for community sites to be .55
and -.79. This property tax elasticity of demand was inelastic and signiﬁcantly less than
similar elastic measure calculated by Fox (-4.43). McHone’s result provided strong
empirical evidence to support the contention that property tax differentials exert a
statistically signiﬁcant, but inelastic inﬂuence on both the demand and supply of
intrametropolitan ﬁrm sites.

Ladd (1975) tested the hypothesis that the composition of a community’s property
tax base affects its local expenditure decision. Lass believe d that the non-residential size
of the tax base inﬂuences local demand for municipal services in three way: (1) reducing

the perceived tax price of local services to residents, (2) increasing local expenditures on

29

services provided to ﬁrms, and (3) increasing expenditures on local services necessary to
mitigate ﬁrm’s environmental damage.

Ladd tested her hypothesis by estimating a standard demand function for local
educational services in the Boston S.M.S.A in 1970. The residential tax price in her
demand function equaled “l-aC-bM.” “C” and “M” corresponded to the commercial and
manufacturing portions of the locality’s tax base. Ladd derived estimates of “a” and “b.”
If “a” and “b” both equal one, the median voter’s tax price for an additional dollar of
public expenditure was perceived to be equal to the residential percentage of the local tax
base. If “a” and “b” were both less than one, the median voter perceived his tax price to
be greater than the residential portion of the local property tax base. This occurs if the
ﬁrm portion of the property tax is shifted to local residents or an increased local property
tax rate causes ﬁrm relocation and decreased future property tax rate revenue. Ladd
calculated “a” to be .8 and “b” to be .45. Thus, -.2 and .55 equals the elasticity of the
local commercial and manufacturing property tax bases with respect to local property tax
rates. Ladd found the more standard result that a metropolitan community’s
manufacturing tax base is more footloose than its commercial tax base. A manufacturing
tax base is more likely to be driven out of a community by its high property tax rates.

Ladd and Bradbury (1988) used regression analysis to measure the relationship
between city taxes and city property bases. Their theoretical model accounted for the four
structural components that determine this relationship: (1) city tax base, (2) city balanced
budget, (3) resident demand for public spending, and (4) city tax mix. The fact that a
city’s property tax rate is endogenously determined by its property base was accounted

for.

30

Ladd and Bradbury estimated a reduced form of equation representing
determinants of a city’s tax base. They are very careful to identify accurately the
independent property tax variable. Their pooled data set is drawn for the years 1972,
1977, and 1982 from large US. cities whose 1970 population was greater than 300,000.
The fact that observed property bases do not represent long-run equilibrium values is
accounted for in their regression methodology. The long-run elasticity of a city’s property
base with respect to its property tax, overlying county and state taxes, and income tax
was respectively calculated to be -.15, -.1, and -.07. A city’s sales tax had a statistically
insigniﬁcant inﬂuence on the city’s property base.

Erickson and Wasylenko (1980) conducted a regression study of local taxes and
the site selection of ﬁrms moving from the Milwaukee central city to its suburbs. They
criticized past research for its lack of an explicit theoretical model. Erickson and
Wasylenko derived a general speciﬁcation of ﬁrm demand for community sites based on
cost minimization for manufacturing ﬁrms or proﬁt maximization for commercial ﬁrms.
They assumed that a community’s supply of potential sites was perfectly elastic in the
range demanded by ﬁrms.

Erickson and Wasylenko’s dependent variable was the number of ﬁrms in one
industry that moved to a speciﬁc suburban city, divided by the entire number of ﬁrms in
that industry that moved from Milwaukee to any suburban city. The dependent variable
was calculated for a ten-year period beginning in 1964. They avoided the questionable
assumption of long-run metropolitan location equilibrium by using a dynamic dependent
variable. A weighted least squares logistic technique was used to regress their dependent

variable against mid-period proxies for land price, wage rate, effective property tax rate,

31

community provided ﬁrm services, and agglomeration economies. Erickson and
Wasylenko included local measures of population density and per-capita income to proxy
for market effects on commercial location.

In all of Erickson and Wasylenko’s regressions, industry employment
concentration and the available industry work force within a seven-mile radius exerted a
signiﬁcant positive inﬂuence on relocation. For the construction and wholesale trade
industries, distance from the central city exerted a signiﬁcant negative inﬂuence. For
manufacturing, the percentage of land devoted to manufacturing, and the percentage land
vacant, exerted a signiﬁcant negative and positive inﬂuence. The percentage of land
vacant had a signiﬁcant negative inﬂuence on the whole sale trade. Erickson and
Wasylenko found that local ﬁscal variables did not inﬂuence relocating ﬁrm’s suburban
site selection.

Wolkoff(l983) developed a systematic framework to assess the effectiveness of
property tax abatements. Using a J orgenson-type investment function and 19705 data
from the city of Detroit, he found that an abatement which reduces a ﬁrm's property taxes
by 50 percent would only increase ﬁrm investment by 2 to 5 percent. He concluded that
this was too small of a response to justify the magnitude of property tax abatements the
city of Detroit had offered in the 1970’s. Wolkoff suggests that local policymakers
differentiate between applicants and vary the size and length of abatement awards more.

Wassmar (1992) used the simultaneous equations to analyze relationships among
local ﬁscal variables, property tax abatement and the composition of the property base in
Detroit metropolitan areas. Using the proﬁt-maximizing model of ﬁrm behavior, he

derived the schedule of manufacturing property tax abatements in long run. His model is

32

based on the assumption that nonresidential taxable property, excluding land, is only
perfectly mobile between communities in a metropolitan area in the long run.

According to Wassmar, local governments offer property tax abatements because
a community's proﬁt-reducing characteristics are not necessarily fully capitalized into
lower land prices. If a community in any of these situations desires to attract and retain
ﬁrms, it offers some form of compensating incentive. It has been shown that communities
with higher local property taxes and greater crime per capita offer greater property tax
abatements. Communities that provide more local services to ﬁrms, have greater highway
networks, and have residents and surrounding communities with greater income, offer
less property tax abatements. He concluded that an increase in manufacturing property
abatements does increase the average community's manufacturing property tax base and
consequently the local property tax revenue collected. Property tax abatements help
communities overcome local proﬁt-reducing characteristics and retain existing, as well as
attract new, ﬁrm property base.

This literature on the relationship between the local tax/expenditures policy and
ﬁrm location did not provide ﬁrm conclusions about the tax abatement policy. It did
provide some economic rationale for local utilization of tax abatements. This review of
the local tax/expenditures policy and ﬁrm location literature casts serious doubt upon the
importance of tax differentials in inﬂuencing location decision. This suggests that tax
abatements are unlikely to have a major impact on a ﬁrm’s investment decision. Rather,
non-ﬁscal characteristics such as local agglomeration economies, labor availability, and

land prices do inﬂuence ﬁrm’s investment decision.

33

However, while existing research has not established the relationship between tax
incentives and urban investment, it also has not proved that no relationship exists. Some
argued that tax differentials might be important to those a ﬁrm’s decision about a
particular site within an acceptable region for conducting business.

Industrial investment decisions can be shaped not only by the behavior of ﬁrms
but also by the policy tools of local governments. Local governments have only a small
arsenal of tools to promote economic development. Among these are tax abatements. If
these incentives can induce some development that would not have otherwise occurred,
the economic pay-off is potentially large. Even if the pay-off is not large, it may still be
rationale for cities to offer tax abatements as long as the discounted stream of expected
beneﬁts exceeds the cost of granting the abatement. Tax abatements may not by
themselves be the solution to the urban economic development problem but they may, on

the margin, encourage economic development that would otherwise not have occurred.

3.3 Political Economy Approach

3.3.1. Political Rationale of Tax abatement Policy

There are two different domains of local politics in considering economic
development policy; allocational and developmental. The domain of allocational policies
is characterized by intense and open political debate between pluralistic interests (Sharp
and Elkins 1991). The domain of developmental policies is characterized by a centralized
and relatively closed, consensual decision-making process between economic and

government elite. Traditional economic development policies are in the developmental

34

policy domain; the decision process is relatively closed and secretive. Political and
bureaucratic rationality, not economic rationale, dictates that the economic development
policies that serve the needs of the political regime are arrived at through a decision
process that lies in the domain of developmental politics. The analysis of political and
bureaucratic rationality can be extended in considering risk in an uncertain environment.
In an uncertain environment, in which policy initiatives are constrained by scarce
resources, the adoption of economic development policy is ﬁirther determined by the
degree of risk associated with policy.

This uncertainty and risk are recognized as determinants of decision making in
general and in the economic development literature (Peretz 1986; Rubin and Rubin 1987;
Stone 1987). Economic development policy has inherent risks, because both resources for
policy and the beneﬁts unknown. There is no certainty that economic development policy
will produce the results or beneﬁt expected.

Political risk is deﬁned as the potential for positive or negative political
consequences resulting from a policy position or decision. The uncertainty of resources
and results forces policy-makers to concentrate on this risk. Political risk particularly
salient in economic development policy, because the environment is uncertain and the net
effects of economic development policy are undeterminable over the long run. Risk
becomes a political question, determined subjectively by the actors involved (Stone
1987). Political risk can be understood in reference to the uncertainty of the environment.
Environmental uncertainty arises from incomplete knowledge of the environment.
Environmental uncertainty comes from two areas: uncertainty about competition in the

environment and general uncertainty about environmental changes.

35

Peretz (1986) and Walker (1989) suggest competition as a factor that inﬂuences
the adoption of development policy. The widespread competition for economic
development has the effect of heightening the scarcity of ﬁrms. Tax incentive and
ﬁnancial programs are adopted by governments in the effort to remain competitive.

In the context of economic development, policymakers have uncertain and
incomplete knowledge about the level of incentives that must be offered to recruit
industry. Firms have information that gives them a bargaining advantage in negotiating
incentives (Blair, Fichtenbaum, and Swaney 1984). Firms may threaten to locate
elsewhere if states and localities do not provide the desired incentives, and government is
uncertain about the seriousness of these threats. This uncertainty may be reduced by
offering the incentives sought by industry without questioning what is actually needed to
recruit the industry.

Tax abatement policy is relatively invisible to the general public in terms of cost.
From political-economy perspective, a secret policy process and hidden agenda
reinforces regime politics and reduced public input into the design of incentives. As a
result, decisions are further removed from the external pressures of public sentiment
(Stone 1980) and can be made on the basis of the needs of the politician or bureaucrat.
Public officials are inclined to favor policies with low public visibility because they avoid
direct competition for resources. Economic development policies that do not have visible
costs and are supported by the political regime will be favored. Tax abatement policy can
be adopted with the support of prospective ﬁrms, improve environmental certainty for
public ofﬁcial and entail very low risk. Policy cost and the level of beneﬁts are concealed

by hidden, relatively invisible tax abatements or tax expenditures. These policies produce

36

symbolic beneﬁts for public ofﬁcials, regardless of their measure of effectiveness. From a
political-economy perspective, cost-minimization strategies are characteristic of a

caretaker regime (Stone, Whelan, and Murin 1986).

3.3.2. Determinants of Local Economic Development Policy

Economic development, in its general sense, is a process by which materials and
social well-being is increased (Institute for Public Policy Studies, 1985). Therefore,
economic development is a vital component of community public policy (Peterson,
1981). Although the goal of the economic development process might vary across
communities, the importance of economic development to community prosperity, broadly
deﬁned, is indisputable. Economic development is deﬁned operationally as a city's policy
actions (promotional strategies and market interventions) aimed at creating jobs and
increasing capital investment in the jurisdiction. One way of achieving these outcomes is
to attract new ﬁrms. Jobs and capital that are won by one city will be lost to other cities.
This is most clearly seen in relocation cases-when a ﬁrm exits one jurisdiction and
reestablishes in another. Even when cities eschew attraction strategies and redirect their
efforts toward retaining existing ﬁrms, assisting in expansion, and creating new ﬁrms, the
process can still be understood as competitive. In these cases, although the jurisdictional
behavior no longer resembles a head-to-head battle, it has effect of changing the
competitive balance among cities.

Faced with major economic and social changes, intense citizen's demands, and

declining federal aid, local leaders have adopted a host of policies to promote the

37

economic and ﬁscal health of their communities. There are two problems with this
"intense preoccupation with economic development that has been marked by a level of
consensus and expectation unusual in American politics" (Eisinger 1988: 3). First, those
interested in the practice of economic development have placed such emphasis on being
exhaustive in identifying options that they tend to ignore variation in the conditions under
which communities are willing or able to adopt different policies. Second, scholars have
examined such variation, but have been polarized around two competing explanations,
one based on the broader economic and political systems and another that relies on the
actions of local political and economic actors.

The structure theory is that urban development is shaped by economic and social
conditions beyond the control of local policy-makers. Peterson (1981: 20) argues that
cities must promote their "interest" i.e., "the economic position, social prestige, or
political power of the city, taken as a whole." They are constrained, however, by the
ability of many businesses and residents to move to another city if tax levels become too
high or services seem inadequate. Local ofﬁcials act in response to this pressure by
competing with other cities to attract new ﬁrms and residents and to keep existing
taxpayers from moving.

The economic constraint model looks for structural factors in understanding city
policy (Peterson, 1981; Tiebout, 1956, Oates, 1972; Mills and Oats, 1975). The economic
constraint model, which can be traced back to Tiebout's (1956) ideal world of ﬁscal
equilibrium, has been most systematically presented in Paul Peterson's City Limits
(1981). According to this approach, local communities are more constrained than the

federal government by the environment in which they operate because they have to

38

compete with one another in luring investment and in exporting their goods. Local
governments cannot regulate the ﬂow of productive resources, namely, labor and capital
(Oates, 1972; Mills and Oates, 1975). Thus, local communities face numerous constraints
in attempting to maximize their economic prosperity. Without economic growth, local
governments face either a stable or shrinking ﬁscal base. Accordingly, like any other
rational actor, localities are expected to pursue their economically beneﬁcial programs
and stay away from activities that might jeopardize their ﬁscal well-being.

Structural theories imply that the more adversely a city is affected by broad
economic, demographic, and political forces, the more development policies its ofﬁcials
adopt. In terms of economic factors, deindustrialization in the past decade suggests that
communities heavily dependent on manufacturing will adopt more policies. Economic
well-being also can vary according to the metropolitan status of a community. Central
cities have tried to adapt as headquarters centers. Nonmetropolitan communities have
tended to focus on mobil capital. Suburbs, however, generally beneﬁt from the dispersion
of economic activity within metropolitan areas and may have little need to promote
growth (Noyelle and Stanback 1983; Baldassare 1986; Berry and Kasarda 1977;
Schneider 1989; Markusen 1989; Green and Fleischmann 1991).

Several demographic characteristics can be expected to inﬂuence development
policy. Total population, like metropolitan status, gauges a city's place in the urban
hierachy. Larger cities are expected to adopt more economic development programs due
to the diversity of both resources and pressures for doing so (Noyelle and stanback 1983;
Friedman 1990; Cook and Beck 1991). In terms of change, slow growth or outright

decline may make cities more vulnerable to pressure to promote growth (Jones and

39

Bachelor 1986; Rubin 1986; Rubin and rubin 1987), while rapidly growing places feel
little push to stimulate development and may even try to limit growth (Baldassare 1986;
Logan and Zhou 1990). Regarding composition, cites with a large numbers of poor
residents are more likely to promote development extensively because of the costs
redistributive programs or constituent pressure to improve the local economy (Peterson
1981)

Structural theories also suggest that actions by other governments will affect
cities' development strategies. In particular, heavy dependence on intergovernmental
revenue as federal aid declined during the 19803 should lead cities to adopt more policies
to stimulate the local economy (Rubin and Rubin 1987; Sharp 1990).

Actor-centored theories point to several local factors that can affect development
policy. One is political leadership. Although the literature is somewhat ambiguous, more
development policies are likely to adopted in cities with a mayor-council government,
where mayors expected to be more responsive to citizen and group pressures than are
politicians in cities using the council -manager plan (F eiock and Clingerrnayer 1986).

Characteristics of the municipal bureaucracy also may affect development policy.
Cities with more bureaucratic capacity (staff size, expertise, and experience) should be
able to implement more development policies (Rich 1989). Moreover, cities may employ
more economic development tactics when they have a specialized agency to administer
them.

Fiscal decisions are the ﬁnal local actions related to development policy. In
particular, local ofﬁcials are under pressure to keep down property taxes and increasingly

resort to debt ﬁnancing to maintain service levels (Schneider 1989; Sharp 1990). Thus

40

one would expect that politicians in cities with high debt levels or property taxes would
adopt more economic development policies in order to avoid the wrath of citizens and
expand the tax base.

One view of development policy making suggests that a community's structural
characteristics inﬂuence strategies chosen by local leaders. The less indulated a city is
from the recent changes in the economy and the effect of national business cycles, the
more likely it is to offer a wide range of incentives (Hanson, 1983). We especially would
expect that the more heavily dependent a city is upon manufacturing, the more it will try
to use a wide range of economic incentives and activities to lure business. We also
anticipate that a large disadvantaged population may spur local ofﬁcials to offer
numerous incentives to business. Specially, the extent of poverty and the percentage of
the population that is nonwhite should be positively associated with efforts to promote
development (Rubin and Rubin, 1987). In addition, we anticipate that more populous
communities will have more resources available for their development effort (Peterson,
1981), and should be able to provide more incentives for economic development. Larger
cities should also have the bureaucratic expertise to develop and implement a wide range
of development programs. Larger cities are also more likely to respond to pressure from
various groups by encouraging minority businesses and engaging in other forms of
economic development not directly related to attracting new industry.

Existing studies imply that the range and types of incentives will vary depending
upon whether local government, a public private development organization, or private
business is the primary promoter of development. Thus, the highest incidence of local

economic development activities should be found in communities where government is

41

the most active promoter of development, the lowest where business is most active.

(Seidman and Gilmour, 1986).

3.4. Local Fiscal Stress Measurement

Local ﬁscal and economic condition is a crucial factor affecting local utilization of the
tax abatement policy. There are also substantial differences among different localities in
ﬁscal and economic conditions. Part of the reason for these differences in employment
and income among areas may be the ﬁscal policies - taxes and expenditures- carried out
by the governments in those places. Also economic conditions inﬂuence the demand for
state-local government services. Moreover, differences in economic conditions and ﬁscal
conditions-tax and expenditures- among localities may themselves inﬂuence business
investment and ﬁrm's location decisions. Thus, measuring local ﬁscal stress is important
to understand the factors related to the local utilization of property tax abatement policy.
Existing measurement studies (Muller 1975; Nathan and Adams 1976; and Burchell et al.
1984) of local ﬁscal stress show that various socioeconomic factors inﬂuence revenue
raising capacity and expenditure decisions of local governments. These studies indicate
that local socioeconomic change affects local ﬁnancial conditions. Local ﬁnancial stress
comes in part from the long-term decline in a local economy. Various approaches to
measuring local ﬁscal conditions have been developed along with speciﬁc research
interests, such as local ﬁscal crisis, stabilization, and capacity.

Many measurements of local ﬁscal performance are found in the local ﬁscal stress

or crisis-related studies. Previous research on local ﬁscal crises developed measurements

42

of the local ﬁscal performance of major US. cities since the 19705. These studies
explain the role of external determinants, such as socioeconomic and demographic
changes which impact the local revenue bases. Many studies focused on identifying the
relationship between local revenue or expenditure patterns and changing socioeconomic
circumstances, such as the change of population size, the magnitude of income, the
incidence of poverty, the change of employment rate, housing starts, the age of housing,
and so on.

According to these studies, local ﬁscal stress is related to the outrnigration of
people and industry. In particular, Lim (1982) provides a theoretical explanation of
‘disequilibrium adjustment processes’ by migrations in local ﬁnance. Muller’s analysis
(1975), which offers an interregional migration model, states that the decline of jobs and
industry in older cities causes the local tax base to shrink and increases the cost of
providing public services. Fiscal stress, basically, refers to the inability of a government
to balance its budget. Inman (1995) argues that ﬁscal crisis exists when local
government’s revenue capacity is insufﬁcient to cover the locality’s service needs.
Inman points out that an unfavorable economy and demographics, reduced external
funds, and local policy inﬂuence the rate at which the local tax base shrinks.

Fiscal stress may be a result of local budgetary processes. Its extent can be
measured by examining ﬁscal factors surrounding local budgetary processes. Therefore,
“ﬁscal stress is a structural phenomenon, reﬂecting shifts in the social and economic
conditions of the city” (Pagano and Moore 1985:23). Measurements of budgetary
distress may include such variables as surplus (or deﬁcits) in an operating budget

(Gramlich 1978) and the availability of liquid assets relative to existing claims on those

43

assets (Howell and Stamm 1979). External factors usually inﬂuence local ﬁscal
performance. Local budget constraints are dependent on national economic conditions
and are not subject to local control. In this sense, some researchers have identiﬁed that
ﬁscal stress is the result of excessive debt requirements (Peterson 1976; Clark and Fuchs
1977; Bahl, Jump, and Schroeder 1978; Aronson and King 1978); poor administrative
qualities and mismanagement by public ofﬁcials (Gerard 1976; Clark and Ferguson
1983); and urban age (Perry and Watkins 1977; Mollenkopf 1983).

Other approaches offer different sets of analytic measures. Nathan and F ossett
(1979) presented a widely-cited urban conditions index which was based on the
weighting of a community’s per capita income, percentage of housing stock built before
1940, and the rate of population change. Fainstein and Fainstein (1976) argue that ﬁscal
stress is affected by the amount of intergovernmental aid that a jurisdiction receives.

This existing literature provides no clear criteria for identifying local ﬁscal stress,
because many studies have analyzed the speciﬁc socioeconomic conditions of individual
cities. Furthermore, these studies have focused on only describing the current crisis.
Thus, it is very difﬁcult to apply these measurements to evaluate the local utilization of

property tax abatement policy.

CHAPTER IV

THEORETICAL FRAMEWORK OF LOCAL UTILIZATION
OF PROPERTY TAX ABATEMENT POLICY

4.] . Overview

The review of existing literature on the relationship between tax and expenditures,
a ﬁrm's locational choice, and on local economic development policy in the previous
chapter indicates that the proposed explanations alone are inadequate to explain the local
utilization of the property tax abatement policy. Also, the literature implies that property
tax abatements that cities offer are marginal to a ﬁrrn's locational choice. The major
factors in the choice of ﬁrm location are beyond a city's ability to inﬂuence. Assuming
that property tax abatements have little value in creating local economic development in
cities, some have argued that local governments use property tax abatement because of
pressures from interjurisdictional competition in comparison to the relatively low
political risk granting abatement. Yet, this explanation provides, at best, a partial answer;
it does not explain the variations among cities in efforts to attract ﬁrm.

None of the previous studies has examined and provided rationale for why some
communities choose certain economic development policies such as property tax
abatement over others and at what levels. Also, the lack of meaningful empirical research
points toward subtler and more comprehensive explanatory frameworks. In this context,

this chapter presents a comprehensive framework for the analysis of local utilization of

44

45

tax abatement policy. The chapter starts with a description of tax abatement procedures in

Michigan.

4.2. Procedures for Local Utilization of Manufacturing Property Tax Abatement in
Michigan

Local utilization of manufacturing property tax abatement involves local
governments offering industrial ﬁrms certain property tax incentives to encourage
restoration or replacement of obsolete industrial facilities and to attract new plants. A
goal of manufacturing property tax abatements is to promote local economic
development by encouraging new private investment in a particular locale in the hopes of
directly creating or retaining jobs and diversifying the tax base.

The process of local utilization of property tax abatement in Michigan consists of
two major steps: 1) to establish a plant rehabilitation district or industrial development
district; 2) to issues an industrial facilities exemption certiﬁcate. In the ﬁrst step, a local
government in which the total property tax levy is at least 30 mills, or in which a city
income tax is levied, may establish a plant rehabilitation districts and industrial
development districts. An additional condition of a plant rehabilitation district is the
requirement that 50 percent of the state equalized valuation of industrial property within a
proposed district must be obsolete industrial property. After the district is established, the
approval of applications for Industrial Facilities Exemption Certiﬁcates is a two-step
process. Applications are ﬁled, reviewed and approved locally, but are also subject to

review at the state level by the State Tax Commission and the Department of Commerce.

46

The State Tax Commission is ultimately responsible for ﬁnal approval and issuance of
Industrial Facilities Exemption Certiﬁcates.

The granting of property tax abatements is a local option left to the discretion of
the legislative body of the local governmental unit, and is triggered by the establishment
of a district on behalf of the ﬁrm which requests it.

Although the legislation makes no attempt to interfere with local autonomy by
specifying how to make the trade-off between reward and incentive, it identiﬁes a
number of issues that must be considered before an abatement is approved. The state is
concerned about jurisdictions competing with each other over ﬁrm location decisions. It
also wants the locality to consider the revenue loss of tax abatement. PA. 198 establishes
guidelines in these areas but does not bind the local decision process. In particular,
Section 9 of the law enumerates a set of criteria that must be considered before the local
governmental legislature issues a resolution approving an application for the Industrial
Facilities Exemption Certiﬁcate. The extent to which each of these criteria is instrumental
in shaping local decisions varies.

The local jurisdiction is required to make a separate ﬁnding that the ﬁscal
capacity of the taxing jurisdiction is not impaired by the abatement. The State Tax
Commission must be notiﬁed when the exempt portion of state equalized valuation
exceeds 5 percent of the total state equalized valuation of the jurisdiction. This provision
is meant to force the locality to consider the impact of the abatement upon the local ﬁscal
condition. The 5 percent guideline probably makes little sense to local ofﬁcials. They
regard the revenues foregone due to the tax abatement as uncollectible without the

incentive. Further, due to underutilized capacity and previously established inﬁ'astructure,

47

new developments do not impose major increase in serving costs in urbanized areas. In
the case of school districts, property taxes lost through abatement are compensated by
higher grants from the state school ﬁnance formula. Therefore, few circumstances exist
where local ofﬁcial would value a judgment that the ﬁnancial soundness of the taxing
unit would be impaired.

Fiscal capacity is not the only criteria identiﬁed in Section 9; local employment
impacts must be considered as well:

Completion of the facility is calculated to, and will at the time of issuance of the

certiﬁcate have the reasonable likelihood to create employment, retain

employment, or prevent a loss of employment in the community in which the

facility is situated. (Section 9c)
If Section 90 is interpreted narrowly, then any facility that was not fully automated could
satisfy this requirement. Informed decision making necessitates a much more
sophisticated regulation; one that recognizes the complex environment that exists. The
decision maker must assess how likely investment would be without the incentive in
order to lend meaning to the "reasonable likelihood" requirement. Also, local ofﬁcials
must still be concerned with the ﬁscal impairment criterion outlined in Section 9.1.

Deciding how much employment is necessary to make up for lost tax revenue or what

size abatement is necessary to induce investment is left to local discretion.

48

Figure 4.1. Process of Local Utilization of Manufacturing Property Tax abatement in
Michigan

 

Local government
1)Total local tax levy in unit exceeds $30.00 per $1,000 of
S.E.V.

or 2) Levies an income tax

 

 

 

1 Hearing with residents and
owners of real property

 

Establish
Plant Rehabilitation District or/and
Industrial Development District

1

After district established,
ﬁrm’s application is ﬁled with clerk of local government

 

 

 

 

 

 

 

Hearing to applicant, assessor
and representative of affecting taxing unit

 

Local legislative body shall
by resolution, approve or disapprove application

1

If approved, forwarded to the State Tax Commission

 

 

 

 

 

 

 

49

4.3. Conceptual Framework for Local Utilization of Property Tax Abatement

Local utilization of manufacturing property tax abatement involves local
governments offering industrial ﬁrms certain property tax incentives to encourage
restoration or replacement of obsolete industrial facilities and to attract new plants. A
goal of manufacturing property tax abatements is to promote local economic
development by encouraging new private investment in a particular locale in the hopes of
directly creating or retaining jobs and diversifying the tax base. With all of the caveats
described in the review of literature, property tax abatement may be an effective policy
tool that some local governments can use to encourage economic development and
increase community welfare. By reducing the price of capital facing investing ﬁrms, tax
abatements can alter the ﬁrm's investment decision.

However, the choice of property tax abatement and level of property tax abated
vary among cities. This variation can be explained by difference in local context. Thus, I
will ﬁrst discuss local condition — ﬁscal and economic — and their measurement. Then, I
will conceptualize the relationship between local ﬁscal and economic conditions and the

utilization of the property tax abatement.

4.3.1. Local Context

Local government operates and functions within a jurisdiction delimited by area

and services. It has its own conditions of existence. It is subject to particular pressures

and problems inherent in the local area. Differences among places are important.

50

Although all local governments are subject to certain common nonlocal pressures, they
are affected by, and will respond to these differently, depending on speciﬁc local context.
The local condition that creates the occasion for the choice is important since it entails
some behavioral assumptions about how local problems are addressed.

In understanding the local context and its inﬂuence, the emphasis is neither on the
institutional framework nor the policy environment. Rather it is on the context of
meaning which shapes how policy problems are deﬁned (Dunn, 1982). Once issues of
deﬁnition are resolved, the choice of policy instruments becomes a relatively
straightforward matter of matching tool to task. To say that the context determines the
selection and performance of instruments, from this perspective, is to claim that the
instrument and the problem share the same context of meaning.

The conceptual framework for the utilization of manufacturing property tax
abatements can be derived from the premise that utilization of the property tax abatement
at the local level is based on local needs. As described in the description of the Michigan
law, two key factors are important; local ﬁscal capacity and local employment impact.
The local jurisdiction is required to make a separate ﬁnding that the ﬁscal capacity of the
taxing jurisdiction is not impaired by the abatement. This provision is meant to force the
locality to consider the impact of the abatement upon the local ﬁscal capacity. On the
other hand, the decision-maker must assess how likely investment would be without the
incentive in order to lend meaning to the reasonable likelihood requirement. Thus,
deciding how much employment is necessary to make up for the lost tax revenue or what
size abatement is necessary to induce investment is left to local discretion. These

decisions depend on local ﬁscal and economic conditions. Thus the variation in local

51

utilization of manufacturing property tax abatement among cities can be explained in the
relation with local ﬁscal and economic performance.

The cities suffering from economic distress are not necessarily the same cities that
are suffering form ﬁscal distress. In principle, the economic and ﬁscal performance of a
city is a product of the activities of industries in the cities and broader urban area, the
behavior of ﬁrms within the areas, and the local environment including ﬁscal policies of
local governments. These ﬁscal and economic characteristics of a jurisdiction affect the
local utilization of the property tax abatement. The interaction among these conditions is
crucial to understanding local utilization of the property tax abatement. In the next
sections, I will reﬁne conceptual links between the local context and the local utilization

of the property tax abatement.

4.3.2. Development of Local Fiscal and Economic Performance Measure

In this section, I will discuss the economic and ﬁscal performance of cities in
Michigan during the 19805. I will deal with two aspects of performance. First, what is the
relative performance level of the cities on key economic and ﬁscal indicators? Second,
are there similarities among groups of cities in terms of their economic and ﬁscal
performance which could suggest the rationale for different levels of property tax

abatement across group.

4.3.2.1 Deﬁning Economic and Fiscal Performance

52

Economic performance level of a city describes the level of economic activity in a
jurisdiction. The economic performance of cities is affected both by the overall change in
manufacturing employment and consequent earnings and by continuous change in the
location of economic activities. These considerations of both employment and income
performance underscore the need for substantial economic development initiatives,
particularly those related to increasing private jobs and the earned income associated with
those jobs. In the relation with local utilization of property tax abatement, two aspects of
the city economy are important here: economic health and economic structure. Economic
health is the overall level of economic activity. It can be measured by the number of jobs
per resident. It is closely linked to the wage and salaries generated in the city per resident,
but it is not the same as the economic health of city residents, which is measured by their
per capita income. Economic structure represents the distribution of private sector jobs
between manufacturing and service activities.

Fiscal performance of a city represents the capacity of a local government to
provide the public services, i.e. the ability of a locality to use sufﬁcient revenues to afford
to adequate level of public service. Fiscal capacity of local government is an important
factor because state law requires that the ﬁscal capacity of the local government is not
impaired by the abatement. The state law is meant to force the local government to
consider the impact of the abatement upon the local ﬁscal capacity. The ﬁscal
performance level of a city can be deﬁned as the difference between the ﬁscal capacity of
the local government relative to other governments and its cost for delivering a unit of

service relative to the cost of other local governments for delivering that same unit of

53

service. Fiscal performance can be measured by tax burden, long term debt and common

function expenditures.

4.3.2.2.1. Economic and Fiscal Performance Index of Cities

The study is concerned with the relationship between ﬁscal and economic
performance of cities and local utilization of the property tax abatement. This focus leads
to identiﬁcation and examination of the key indicators of ﬁscal and economic
performance of cities. In measuring differences in ﬁscal and economic performance
among cities, two types of measures are important: relative performance, absolute levels
of performance. The ﬁrst point is that measures of ﬁscal and economic performance
among cities are relative and only have meaning in comparison with other places. The
study needs to develop measures that will provide relative comparison among cities. The
second issue includes the absolute level and the change in level. Most measures of urban
health can be expressed as either a level for a given point in time or rate over time. Tax
abatement decisions are affected by historical changes of local indicators as well as the
current level of ﬁscal and economic performance. Thus, the study needs to account for
both the level of and the change in key indicators. A place which is in bad shape but
getting better is clearly in a better condition than a place which is in bad shape and

getting worse.

The indicators, which I will use to measure economic performance, are:
1) changes in the number of manufacturing jobs between time t to t-5

2) per capita income levels in time t

54

3) change in per capita income between time t to t-5
4) unemployment rate in time t

5) change in unemployment rate between time t to t-5.

The indicators used to measure ﬁscal performance are:

1) long-term debt in time t

2) common ﬁrnction expenditures in time t

3) changes in common function expenditures ( all on per capita basis) between time t
and t-5

4) tax burden at time t

5) change in tax burden between time t and t-5.

The numerical values of these variables were adjusted to standard deviations from
the “all sample city” mean for each variable in order to make values more comparable
across variables. The standard values were aggregated to produce performance indices for
economic and ﬁscal distress.

The standard value is a relative measure for ﬁscal and economic distress,
adjusting to the standard deviation from the all sample mean for each variable.

In formula,

 

where
2,]: standard score of ith jurisdiction for jth variable

 

N .—
3}: standard deviation jth variable = ,l 31.2 = 2(Xy _ X,)2
i=1

X0- : numeric value of ith jurisdiction for jth variable

X; : the ‘all sample city’ mean for jth variable

55

For overall relative ﬁscal distress level for ith jurisdiction (F X,),

i Zn
FX,‘ = ——k=l ,
5

where
FXi: overall relative ﬁscal distress level for ith jurisdiction

Z”, : standard score for each ﬁscal performance indicator for ith
jurisdiction.

If the value of F X,- is negative, ith jurisdiction is relatively distressed in terms of
ﬁscal performance. Otherwise, ith jurisdiction is not relatively distressed. The larger
negative score of FX, indicates that ith jurisdiction is more distressed in terms of ﬁscal
performance.

For overall relative economic distress level for ith jurisdiction (EX,-),

2 Zn
EX; = _’:l
5

where
EXi: overall relative economic distress level for ith jurisdiction

Z,- 1: standard score for each economic performance indicator for ith
jurisdiction

If the value of EX; is negative, ith jurisdiction is relatively distressed in terms of
economic performance. Otherwise, ith jurisdiction is not relatively distressed. The
larger negative score of EX) indicates that ith jurisdiction is more distressed in terms of

economic performance.

4.3.3. Relationship between Local Fiscal and Economic Performance and Local

Utilization of Property Tax Abatement

56

The way in which variation in real-world ﬁscal and economic conditions affect
the utilization of the property tax abatement is extraordinarily complex. This is the case
because no two municipal economies develop in exactly the same way. Some local
economies are growing, while others are maturing or declining. Also, cities have
differences in their ﬁscal capacity for stimulating private-sector capital spending among
existing and new industries. Complexity also results from local environmental factors
such as a ﬁrm’s response to local conditions, variations in local tax-expenditure patterns
and spatial variations. All of these factors make it exceedingly difﬁcult to gain clear
understanding of the cause and effect relationships between local ﬁscal and economic
conditions and the local utilization of the property tax abatement.

A conceptual framework is needed through which cities can be classiﬁed into
relatively homogeneous ﬁscal and economic performance groups as a basis for analyzing
the local utilization of the property tax abatement. I classiﬁed the 50 Michigan cities with
population over 25,000 into four groups based on their relative level of ﬁscal and
economic performance. This framework provides the basis for analyzing how ﬁscal and
economic conditions affect the local utilization of the property tax abatement. The
framework is based on the idea that cities with similar ﬁscal and economic conditions
may make similar decisions in using the property tax abatement.

Figure 4.2 shows classiﬁcation of community types by ﬁscal and economic
performance. In the Figure 4.2, type I group represents cities which suffer from ﬁscal and
economic distress. Type 11 cities are ﬁscally adverse while their economic performance is
sound. Type III group cities are economically distressed while their ﬁscal performance is

above the average. Type IV group cities are both ﬁscally and economically better off.

57

Figure 4.2. Classiﬁcation of Communities Types by Fiscal and Economic

 

 

Performance
Economic Distress Level
high low

high Type I Type II
Fiscal
Distress
Level

low Type III Type IV

 

 

 

 

The local utilization of property tax abatement can be explained I) by the
interaction between ﬁscal and economic conditions, 2) by the behavior of ﬁrms within
the areas, and 3) by the local environment including ﬁscal policies of local governments.
Basic to the local utilization of the property tax abatement is the perceived need and the
capacity for localities to stimulate private-sector capital spending for job creation among

existing and new industries.

Distressed cities in Type I can be identiﬁed using a variety of indicators such as
high unemployment and population loss. If a small city is dependent on one or two large
plants and these close down, the local government may face serious ﬁnancial problems.

The erosion of its tax base leads to reductions in services even if local taxes are increased

58

to the legal or political limit. Under such conditions, it becomes exceedingly difﬁcult to
attract any new industry or to retain existing business.

In the most distressed communities, the utilization of tax abatements can be
confounded by several factors. First, advanced technology industries are unlikely to
employ the long-term unemployed such as educationally and socially disadvantaged
minorities or the older people laid off from manufacturing industries. The existing
infrastructure may be in need of expensive repair as well. Second, the cities with the
greatest needs often lack resources. Third, once some poor communities have been in
decline for many years, recovery becomes successively less likely if infrastructure has
deteriorated and the most productive sectors of the workers have emigrated, leaving and
increasingly large dependent population to be supported on a dwindling tax base. It
becomes progressively more difﬁcult to attract either industry or labor in such
circumstances. Finally, local govemments are limited in the offsetting subsidies they can
use to persuade businesses to locate in a particular area. Firms and their employers value
clean air, good schools, pleasant surroundings, and low crime rates. These amenities are
not often available in inner cities or depressed communities. Businesses also value the
availability of business services and skilled labor, often preferring to locate near
companies doing similar work (agglomeration effects). Thus, even though Type I
communities confront the greatest need, they have severe difficulties in utilizing the
property tax abatement program.

Pontiac and Highland Park are the cities that epitomize Type I. In case of
Pontiac, the relative level of overall ﬁscal performance is so severe. (F Xs are —2.476, -

3.72, and -1.6 for 1982, 1987, and 1992 respectively.) The relative level of overall

59

economic performance of Pontiac is also severe. (EXs are —0.58, -102, and —1.63 for
1982, 1987, and 1992 respectively.) However, even though these cities have their severity
in ﬁscal and economic performance, they rarely utilize the property tax abatement
program. (Property tax abatement had been granted 3 times for Pontiac and 2 times for
Highland Park during 1982-1992.)

Type II cities are generally in their early growth stages. They experience rapid
and extensive private-sector investment as well as substantial population in-migration.
These cities can suffer from ﬁscal imbalance since their ﬁnancial spending is growing
more rapidly than their economic base, thus pushing their tax, debt, and expense higher.
Thus some such communities may adopt policies which discourage private sector
investment. They are not willing to utilizing property tax abatement much. However,
existing ﬁrms and new industries may negotiate with local governments to grant tax
abatements. These demands for the property tax abatement will make these cities utilize
the property tax abatement program.

Novi is the city that epitomizes Type II. Novi, one of fast growing communities,
is not distressed economically, but the city has relative difﬁculties in ﬁscal performance.
Novi is inactive in utilizing the property tax abatement program.

Type III cities, in contrast to Type II, are cities with older economies. As cities
pass into the stage of industrial maturity, fall in private-sector investment off and a
substantial loss of manufacturing employment induces. Even though cities may suffer
form economic decline, their ﬁnancial equilibrium balance appears to be within the
control. Thus this group of cities has the most motivation to utilize the property tax

abatement program to encourage economic restructuring. Grand Rapids and Jackson are

60

the cities that epitomize Type III. Their ﬁscal condition is relatively sound, but their
economic condition, especially unemployment rate, is distressed. These cities are the
most active cities in utilizing the property tax abatement program. (Grand Rapids granted
tax abatements more than 300 times during 1982-1992.)

Type IV cities’ ﬁscal and economic performances are better off. Most successful
suburban cities belong to this group. These suburban cities generally beneﬁt from central
city growth activities. This has allowed suburban cities to become less dependent upon
manufacturing industries and more linked to the service economy. Under such conditions,
decision-makers of these cities may make little use of tax abatement programs to promote
economic development but may devote signiﬁcant attention to local environmental and
land use issues. Allen Park and F armington are the cities that epitomize Type IV. Their
ﬁscal and economic performances are better off. They are not inactive in utilizing the
property tax abatement program.

Figure 4.3 shows actual numbers of cities, which belong to community types by
relative ﬁscal economic performance and how cities change their community types along
with years.

Most of Type 1 cities do not move their community types much along with years.
Among Type I cities, Bay City and Wyandott, which are more likely active in utilizing
the property tax abatement program, change their community types from Type I to Type
111. Even though large central cities among Type I cities, such as Flint, Saginaw and
Detroit, are active in utilizing the property tax abatement program, they do not change

their community types along with years. However, Pontiac and Highland are inactive in

61

granting tax abatements and their ﬁscal and economic conditions have gotten worse along
with years.

Among Type 11 cities, Battle Creek and Dearbom move their community type
from Type II to Type IV. These cities are more likely active in utilizing the property tax
abatements. Even though Kalamazoo and Midland are active in utilizing the property tax
abatements, they do not move their community type. However, the other Type 11 cities
are less active in utilizing the property tax abatements and do not move their community
type.

Type III cities are more likely active in utilizing the property tax abatements, but
most cities do not change their community type. However, Grand Rapid, which is one of
the most active cities in utilizing the property tax abatements, changes the community
types from Type III to Type 11. Also, Traylor moves community type from Type III to
Type IV and to Type II. This means that these cities improve their economic performance
level but their ﬁscal conditions get little bit worse through utilizing the property tax
abatement program.

Most successful suburban cities belong to Type IV. These cities are not active in
utilizing the property tax abatement program. However, some of fast growing cities
among Type IV, such as Holland, Livonia, and Southﬁeld, are more likely active in
granting tax abatements. These cities move their community types from Type IV to Type
II. These cities can suffer from ﬁscal imbalance since their ﬁnancial spending is growing
more rapidly than their economic base.

Figure 4.4 shows actual numbers of cities, which belong to community types by

absolute value based on unemployment rate and budget deﬁcit (per capita revenue minus

62

per capita expenditures). If a city has an unemployment rate of 8% or higher, then it can
be classiﬁed into ‘economically distressed city.’ If a city has budget deﬁcit, then it may
be distressed ﬁscally.

This measure does not explain classiﬁcation of community types much since the
cities with high unemployment rate, 10% or higher, do not fall into Type 1. Budget deﬁcit
may not be a good measure as a ﬁscal performance. However, the cities with high
unemployment rate (10% or higher), such as Detroit, Flint, Highland, Pontiac, Port
Huron, Saginaw, and Bay City, fall into Type I in the relative ﬁscal and economic
performance measures.

In sum, some of Type I cities, such as large central cities, tend to utilize the
property tax abatement program. But the program does not help these cities ﬁscal and
economic conditions. In the case of Pontiac and Highland, even though these cities have
their severity in ﬁscal and economic performance, they rarely utilize the property tax
abatement program because of their unattractiveness to business. Most Type II and Type
IV cities are not willing to grant tax abatements. However, Type III cities and some of
fast growing cities in Type IV are more likely active in utilizing the property tax
abatement program. In these cases, the program has some marginal effect to change
communities’ ﬁscal and economic conditions. In Type I cities, it seems that the program

does not have much effect to cope with their severity in ﬁscal economic conditions.

63

Figure 4.3. Numbers of Cities in Communities Types by Each Year

(By relative level of ﬁscal and economic performance)

A. Cities in 1982

Economic Distress Level

 

 

high low
Fiscal hlgh 8 7
Distress
Level ow 16 19

B. Cities in 1987

 

 

 

Economic Distress Level

 

 

high low
h' h
Fiscal 1g 1 O 5
Distress
Level low 14 21

C. Cities in 1992

 

 

 

Economic Distress Level

 

 

high low
h' h
Fiscal 1g 10 12
Distress
L l
eve low 13 15

 

 

 

 

 

 

64
Figure 4.4. Numbers of Cities in Communities Types by Each Year

(By unemployment rate and budget deﬁcit)

A. Cities in 1982

Economic Distress Level

 

 

high low
Fiscal hlgh 3 1 5
Distress
Level ow 10 22

B. Cities in 1987

 

 

 

Economic Distress Level

 

 

high low
h' h
Fiscal ‘g 7 12
Distress
Level low 11 20

C. Cities in 1992

 

 

 

Economic Distress Level

 

 

high low
h'
Fiscal 1g” 12 13
Distress
L l
eve low 7 18

 

 

 

 

 

 

65

4.3.4. Local Environmental Factors in Utilizing Property Tax Abatement

The differences in environmental conditions surrounding local governments may
cause the extent of local utilization of the property tax abatement program to vary across
local governments. These factors are 1) local government structure, 2) spatial location, 3)

local tax/expenditure policy, and 4) local social and structural conditions.

1) Government Structure

According to actor oriented theory, one of the important local factors that may
affect the local utilization of property tax abatement is political leadership. Because the
environment is uncertain and the net effects of tax abatement policy are undeterminable
over the long run, the utilization of tax abatement becomes a political question,
determined subjectively by the actors involved (Stone 1987). Because strong mayor
system is expected to be more responsive to citizen and group pressures and more
aggressive to adopt economic development policy than are politician in cities using the
council-manager form, more property tax abatement is utilized in cities with a mayor-

council government.

2) Spatial Variation

Local decision makers may provide tax abatement as defensive measures against
regional competitors rather than using tax abatement as part of a well-formulated
economic development plan (Bowman 1988, Gradt 1987; Peretz 1986). Decision makers

in central city and nonmetropolitan communities are more likely to be inﬂuenced by the

66

level of regional competition than those in suburban communities because the central city
and nonmetropolitan communities depend more heavily on their own economic base.
There are several reasons to expect that central cities, suburbs, and nonmetropolitan cities
will use tax abatement regarding local economic development. Suburban decision-makers
are likely to be the least active in promoting development. In many suburban
communities, in fact, there have been campaigns to limit growth (Baldassare 1981;
Schneider 1989). Whereas central cities and nonmetropolitan cities are more dependent
upon their own economic bases, suburbs generally beneﬁt from central city grth
activities -what Barry and Kasadra (1977) called the suburban spill-in effect. This has
allowed suburbs to become less dependent upon manufacturing industries and more
linked to the service economy (Schneider and F ernander 1989).

Under such conditions, suburban decision makers may use little tax abatement to promote
economic development but may devote signiﬁcant attention to local environmental and

land use issues

3) Local Tax/Expenditure Policy

The effects of local tax/expenditure policies are more under the control of local
governments than are other local conditions. Developmental expenditures of local
government such as capital investment and highway expenditures improve the business
climate in a city and provide attractiveness to ﬁrms. Thus decision-makers may use little

tax abatement to encourage private investment.

4) Social Conditions

67

Social conditions of a city may describe the demands for a service-dependent
population. The competition for limited resources between developmental and social
concerns in a city may affect the local utilization of property tax abatement. These social
conditions are somewhat related to local policy. Cities with service-dependent population
are primarily oriented toward the support of social activities such as welfare and health,
education and public housing. Thus the greater service-dependent population will

negatively affect the local utilization of property tax abatements.

CHAPTER V

EMPIRICAL ANALYSIS

5.1 Overview

This chapter provides hypotheses for the research and a methodology for an
empirical analysis of the local utilization of property tax abatement policy in Michigan
cities. The analytical method of this study is a statistical analysis using multiple
regression models that identify the relationship between local utilization of property tax
abatement policy and local conditions such as local ﬁscal and economic performance,
political factors, and environmental factors. Based on the relevant literature in Chapter
Three and the conceptual framework in Chapter Four, this chapter speciﬁes two types of
analytical models: 1) a basic model, which focuses on local ﬁscal and economic

conditions; and 2) an extended model, which considers local environmental factors.

5.2 Hypotheses

This study will analyze the relationship between the local utilization of the property
tax abatement, which refers to the use of the property tax abatement to encourage local

economic development, and local ﬁscal and economic conditions.

68

69

The basic hypothesis to be tested focuses on how local ﬁscal and economic condition
are related to the local utilization of property tax abatements. Local governments use the
property tax abatement program to encourage new private investment in the hopes of
directly creating or retaining jobs and diversifying the tax base. This utilization of the
property tax abatement at the local level is based on local needs. Although some argue
that distressed cities are more inclined to offer abatements because of local needs, others
argue that prosperous cities actually use abatements more because ﬁrms tend to locate in
areas that are already economically successful, and are likely to apply for abatements in
attractive places. These arguments about the relationship between the local utilization of
the property tax abatement and local conditions are caused by confounding factors such
as the behavior of ﬁrms and the local environment including the ﬁscal policies of local
governments.

As discussed in the previous chapter, the decision to utilize the property tax
abatements is affected by the perceived need and the capacity for localities to stimulate
private sector capital spending for job creation. Even though a city perceives a local need
to utilize the property tax abatement program, if its weak ﬁscal capacity is affected by the
abatement and if there is little demand from ﬁrms due to its poor amenities, the
community will ﬁnd it hard to utilize the abatements. Cities, which suffer from'economic
decline but are ﬁscally sound, tend to use the property tax abatement program
aggressively to attract private capital.

Thus this study deals with the ﬁscal performance and the economic performance
of a city separately. Based on the conceptual framework, the hypotheses of this study

may be postulated as follows: in a given city, economic distress level is positively related

70

to the degree of the local utilization of property tax abatements; and in a given city, ﬁscal
distress level is negatively related to the local utilization of the property tax abatements.
Each hypothesis can be reconstructed through its measurable variables.

The ﬁrst set of hypotheses pertains to a city’s economic performance. Two
aspects of the city economy are important: economic health and economic structure. The
economic health of cities is affected both by overall change in manufacturing
employment and consequent earnings and continuous change in the location of economic
activities. These considerations, both manufacturing employment and income
performance, underscore the need for substantial economic development initiatives,
particularly those related to increasing private jobs and the earned income associated with
those jobs. Yet, per capita income better represent the economic health of city residents
than the economic health of the city. The number of jobs is closely linked to earnings
generated by city residents, but it is not the same as the economic health of city residents.
Thus, changes in manufacturing employment rather than an income variable is most
strongly related to the local utilization of the property tax abatement.

The economic structure of a city is represented by the distribution of private
sector jobs between manufacturing and service activities. Since the manufacturing
property tax abatement is granted to industrial ﬁrms to encourage restoration or
replacement of existing obsolete industrial facilities and to attract new plants, cities with
high dependency on manufacturing industry more aggressively utilize the property tax

abatement program.

71

H1: In a given city, economic distress level relates positively to the degree of the
local utilization of property tax abatements.

Hla: In a given city, negative change in manufacturing employment relates
positively to the degree of the local utilization of property tax abatements.

Hlb: In a given city, dependency on manufacturing industry relates positively to

the degree of the local utilization of property tax abatements.

The second set of hypotheses pertains to ﬁscal performance. The ﬁscal
performance level of a city can be deﬁned as the difference between the ﬁscal capacity of
the local government relative to other governments and its cost for delivering a unit of
service relative to the cost of other local governments for delivering that same unit of
service. Despite the appearance of no budget outlays, tax abatements are local tax
expenditures that represent a forgone revenue stream. The lost revenues must be obtained
from some other sources in order to balance local budgets. Property tax abatements for
industrial property result in higher taxes for other classes to delivery the same public
services. Thus, ﬁscally distressed cities have difﬁculties utilizing property tax
abatements. In general, those local governments with the greater own-source revenues,
ﬁnd it easier to utilize tax abatements.

Reliance on a particular revenue source is also important to measure ﬁscal stress
in a city. Property taxes are the main revenue source of local governments. In some way,
the revenue growth potential of a local government is a function of property taxes, and
the capacity to increase property tax rates is, in part, dependent on the size of the existing

property tax burden. Thus, increase in property taxes is dependent not only on existing

72

tax burden and on legal restrictions on tax rates, but also on the political acceptance of a
tax increase. Thus, reliance on per capita property tax and tax burden may negatively

affect the local utilization of the property tax abatement.

H2: In a given city, ﬁscal distress level is negatively related to the local utilization
of the property tax abatements.

H2a: In a given city, per capita own-source revenue is positively related to the
local utilization of the property tax abatements.

H2b: In a given city, reliance on per capita property tax is negatively related to the
local utilization of the property tax abatements.

H2c: In a given city, tax burden is negatively related to the local utilization of the

property tax abatements.

5.3. Analytical Model

The purpose of this section is to develop a model that explains the variation in the
utilization of property tax abatement. I propose a statistical method to ﬁnd the
relationship between the degree of local utilization of property tax abatement and local
ﬁscal and economic indicators. The previous chapter contained a basic conceptual

framework of what factors determine the level of local utilization of the manufacturing

73

property tax abatement at the local level. For a given city, this theory can be represented

in general functional form as:

(5.1) LUTA, = 1mm X2, X,,)

Where local utilization of property tax abatement is the use of property tax abatement in i
th local government, X], X 2, ----, X" are factors that are related to the degree of local
utilization of property tax abatement.

As a dependent variable, the degree of local utilization of property tax abatement
(L UT A ,~) is measured in two ways: per capita amount of cumulative real market value of
manufacturing property tax base abated away in the following period (t to t+5) divided by
population (KTAP) and numbers of manufacturing property tax abatement issued in the

following period (TANO).

5.3.1 Basic Model

The research question addressed in this study is how differing levels and changes of
local ﬁscal and economic conditions affect the variation in utilizing the property tax
abatement at the local level. Hence, ﬁrst of all, the study asks what effects local ﬁscal and
economic performance (distress) levels have on the local utilization of property tax
abatement, holding the other local factors constant. This interest leads to the

incorporation of local ﬁscal and economic indicators and variables into the analysis. In

74

this sense, the basic model (Model I) to estimate the relationship between local ﬁscal

economic condition and the local utilization of property tax abatement is represented by

(5.2).
k k
(5. 2) Y. = so + ZorrFX/u + ZyIEXI. + e,,
k=l k=l
where
Y ,- is a local utilization of property tax abatement indicator;
,80 is the intercept;
k
i; akFXk, are the effects of ﬁscal condition variables;
k
£ 171.15in are the effects of economic condition variables;
e] is the error term.

Equation (5.2) estimates the effect of local ﬁscal and economic condition on the local
utilization of manufacturing property tax abatement. The variables for local ﬁscal
condition are the level of and the change in per capita common-function expenditures, the
level of and change in the tax burden, per capita debt, per capita non-tax revenues, per
capita tax revenues, reliance on property tax revenues, the state equalized value of local
property, city income tax as a dummy variable and per capita intergovernmental revenues
from state and federal governments. The variables for local economic condition include

rates of change in manufacturing employment, economic structure, the level of and the

 

 

75

change in median income, the level of and the change in unemployment rates and
employment per resident.

Consequently, the new proposed basic model is shown in (5.3)

(5. 3) LUTA, = ,6” + 3, EXP,- + p; CEXP,- + ﬂ3TXB,- + a, CTXB,- + ,B5DEBTI + ,6, OREV,-
+ [37 TAX,- + pBPTXR. + ,BgSEVi + ,BmINCT)(,- + ﬂ,,1NT,-+ ﬂlzRMEM, +
£13 MBASE; + ,614INC; + ﬂ” CINC] + ,616 UNEMP; + ﬁnCUNMPi +
,318 EMPP.- + 6‘1.

where,
EXP : per capita common function expenditures
CEXP : change in per capita common function expenditures from time t-5 to t
TXB : tax burden
CTXB : change in tax burden from time t-5 to t
DEBT : per capita long-term debt
OREV : per capita non-tax revenues

TAX : per capita tax revenues

PTXR : per capita property tax revenues as a percentages of own-source
revenues

SEV : state equalized valuation of local property

INT : intergovernmental transfer from state and federal government

INCTX : city income tax

RMEM : rate of change in manufacturing employment between time t-5 and t
MBASE : manufacturing employment as a percentage of total employment
INC : median income

CINC : change in median income between time t-5 and t

UNEMP : unemployment rate

CUNEMP: change in unemployment rate between time t-5 and t

EMPP : total employment per resident

5.3.2. Extended Model

As discussed in the previous chapter, the local utilization of the property tax

abatement may be affected by various local environment factors as well as local ﬁscal

76

and economic factors. Some of these include spatial variation, local tax expenditure
policy, social condition, and government structure. Thus the extended model incorporates

these factors in the analysis in addition to the basic model. The above equation (5.2) is

rewritten as:
k k k
(5.4) Yi = [30 + 2mm.- + 271ml,- + ZSIENVI. + e],
k=l lr=l k=l
where
Y,- is a local utilization of property tax abatement indicator;
,60 is the intercept;
k
£6417in are the effects of ﬁscal performance variables;
I:
gift/EX,“- are the effects of economic performance variables;

Z dkENVk; are the effects of government structure, spatial variation, local
policies, and social condition described the previous chapter;

e; is the error term.

In the extended model, local ﬁscal and economic variables were presented in the previous
section in explaining the basic model. Among several local factors that may affect the
local utilization of property tax abatement, one is political leadership. More property tax

abatement is utilized in cities with a mayor-council government, where mayors expected

 

77

to be more responsive to citizen and group pressures than are politician in cities using the
council-manager form. This governmental structure variable is included as a dummy
variable. The second local environmental factor is spatial variation. Decision makers in
central city and non-metropolitan communities are more likely to be inﬂuenced by the
level of regional competition than those in suburban communities because, whereas
suburbs generally beneﬁt from central city growth activities, the central city and non-
metropolitan communities depend more heavily on their own economic base. Thus
suburban decision-makers may make little use of tax abatements to promote economic
development. City’s spatial status dummy variable (CS) will be used as an explanatory
variable.

Third local factor that may affect the local utilization of property tax abatement is
local policy. For the local expenditure policy variable, I divided local expenditures into
three categories; redistributive expenditures, allocational expenditures and developmental
expenditures. I use expenditures on education for redistributive expenditure; police and
ﬁre expenditures for allocational expenditures, and capital investment, highway and
sewer expenditures for developmental expenditure. Cities with higher development
expenditures per capita such as highway expenditure and capital investment will use less
property tax abatement. Since capital investment and highway expenditures are
alternative developmental policy to encourage local economic development and, in
general, these cities have attractiveness to ﬁrms, they will not depend on the property tax
abatement. Finally, I will use minority population, poverty, and population density to

represent the social and structural conditions.

Consequently, the proposed extended model is shown in (5.5).

 

(5.5)

where,

78

LUTA; = a, + ,6, EXP, + ,BZCEXP, + ﬂ3TB,~ + ,64CTB. + ,B5DEBT, + ﬂgREV; +
a TAX.- + ﬂsPTX. + 13951514- + ﬂzoINTI + ,6” INCTX.- + ﬂlszEM +
ﬁn MBASE,- + ﬂl4INCj + ﬂ15CINC] + ,8/6 UNEMP,- + ﬂ17CUNEMpi+
as GFORM. + ,3”, CS.- + ,320 CAP.- + .62, W.- + ,322 POL. + 1323 SEW.- +
ﬂy EDU, + ,625 PRATE; + ﬂ26 BALCK; + ,627PDEN1 + ﬂzg POVTY, +

ﬂ29 HVI' + e i
GFORM : government form
CS : city status
CAP : capital investment
HW : highway expenditure
POL : police expenditure
SEW : sewer expenditure
EDU : education expenditure
PRATE : property tax rate
BLACK : percentages of black population
PDEN : population density
POVTY : percentages of population below poverty line

HV

: median home value

79

5.3.3. Reduced Model

The reduced regression model is prOposed to resolve two possible violations of
regression assumption, which may be inherent from full model. The one is
autocorrelation, the other is multicollinearity. Before I will discuss the reduced regression
model, I will ﬁrst analyze the autocorrelation and multicollinearity problem of the full

model (the Basic Model and the Extended Model).

5.3.3.1. Autocorrelation

An important assumption of the classical linear regression model is that there is
no autocorrelation or serial correlation among the disturbances. That is, the classical
regression model assumes that the disturbance term relating to any observation id not
inﬂuenced by the disturbance term relating to any other observation. However, since the
study uses a panel data set and observations are derived from 1977, 1982, 1987 and 1992,
the data set itself may have two possible sources, which autocorrelation may occur. The
ﬁrst source is that this panel data set includes time series data; the second source is
manipulation of data. Because some socio-economic variables were not available for
1977, 1982, 1987, and 1992, it is necessary to extrapolate some values from the 1970,
1980 and 1990 US. Census. This extrapolation of data might impose upon the data a

systematic pattern, which might not exist in the original data.

80

Thus, this study used the Durbin-Watson d test to detect autocorrelation between

residuals. In the Durbin-Watson d test, decision rules are shown in Table 5.1 and Figure

5.1.

Table 5.1. Dubin — Watson (I test: Decision rules

 

 

 

 

 

 

 

 

 

Null hypothesis Decision If

No positive autocorrelation Reject 0 < d < dL

No positive autocorrelation No decision dL < d < du

No negative autocorrelation Reject 4 - dL < d < 4

No negative autocorrelation No decision 4 - du < d < 4 - dL
No autocorrelation Do not reject du < d < 4 - du

 

Figure 5.1. Dubin-Watson d test: Decision rules

 

 

 

 

 

 

 

 

 

f(d)
¢ N >
+——> d—D
Reject Ho Zone of . ,

Indecision Zone 0f R313“ H0
Evidence of Indecrsron
Positive Evidence of
Autocorrelatio Negative
n Autocorrelation

< >
Accept H0 or Ho"
or Both
dL du 4-du 4-dL

 

81

From the Dubin-Watson tables, for the given sample size (n =150 in both model) and
given number of explanatory variables (k = 16 in the Basic Model and k = 26 in the
Extended Model), the critical dL and du values at 0.01 level of signiﬁcance are dL =
1.400 and du = 1.863 for the Basic Model, and dL = 1.340 and du = 1.931 for the
Extended Model.

From the SPSS output result given in Table 5.3. and Table 5.4, the estimated

Dubin-Watson d values are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

KT AP
Model I Model II
Dubin-Watson d 2.259 2.257
T ANO
Model I Model 11
Dubin-Watson d 1.655 1.675
Thus, for KTAP,

Model I: 4 - du = 2.069 < d = 2.259 < 4 - d1, = 2.586 : No decision;

Model II: 4 - du = 2.153 < d = 2.257 < 4 - dL = 2.660 : No decision.

For TANO,
Model I: dL = 1.4 < d = 1.655 < dU = 1.863 :No decision;

Model II: dL = 1.4 < d = 1.675 < du = 1.863 : No decision.

Since d statistics in all four regression models fall in the indecisive zone (region of

ignorance), we cannot conclude whether autocorrelation does or does not exist.

 

 

82

5.3.3.2. Multicollinearity

The independent variables in the full model (the basic model and the extended
model) might be correlated linearly. A popular means of detecting multicollinearity is
through the use of the correlation matrix. In this study, Pearson correlation technique is
applied to investigate the correlation among independent variables. In a matrix of simple
correlation coefﬁcients between all pair of the independent variables, a high value (about
0.8 or 0.9 in absolute value) of one of these correlation coefﬁcients indicates high
correlation between the two independent variables to which it refers (Kennedy, 1987; p.
150). The correlation matrix of independent variables in the full model is presented in
Table 5.2. Among correlation coefﬁcients of independent variables, most correlation
coefﬁcients are moderate and very low. However, the level of per capita expenditure
(EXP) and per capita other revenue source (OREV) are highly correlated with the tax
burden (TXB). Their correlation coefﬁcients are 0.944 and 0.952 respectively. Thus,
these variables need to be eliminated for regression analysis. The coefﬁcient of
employment per resident (EMPP) to the level of poverty (PRTY) is shows high (-0.824).

Therefore, one of these variables needs to be eliminated for regression analysis.

83

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5.3.3.3. Reduced Model

As discussed in the previous section, even though the four regression equations in
the basic model and the extended model do not have severe autocorrelation problems, we
cannot also conclude that there are no autocorrelation. Thus, it needs to reconstruct model
to check possible sources of autocorrelation. To do this, the study needs to rerun
regressions by dividing pooled time-series cross-section data set into 3 separate cross-
sections data set (82, 87, 92). However, because each of three cross-section data set
includes only 50 observations, 26 explanatory variables are too much for the model. I will
reduce explanatory variables from 26 to 11, which is appropriate to small data set (50
observations).

Also, as discussed in the previous section, the level of per capita expenditure
(EXP) and per capita other revenue source (OREV) are highly correlated with the tax
burden (TXB), these variables are eliminated in the reduced model. The coefﬁcient of
employment per resident (EMPP) to the level of poverty (PRTY) is shows high (-0.824).

Therefore, one of these variables needs to be eliminated for regression analysis.

Consequently, the new proposed reduced regression model is shown in (5.6)

5.6 LUTA- = ,Bo + ﬂ-TXB- + ﬂzCTXB; + ,63 TAX,- + ﬂ4PTXRi + 3551514. + p6RMgM, +
ﬂ7MB/ISE; + ﬂglNCi + ’69 CINC] + 1610 UNEMPi + ﬂu CUNMP; + e],

86

5.4. Data and Variables

5.4.1 Data

The Michigan cities are chosen as the area from which to gather data for the
empirical analysis. A major reason for choosing the cities of Michigan is the use of
property tax abatement by localities. The state of Michigan has passed legislation that
allows communities the right to grant manufacturing property tax abatements. Michigan's
Public Act 198, enacted July 9, 1974 and titled "Michigan's Plant Rehabilitation and
Industrial Employment Act," was the ﬁrst of this legislation. In effect today,
manufacturing property tax abatements can be granted at a community's discretion for up
to 12 years. For a new manufacturing facility the abatement is equal to one-half the
normal property assessment. For a rehabilitated manufacturing facility the property
assessment is frozen at the level before rehabilitation. Firms granted a manufacturing
property abatement pay what is called an "Industrial Facilities Tax" instead of the
standard property tax.

For the study, a panel data set will be used because a single cross-section of
Michigan cities results in too small of a data set. The panel data set consists of four
pooled cross sections beginning in 1977 and continuing in ﬁve-year increments up to
1992. A ﬁve-year period is believed to be a period long enough to allow for substantial

adjustment in local property and non-residential property abatement values.

87

The availability of data limited to cities with populations greater than 25,000 in
1990. The result is a sample of 50 cities for end of the four cross sections or a total panel
of 200 observation.

Because observations are desired from 1977, 1982, 1987 and 1992, and some
socio-economic variables were not available for these years, it is necessary to extrapolate
some values from the 1970, 1980 and 1990 US. Census. All nominal dollar values have

been placed in 1982 real dollars using the Detroit Consumer Price Index.

5.4.2 Data Source

A portion of the data needed for the study was collected from the published
documents of the US. Census Bureau and from other federal and state agencies. SEV and
average property tax rate for city come from State Equalized Valuations and Average Tax
Rate Data, Property Tax Commission, Michigan Department of Treasury, for 1977, 1982,
1987 and 1992. The data for economic variables are gathered from City and County
Databook, US. Census Bureau. The socio-economic variables are gathered and
calculated from Characteristics of the Population - Michigan, 1970, 1980 and 1990, US.
Census Bureau. City government's ﬁscal data comes from Finances of Municipal and
Township, Census of Governments, US. Census Bureau. The data for education
expenditure are gathered from Finances of School Districts, Census of Governments,
1977, 1982, 1987, and 1992.

Tax abatement data is calculated from the raw data ﬁle of Property Tax

1"

Commission, Michigan Department of Treasury. The data for government structure

88

variable and city bond rating are collected from Municipal Year Book, 1977, 1982, 1 98 7,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1992.
Table 5.3. Variables and Deﬁnitions
Variable Deﬁnition
Dependent KTAP per capita amount of cumulative real market value of dollar
manufacturing property tax base abated away in the
following period (t to t+5) divided by population
TANO numbers of manufacturing property tax abatement number
issued in the following period (t to t+5)
Independent EXP per capita common-function expenditure dollar
CEXP change in per capita common-function expenditure %
from time t-S to t
TXB tax burden which is deﬁned as the ratio of own %
source revenues per capita to per capita income
CTXB change in tax burden from time t-5 to t %
DEBT per capita long-term debt dollar
OREV per capita non-tax revenues dollar
TAX per capita tax revenues dollar
PTXR per capita property tax revenue as a percentages of %
own-source revenue
SEV state equalized valuation of local property divided by dollar
area
INT per capita intergovernmental revenue from state and dollar
federal government
RMEM change rate in manufacturing employment between %
time t-5 and t
MBASE percentage of manufacturing employment among %
total employment
INC median income dollar
CINC change in median income between time t-5 and t %
UNEMP unemployment rate %
CUNEMP change in unemployment rate between time t-5 and t %
EMPP total employment per resident person
GFORM government form; dummy variable; “1” for mayor-
council system, otherwise “0”
CS city status; dummy variable; “1” for central city,
otherwise “0”
CAP Per capita capital investment dollar

 

 

 

 

 

Table 5.4.

89

1ta 1
Per 1ta ice
Per 1ta sewer
education
Income tax
tax rate
0

1tures

nty

0

UC

Variable Derivation and Sources

1tures

1tures

 

The variables were calculated for of the 50 cities used in this dissertation for each of the

years listed.

 

 

 

 

 

 

 

Variable Derivation for Year "t" Sources

Deﬂator- 1977, '82, '87, '92: (1982 base Bureau of Labor Statistics, US.
Detroit Consumer Price Index for Department of Commerce.
all items)t /97. '

POP- 1977: {(1970 population + .7 (1980 US. Census Bureau (1970, 1980,
population - 1970 population)}. 1990), Characteristics of the
1982: {(1980 population + .2 (1990 Population — Michigan, US.
population - 1980 population)}. Department of the Commerce,
1987: {(1980 population + .7 (1990 Washington, DC.
population - 1980 population)}.

1992: {(1990 population + .2 (1990
population - 1980 population)}.

AREA 1977, ‘82, ‘87, ‘92: (square miles) -, County and City Data Book, 1977,
1982, 1987, 1994. US. Department
of Commerce.

KTAP! 1982, '87, '92, ’94: {(sum of state- Calculated from computer ﬁle.
equalized assessed value Michigan Property Tax Commission,
manufacturing property abatements Michigan Department of Treasury,
through year)- / POPt / deﬂator } L Lansing, Michigan.

EXP- 1977, ’82, ‘87, ‘92: {(common County and City Data Book, 1977,

 

function expenditures) / POP-/

 

1982, 1987, 1994. US. Department

 

 

90

 

 

 

 

 

 

 

 

 

 

 

 

 

deﬂator } t, of Commerce.
CEXP- 1982, ‘87, ‘92: {(EXP- — EXP--5 )/
EXP--5 }-

TXB- 1977, 1982, 1987, 1992: {(own County and City Data Book, 1977,
source revenue per capita/deﬂator)/ 1982, 1987, 1994. US. Department
(per capita income/deﬂator)}-. of Commerce.

CTXB- 1982, 1987, 1992:

{(TXB- - TXB--5 )/ TXB--5 }-

DEBT- 1977, ’82, ‘87, ’92: (Per capita County and City Data Book, 1977,
outstanding debt / deﬂator)-. 1982, 1987, 1994. US. Department

of Commerce.

OREV, 1977, ’82, ‘87, ’92: {(per capita County and City Data Book, 1977,
own source revenue — per capita tax 1982, 1987, 1994. US. Department
revenue) / deﬂator} -. of Commerce.

TAX- 1977, ’82, ‘87, ’92: (Per capita tax County and City Data Book, 1977,
revenue / deﬂator) -. 1982, 1987, 1994. US. Department

of Commerce.

PTXR, 1977, ’82, ‘87, ’92: {(per capita
Property tax / deﬂator) / (own
source revenue per capita / deﬂator
)} 1 * 100.

SEV, 1977, ’82, ‘87, ’92: (state equalized State Equalized Valuations and
assessed value property / area / Average Tax Rate Data, 1977, 1982,
deﬂator) -. 1987, 1992, Property tax

Commission, Michigan Department
of Treasury.

INT, 1977, ’82, ‘87, ’92: (per capita County and City Data Book, 1977,
intergovernmental revenue from 1982, 1987, 1994. US. Department
state and federal government / of Commerce
deﬂator)- .

RMEM- 1982, ‘87, ’92: {(manufacturing US. Census Bureau (1970, 1980,
employment- — manufacturing 1990), Characteristics of the
employment--5 ) / manufacturing Population — Michigan, US.
employment-.5 } 1 Department of the Commerce,

Washington, DC.
MBSE- 1982, ‘87, ’92: (manufacturing US. Census Bureau (1970, 1980,

 

employment / total employment
over 16 years old)-

 

1990), Characteristics of the
Population - Michigan, US.
Department of the Commerce,

 

 

91

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Washington, DC.
INC- 1977, ’82, ‘87, ’92: (median US. Census Bureau (1970, 1980,
household income / deﬂator)- 1990), Characteristics of the
Population — Michigan, US.
Department of the Commerce,
Washington, DC.
CINC- 1982, ‘87, ’92: {(INC- - INC--5 )/
INC t-5 }r
UNEMP, 1977, ’82, ‘87, ’92: unemployment County and City Data Book, 1977,
rate 1982, 1987, 1994. US. Department
of Commerce
CUNEMP, 1982, ‘87, ’92: {(UNEMP- — County and City Data Book, 1977,
UNEMP--5 )/ UNEMP-.5 }, 1982, 1987, 1994. US. Department
of Commerce
EMPP. 1977, ’82, ‘87, ’92: (total US. Census Bureau (1970, 1980,
employment over 16 year old / 1990), Characteristics of the
population)- * 1000. Population — Michigan, US.
Department of the Commerce,
Washington, DC.
GFORM- 1977, ’82, ‘87, ’92: (equals “1” if Municipal Year Book, 1977, 1982,
major-council form, otherwise “0”) 1987, 1992, ICMA
-.
CS- 1977, ’82, ‘87, ’92: (equals “1” if Municipal Year Book, 1977, 1982,
central city, otherwise “0”) t. 1987, 1992, ICMA
CAP- 1977, ’82, ‘87, ’92: (per capita Census of Governments, 1977, 1982,
capital investment / deﬂator) -. 1987, 1992. Government Finances,
Finances of Municipal and Township
Governments, US. Department of
. Commerce.
HW- 1977, ’82, ‘87, ’92: (per capita County and City Data Book, 1977,
highway expenditure / deﬂator) 1. 1982, 1987, 1994. US. Department
of Commerce
POL- 1977, ’82, ‘87, ’92: (per capita County and City Data Book, 1977,
police expenditure / deﬂator)-. 1982, 1987, 1994. US. Department
of Commerce
SEWt 1977, ’82, ‘87, ’92: (per capita County and City Data Book, 1977,
sewer expenditure / deﬂator)-. 1982, 1987, 1994. US. Department
of Commerce
EDUEXP- 1977, ’82, ‘87, ’92: (general Census of Governments, 19—77, 1982,
education expenditure / enrollment 1987, 1992. Government Finances,
/ deﬂator) t. Finances of Public School Systems,
US. Department of Commerce.
PRATE- 1977, ’82, ‘87, ’92: (average State Equalized Valuations and

 

 

92

 

property tax rate) -

Average Tax Rate Data, 1977, 1982,
1987, 1992, Property tax
Commission, Michigan Department
of Treasury.

 

 

 

 

 

BLACK- 1977, ’82, ‘87, ’92: (Black US. Census Bureau (1970, 1980,
population / population)- * 100. 1990), Characteristics of the
Population — Michigan, US.
Department of the Commerce,
. Washington, DC.
PDEN- 1977, ’82, ‘87, ’92: (population/ US. Census Bureau (1970, 1980,
area)- 1990), Characteristics of the
Population — Michigan, US.
Department of the Commerce,
Washington, DC.
HV- 1977, ’82, ‘87, ’92: (median US. Census Bureau (1970, 1980,
housing value / deﬂator)- 1990), Characteristics of the
Population — Michigan, US.
Department of the Commerce,
Washington, DC.
INCTX. 1977, ’82, ‘87, ’92: (equals “1” if

 

imposes city income tax, otherwise
66099) t

 

 

 

93

5.5. Results of Empirical Analysis

This section presents the results of the empirical analysis, which attempts to
investigate the relationship between the degree of local utilization of property tax
abatement and local ﬁscal and economic conditions. To induce appropriate results, this
study uses two types of analytical models: a basic model (Model I), which focuses on
local ﬁscal and economic conditions; and an extended model (Model II), which considers
local environmental factors.

Dependent variables for the empirical models include two types of measures of
the local utilization of property tax abatement; 1) per capita amount of cumulative real
market value of manufacturing property tax base abated away (KTAP) and 2) the number
of manufacturing property tax abatements issued (TANO). The results of the empirical
analysis illustrate that the interlocal differences in ﬁscal and economic conditions are

related to variation in the degree of the local utilization of the property tax abatement.

5 .5. 1. Regression Results

This study can test the null hypothesis that there is no effect of local ﬁscal and
economic conditions on the local utilization of property tax abatement. Based on the
preliminary regression run for the purpose of testing this hypothesis, this study performed

F tests. These tests indicated that the null hypothesis of no effect of local ﬁscal and

94

economic conditions on the local utilization of property tax abatement could not be
accepted for the Michigan cities sample during 1977-1992. On the basis of the test
performed, however, this study cannot ascertain whether the variation in utilizing
property tax abatements in Michigan cities is primarily a consequence of the fact that
cities are faced with different environmental conditions or, rather, are due to their ﬁscal
and economic conditions.

The data were analyzed so as to determine whether the ﬁscal and economic
conditions of a given city are related to the variation in utilizing property tax abatements.
Thus the discussion of statistical results is focused on the identiﬁcation of relationships
between local ﬁscal and economic conditions and the utilization of property tax
abatement.

Model I only considers local ﬁscal and economic variables to identify the
relationship between local ﬁscal and economic performance and the degree of the local
utilization of property tax abatements. In Model 11, local environmental variables, which
may affect the local utilization of property tax abatements, are included. The local
environmental variables are as follows; governmental structure dummy variable
(GFORM); city status dummy variable (CS) as a spatial variation variable; per capita
capital investment of a city (CAP), per capita highway expenditure (HW), per capita
police expenditure (POL), per capita sewer expenditure (SEW), income tax dummy
variable (INCTX), and average property tax rate (PRATE) as local tax/expenditure policy
variables; percentages of black population over total population (BLACK), population
density (PDEN), and population below poverty line (POVTY) as social-structural

variables. These regression models yielded the coefﬁcient estimates presented in Tables

95

5.5 and 5.6. Listed for each of the two models are the coefﬁcient’s estimates and their t-

value, squared multiple R, and F values.

5.5.1.1. Determinants of the Local Utilization of Property Tax Abatement (KTAP)

Two regression equations such as the basic model (Model I) and the extended
model (Model II) are estimated using the per capita amount of manufacturing property
tax abated away (KTAP) as the dependent variable. The outcome is presented in Table
5.3. While the explanatory power of Model I is relatively low (R2=.365), that of Model II
is relatively high (R2 = .667).The F statistics of these models are 3.347 and 3.380

respectively.

Fiscal Condition

 

Among variables representing local ﬁscal condition, per capita tax revenue (TAX)
and the level of reliance on property tax (PTXR) prove the most signiﬁcant variables in
both models. The level of per capita tax revenue, whose coefﬁcient is 10.955 and t-value

is 2.212 in Model I and 18.466 and 2.738 respectively in Model II, is most signiﬁcantly

related to the degree of local utilization of property tax abatement in terms of per capita
amount of property tax abated (KTAP). This value is statically signiﬁcant at 5 percent

and at 1 percent in Model I and in Model 11 respectively.

Table 5.5: Determinant of Local Utilization of Property Tax Abatement

(Dependent variable: KTAP)

 

 

Variable Model I Model II
CONSTANT 1003 .48 -l661 . 16
(.323) (-.300)
CEXP -8.969 -l4.079
(0552) (4604)
TXB -42786.6 -l9837.5
(4.130) (-.448)
CTXB -9.592 17.78
(-.676) (.885)
DEBT .106 .437
(.186) (.635)
OREV 3.547 -1342 '
(.776) (-.246)
TAX 10.955" l8.466***
(2.212) (2.738)
PTXR -82.059* -77.532"'
(-1 .465) (4.954)
SEV -2.399E-08 -l .76E-07
(-.092) (-.274)
INT -3.639 2.821
(-l.036) (.652)
RMEM 2.36 -15.551
(.261) (-l.63l)
MBSAE 86.144*"‘* 100.12"
(3.401) (2.488)
INC -8.51 lE-02 -l .5E-02
(-.354) (-06 l)
CINC 31.180* 45.214*
(1.764) (1.813)
UNEMP 40.658 36.499
(367) (191)
CUNEMP -68.406*** -45.639
(-2.802) (-1.483)
EMPP 1.976 -7.860
(.382) (-.748)
GFORM 1635.508"
(2.628)
CS 846.074
(970)
CAP -5.369*
(-1.874)
HW -l6.48l
(-1 .648)
POL -4.67

(-.381)

97

 

sew -2.312
(-471)
INCTX -613.028
(-061)
PRATE 47.429
(1.156)
BLACK -48.602
(-129)
PDEN -557“
(-2.478)
POVTY -34579
(-341)
R2 .365 .667
P 3.347 3.380

 

Note: t values are in parentheses.
*, **, and *** indicate signiﬁcance at 10%, 5%, and 1% level respectively.

These result shows that cities with less ﬁscally distressed tend to use tax abatement
program more, contradicting the conventional notion that the ﬁscally distressed
communities will use more the property tax abatement program.

The elasticity of reliance on property tax revenue (PTXR) is estimated to - 82.059
and I value is -1.954 in Model I. This means that the level of the reliance on property tax
revenue (PTXR) is an important variable explaining the local utilization of property tax
abatement. The result shows that the level of the reliance on property tax revenue
(PTXR) is negatively related to the local utilization of property tax abatement in the
hypothesized direction. That is, cities with higher reliance on property tax revenues will
not use the property tax abatement program much because of their limited capacity to
increase property tax rate. In part, increase in property taxes is dependent not only on

existing tax burden and legal restrictions, but also on the political acceptance of a tax

98

increase. Thus higher reliance on property tax abatement may negatively affect the local
utilization. Also, the result shows that tax burden (TXB), change in tax burden (CTXB),
and per capita other revenue (OREV) relate to the local utilization of property tax
abatement in the hypothesized directions, but those relationships are not statically

signiﬁcant.

Economic Condition

 

Among variables representing economic condition, manufacturing employment as
a percentages of total employment (MBASE), change in median income (CINC) and
change in unemployment rate (CUNEMP) are most signiﬁcant variables in both models.
Percentages of manufacturing employment among total employment (MBASE), which
represents city’s economic structure, is most signiﬁcantly related to the degree of local
utilization of property tax abatement in terms of per capita amount of property tax abated
(KTAP). Its coefﬁcient is 86.144 and t-value is 3.401 in Model I and 100.12 and 2.488
respectively in Model II. This value is statically signiﬁcant at least at the 5 percent level
in both models.

One of the statistically signiﬁcant and consistent results is obtained for change in
median income (CIN C). Change in median income consistently shows positive
coefﬁcients (31.18 for Model I and 45.124 for Model II), and is statistically signiﬁcant at
the 10 percent level in both models. This means that growing cities in terms of median
income tend to grant property tax abatements more. However, one of the interesting
results is that, even though it is not statistically signiﬁcant, the coefﬁcient for the level of

median income has negative sign consistently in both models. While cities with

99

increasing median income tend to grant property tax abatements more, cities with higher
median income do not use the property tax abatement program much to encourage private
investment.

Another variable, which has statistically signiﬁcant and consistent results, is
change in unemployment rate (CUNEMP). Change in unemployment rate (CUNEMP)
consistently shows negative coefﬁcients (- 68.406 for Model I and - 45.214 for Model 11),
and is statistically signiﬁcant at the 1 percent level in Model I. This means that declining
cities with increasing unemployment rate have difficulties granting property tax
abatements more.

The change rate in manufacturing employment (RMEM) is not signiﬁcant in
Model I, but it appears to have a reasonable level of statistically signiﬁcance (at 15
percent level) in the hypothesized direction in Model II. That is, increase in changing rate
of manufacturing employment will affect negatively the utilization of property tax

abatement.

Local Environmental Factors

 

Model 11 (The extended model) shows the effects of local environmental variables
on the local utilization of property tax abatements. Among local environmental variables,
four variables appear to have some statistical signiﬁcance. The coefﬁcient of the
governmental structural form dummy (GFORM) is signiﬁcant at the 5 percent level for a
two tail test. The sign is positive, indicating that a strong mayor form of government

tends to use property tax abatements more.

100

Two variables, which represent local development policy, are statistically
signiﬁcant. The coefﬁcient of per capita capital investment of local government (CAP) is
— 5.369 and signiﬁcant at the 10 percent level for a two tail test. The coefﬁcient of per
capita highway expenditure (HW) is -l6.481 and reasonably signiﬁcant at the 15 percent
level for a two tail test. Signs are all negative, indicating that cities with more
development expenditures tend to use the property tax abatement less to encourage
private capital investment. Another signiﬁcant variable in this analysis is population
density (PDEN). High population density has negative effects on the local utilization of

property tax abatement.

5.5.1.2. Determinants of the Local Utilization of Property Tax Abatement (TAN 0)

Two regression equations such as the basic model (Model I) and the extended
model (Model 11) are estimated using the number of certiﬁcates issued for manufacturing
property tax abatement (TANO) as the dependent variable. The outcome is presented in
Table 5.4. While the explanatory power of Model I is moderate (R2 =.486), that of Model
II is relatively high (R2 = .607).The F statistics of these models are 5.509 and 2.558
respectively. Two models have similar results, but, in Model II, local environmental
variables have no systematic effect on the local utilization of the property tax abatement.

Thus the following discussion will focus on the Model I.

Table 5.6: Determinant of Local Utilization of Property Tax Abatement

(Dependent variable: TANO)

 

 

Variable Model I Model 11
CONSTANT 19.034 82.866
(510) (918)
CEXP 5.099E-02
(794)
TXB -983.003** —1 103.188
(-2.162) (-1.528)
CTXB 5.018E-02 1.313E-02
(.294) (.040)
DEBT 5.796E-O3 5.019E-03
(844) (447)
OREV 8.204E-02 9.523E-02
(1.495) (1.096)
TAX 4.203 E-02 l .373 E—02
(.707) (.125)
PTXR -.8l4* -1.427
(1.71) (1.564)
SEV 807413-09" 2.828E-08***
(2.573) (2.701)
INT -4.835E-02 -3.732E-02
(1.146) (.530)
RMEM 3.794E-02 7.623E—02
(.350) (.491)
MBSAE .921*** .654
(3.028) (.997)
INC -3.659E-03* -7.938E-03*
(-L855) (-L969)
CINC .644*** .864"
(3.032) (2.127)
UNEMP 1.589 3.658
(1.194) (1.173)
CUNEMP ' -l 002*” - l 332*”
(-3.418) (-2.656)
EMPP 6.51 1E-02 .107
(L049) (626)
GFORM -16.3
(-L608)
CS 9.105
(641)
CAP -7.632E-03
(-.I64)
HW 6.863E-03

(.042)

102

 

POL 2.406E-02
(.120)

sew -2.687E-02
(4336)

INCTX 191
(.099)

PRATE 12151302
(.018)

BLACK .694
(1.131)

PDEN 1.363E-02
(.372)

POVTY -2072
(1.254)

R2 .486 .602

F 5.509 2.558

 

Note: t values are in parentheses.
*, **, and *** indicate signiﬁcance at 10%, 5%, and 1% level respectively.

Fiscal Condition

 

Among variables representing local ﬁscal condition, tax burden (TXB), the level
of reliance on property tax (PTXR), and the state equalized valuation of local property
per square mile (SEV) are the most signiﬁcant variables in Model I. Tax burden (TXB),
which is deﬁned as the ratio of own-source revenues per capita to per capita income, is
signiﬁcant and negatively related to the degree of local utilization of property tax
abatement in terms of the number of certiﬁcates issued for manufacturing property tax
abatement (TAN O). This value is statically signiﬁcant at 5 percent in Model. These result
shows that cities with higher tax burden tend to use less tax abatement program.

As shown in the previous regression model (with KTAP), the reliance on property
tax (PTXR) is a signiﬁcant variable in explaining the local utilization of the property tax

abatement. The elasticity of reliance on property tax revenue (PTXR) is estimated to -

 

103

.814 and t value is -l .71 in Model I. The result shows that the level of the reliance on
property tax revenue (PTXR) is negatively related to the local utilization of property tax
abatement in the hypothesized direction. That is, cities with higher reliance on property
tax revenue will not use the property tax abatement program much because of their
limited capacity to increase property tax rate.

One of the most signiﬁcant and consistent results in this regression model is
obtained for the state equalized valuation of local property per square mile (SEV). SEV
consistently shows positive coefﬁcients in Model and Model 11, and is statistically
signiﬁcant at least at the 5 percent level in both models. This means that cities with more
tax base can more easily utilize property tax abatements.

Another variable that appears to have a reasonable level of statistical signiﬁcance
is per capita other own source revenue (OREV). It shows positive coefﬁcient and
statistically signiﬁcant at the 15 percent level for a two tail test. Unlike the previous
regression results, per capita tax revenue (TAX) is not statistically signiﬁcant but relate to

the local utilization of property tax abatement in the hypothesized directions.

Economic Condition

 

The regression results for economic condition variables are similar with results in
the previous regression. Percentages of manufacturing employment among total
employment (MBASE), median income (INC), change in median income (CINC) and
change in unemployment rate (CUNEMP) are most signiﬁcant variables in Model I.

These variables are also signiﬁcant and the same signs in Model 11 except MBASE.

 

104

Percentages of manufacturing employment among total employment (MBASE),
which represents city’s economic structure, is most signiﬁcantly related to the degree of
local utilization of property tax abatement in terms of the number of certiﬁcates issued
for manufacturing property tax abatement (TAN 0). Its coefﬁcient is .921 and t-value is
3.028 in Model I. This value is statically signiﬁcant at least at the 1 percent level.

The most signiﬁcant and consistent results in both models are obtained for change
in median income (CINC) and median income (INC). Change in median income
consistently shows positive coefﬁcients (.644 for Model I and .864 for Model II), and is
statistically signiﬁcant at least at the 5 percent level in both models. However, one of
interesting ﬁnding is that, contrast to the coefﬁcient of CINC, the coefﬁcient for median
income has negative sign consistently in both models and statistically signiﬁcant at the 10
percent level for a two tail test in both models. The results may indicate that, while
growing cities in terms of median income tend to grant property tax abatements more,
cities with higher median income do not use the property tax abatement program much to
encourage private investment.

Another variable, which has statistically signiﬁcant and consistent results, is
change in unemployment rate (CUNEMP). Change in unemployment rate (CUNEMP)
consistently shows negative coefﬁcients (- 1.002 for Model I and — 1.332 for Model II),
and is statistically signiﬁcant at the 1 percent level in both models. This means that
declining cities in terms of unemployment rate have difﬁculties to grant property tax

abatements more.

105

5.5.1.3. Determinant of Local Utilization of Property Tax Abatement (Reduced Model)

In the reduced model, eight regression equations are estimated using the per
capita amount of manufacturing property tax abated away (KTAP) and the number of
certiﬁcates issued for manufacturing property tax abatement (TANO) as the dependent
variables, and the pooled time-series and cross-section data set, and three separate cross-
section data set (82, 87, 92). The outcome is presented in Table 5.7, Table 5.8, and Table
5.9. While the explanatory power of the Reduced Model in all eight regression equations
are relatively moderate (.582 ~ .422). The F statistics of all eight regression equations are
signiﬁcant.

Reduced Model does not improve much in resolving autocorrelation problem.
Among eight regression equations in the Reduced Model, only KTAP regression equation
with pooled time-series and cross-section data set does not have autocorrelation problem.
Its Dubin-Watson d statistics is 2.153 as shown in Table 5.5. It falls in between c1u
(1.473)and 4—du (2.217).l Thus, we cannot reject the hypothesis that there is no
autocorrelation. However, Dubin-Watson (1 statistics in other seven regression equations
fall in the indecisive zone.2 Thus, one cannot conclude whether autocorrelation does or

does not exist.

 

' For k = 11 and n = 150, critical dL and dU are 1.473 and 1.783.

2 For k = 11 and n = 50, critical dL and ti” are 0.913 and 1.925. Thus, the indecisive zones are dL = 0.193 <
d < dU =l.925 and4 - dU = 2.075 <d <4—dL = 3.087.

Table 5.7: Determinant of Local Utilization of Property Tax Abatement :Reduced Model

 

 

Variable KTAP TAN O
CONSTANT 808.517 37.527M
(0.573) (2.179)
TXB -11253+ -310.939***
(1.378) (3.118)
CTXB ~8.318 7.543 E-04
(0.794) (0.590)
TAX 8872*" 6897*
(2.948) (1.877)
PTXR -56.551** -l.044***
(2.581) (3.900)
SEV -1.758E-07 4.646E—09*
(-0.783) (1.694)
RMEM 3.319 5.58E—02
(0.392) (0.540)
MBSAE 88.559*** 0874*"
(3.838) (3.102)
INC 1.438E-02 -7.427E-04
(0.124) (0.524)
CINC 36.414*** 0.707***
(2.391) (3.801)
UNEMP -61.922 0.480
(0.756) (0.480)
CUNEMP -67.890*** -l.075***
(-3. 186) (-4. 136)
R2 .582 .447
F 7.847 4.996
Dubin-Watson d 2.153 1.574

 

Note: t values are in parentheses.
*, **, and *** indicate signiﬁcance at 10%, 5%, and 1% level respectively.

 

 

 

107

Table 5.8. Determinant of Local Utilization of Property Tax Abatement
(Dependent Variable: KTAP)

 

 

Variable ‘82 ‘87 ‘92
CONSTANT 11347** -1708.34 1427.338
(2.176) (-0.413) (0.630)
TXB 13113 -14660 1731.879
(0.571) (-0.848) (0.114)
CTXB -29.721 -12.946 -16.439
(-1.111) (-0.279) (-1.199)
TAX 1667* 16.256“ 6.668+
(1.772) (2.211) (1.557)
PTXR -19.179 -58.736 -51.116+
(-0.354) (-1.084) (-1.434)
SEV -2.62E-07 -5 .095E-07 1.677E-09
(-0.547) (-.989) (-0.370)
RMEM 76.555+ 3.427 5.545
(1.451) (0.287) (0.3)
MBSAE 38.622 229.146*** 96.334”
(0.56) (3.481) (2.194)
[NC -0.753+ -0. 127 —6.507E-02
(-1.632) (-0.369) (-O.3 7)
CINC 308.244* 72.346 210.274*
(1.907) (0.884) (1.755)
UNEMP -306.195 -11.955 -127.06
(-O.885) (-0.046) (-0.902)
CUNEMP 59.639 -224.315 * * -60.207* *
(0.753) (-2.07) (-2.l6)
R2 .456 .503 .575
F 1.983 2.487 3.687
Dubin-Watson d 1.651 1.707 2.093

 

Note: t values are in parentheses.
+, *, **, and *** indicate signiﬁcance at 20%, 10%, 5%, and 1% level respectively.

108

Table 5.9. Determinant of Local Utilization of Property Tax Abatement
(Dependent Variable: TANO)

 

 

Variable ‘82 ‘87 ‘92
CONSTANT 102365" 65.938+ 78.6’”
(1.805) (1.392) (2.273)
TXB -406.719+ -547.09l *** -37.288
(-1.628) (-2.761) (-0.16)
CTXB .287 7.412E-02 -2.657
(0.986) (0.14) (-0.127)
TAX 7.443 E-02 8.289E-02 l .073 15-02
(0.728) (0.984) (0.164)
PTXR -l .395M -1 .877*** -1.037*
(-2.368) (-3.024) (-1 .906)
SEV 9.734E-09* 8.216E-09+ 1.234E-08**
(1.869) (1.392) (2.178)
RMEM .621 .101 .24
(1.082) (0.734) (0.85)
MBSAE 8.208E-03 2236*" 1231*
(.011) (2.965) (1.837)
INC -2.803E-03 -1.l31E-03 -3.574E-03+
(-0.558) (-O.287) (-1.329)
CINC 2.008 8.846E-03 2.077
(1.142) (0.009) (1.135)
UNEMP .527 -.464 -l .995
(0.14) (-0.154) (-O.927)
CUNEMP .642 -1 .820+ -.845*
(0.745) (-1 .466) (-1.987)
R2 .540 .422 .577
F 2.777 3.520 3.725
Dubin-Watson d 1.778 1.517 1.587

 

Note: t values are in parentheses.
+, *, **, and *** indicate signiﬁcance at 20%, 10%, 5%, and 1% level respectively.

109

Fiscal Condition

 

The regression results in the Reduced Model are similar to the previous regression
results in the Basic Model and Extended Model. Among variables representing local
ﬁscal condition, tax burden (TXB), the level of reliance on property tax (PTXR), per
capita tax revenue (TAX), and the state equalized valuation of local property per square
mile (SEV) are the most signiﬁcant variables in the KTAP and TANO regressions with
pooled time-series and cross-section data. While tax burden (TXB) and the level of
reliance on property tax (PTXR) are signiﬁcant in KTAP regression, in TANO
regression, all four variables -tax burden (TXB), the level of reliance on property tax
(PTXR), per capita tax revenue (TAX), and the state equalized valuation of local property

per square mile (SEV)- are statistically signiﬁcant in the hypothesized direction.

Economic Condition

 

The regression results for economic condition variables in the Reduced Model are
also similar with results in the previous Basic and Extended regression. Percentages of
manufacturing employment among total employment (MBASE), median income (TNC),
change in median income (CIN C) and change in unemployment rate (CUNEMP) are
most signiﬁcant variables in both KTAP and TAN O regression equations. These
variables are statically signiﬁcant at least at the 1 percent level in the hypothesized

directions in the both regressions.

110

5.5.2. Summary of Findings

The estimated coefﬁcients presented in the previous section prove that strong
relationships exist between the degree of local utilization and local ﬁscal and economic
conditions. In general, the results of the empirical analysis support both hypotheses that,
in a given city, economic distress level relates positively to the degree of the local
utilization of property tax abatements and that in a given city, ﬁscal distress level relates
negatively to the local utilization of property tax abatements.

Several observations are made in this analysis. First, contradicting the
conventional notion that the ﬁscally distressed communities will use more the property
tax abatement program, communities with the greater revenue and tax base tend to use
more the property tax abatement program. In this analysis, own-source revenues such as
per capita tax revenues, other own-source revenues, and tax base, in part, positively relate
to the local utilization of property tax abatement, whereas tax burden and reliance on
property tax, which represent ﬁscal stress, negatively relate to the local utilization of
property tax abatement.

The second interesting observation in this analysis is that levels and changes in
income and unemployment rate variables have opposite signs. While changes in the
median income variable positively relate to the utilization of property tax abatement, the
level of median income is negatively related to the utilization of property tax abatement.
It can be, in part, explained through the conceptual framework described in the previous
chapter. While communities with increasing rates of median income (growing cities) tend

to grant property tax abatements more, cities with higher median income (Type IV) do

111

not use the property tax abatement program much to encourage private investment. In the
case of unemployment rates, cities with the cycling and structural unemployment (Type
I) have difﬁculty utilizing the property tax abatement program because of lack of place’s
attractiveness to ﬁrms. However, level of unemployment may represent a city’s economic
need to utilize the tax abatement program.

The third point is that this analysis cannot reject ‘the local environmental factors’
inﬂuence hypothesis’. The governmental structural dummy variable and developmental
expenditure variables (CAP and HW) have reasonable statistical signiﬁcance and
consistent direction in both regressions. The mayoral government dummy variable tends
to show the positive relationship to the degree of the local utilization of property tax
abatement. On the other hand, developmental expenditure variables (CAP and HW) show

the negative relationship to the degree of the local utilization of property tax abatement.

CHAPTER VI

CONCLUSION

6.1. Summary

This conclusion chapter discusses the overall results, policy implications, and
limitations of this study, while providing recommendations for further studies. This study
analyzed the relationship between the level of local ﬁscal and economic performance and
the degree of local utilization of property tax abatement in Michigan cities. The results of
this study presented the local ﬁscal and economic factors that were most closely
associated with a high degree of local utilization of property tax abatement.

This study consisted of establishing a conceptual framework for the local
utilization of property tax abatement and analyzing empirical data. This study proposed
two types of analytical models: the basic model that considered only local ﬁscal and
economic variables: the extended model that considered local ﬁscal variables, local
economic variables, and local environmental variables including governmental structure,
spatial variation, local policy effects, and social and structural conditions.

In the multiple regression models, two types of measures of the local utilization of
property tax abatement are used as dependent variable; per capita amount of cumulative
real market value of manufacturing property tax base abated away (KTAP) and certiﬁcate
numbers of manufacturing property tax abatement issued (TAN O).

The results presented in the preceding chapters reveal some important aspects of

local utilization of property tax abatement. The estimated coefficients presented in the

112

113

previous chapter prove that there are strong relationships between the degree of local
utilization and the local ﬁscal and economic conditions. In general, the results of the
empirical analysis support both hypotheses that, in a given city, economic distress level
relates positively to the degree of the local utilization of property tax abatements and that
in a given city, ﬁscal distress level relates negatively to the local utilization of property
tax abatements.

Several observations are made in this analysis. First, contradicting the
conventional notion that the ﬁscally distressed communities will use more the property
tax abatement program, communities with the greater revenue and tax base tend to‘use
more the property tax abatement program. In this analysis, own source revenue such as
per capita tax revenue, other own source revenue, and tax base, in part, positively relate
to the local utilization of property tax abatement, whereas tax burden and reliance on
property tax, which represent ﬁscal stress, negatively relate to the local utilization of
property tax abatement.

The second interesting observation in this analysis is that levels and changes in
income and unemployment rate variables have opposite sign. While the positive 5-year
change in median income variable positively relate to the utilization of property tax
abatement, the absolute level of median income is negatively related to the utilization of
property tax abatement. It can be, in part, explained through the conceptual framework
described in the previous chapter. While communities with increasing rate of median
income (growing cities) tend to grant property tax abatements more, cities with higher
median income (Type IV) do not use the property tax abatement program much to

encourage private investment. In the case of unemployment rates, a ﬁve-year increase in

114

unemployment negatively relates to the local utilization of property tax abatement, while
high absolute unemployment rates is positively related to the local utilization of property
tax abatement but statistically not signiﬁcant. This means that cities with the cycling and
structural unemployment (Type I) have difﬁculty utilizing the property tax abatement
program because of lack of a place’s attractiveness to ﬁrms. However, a high level of
unemployment may represent a city’s economic need to utilize the tax abatement
program.

The third point is that this analysis can not reject ‘the local environmental factors’
inﬂuence hypothesis’. The governmental structural dummy variable and developmental
expenditure variables (CAP and HW) have reasonable statistical signiﬁcance and
consistent direction in both regressions. The mayoral government dummy variable tends
to show the positive relationship to the degree of the local utilization of property tax
abatement. Strong mayor system is expected to be more responsive to citizen and group
pressures and more aggressive to adopt economic development policy than are politician
in cities using the council—manager form. Thus, the property tax abatement policy may be
more utilized in cities with a mayor-council government. On the other hand,
developmental expenditure variables (CAP and HW) show the negative relationship to
the degree of the local utilization of property tax abatement. Developmental expenditures
of local government such as capital investment and highway expenditures improve the
business climate in a city and provide attractiveness to ﬁrms. Thus decision-makers may

use little tax abatement to encourage private investment.

115

6.2. Policy Implications

The results of this study have implications for local, state and federal policy
makers. It has been observed that local ﬁscal factors, especially the ﬁscal capacity of a
local government, play an important role in utilizing property tax abatements.

In this analysis, own-source revenues such as per capita tax revenue, other own-source
revenues, and tax base, in part, positively relate to the local utilization of property tax
abatement. On the other hand, tax burden and reliance on property tax, which represent
ﬁscal stress, negatively relate to the local utilization of property tax abatement. This
suggests that, while ﬁscally healthier communities use property tax abatement more,
ﬁscally distressed communities have difficulties utilizing the property tax abatement
program.

Yet, it has also been observed that, while change in unemployment rate is
positively related to the local utilization of property tax abatement, change in median
income is positively related to granting property tax abatements. This means that
communities with the cycling and structural unemployment have difﬁculties utilizing the
property tax abatement program to create new jobs.

These empirical results imply that property tax abatement policy can create
locational distortions and have undesirable equity consequences. A property tax
abatement program may not be an effective policy tool in the ﬁscally and economically
declining communities such as Type 1 cities in chapter IV. If all communities in a region

were to offer abatements without consideration for their need, declining communities that

116

are unattractive to ﬁrms would lose the power of an incentive that can be used to
overcome their situation. It may enlarge the disparity among jurisdictions.

Even in growing communities or ﬁscally healthy communities, widespread
interurban competition for tax abatement can pose problems. Even if property tax
abatements in the long run increase business activity enough to actually increase revenue,
local government ofﬁcers will have to deal with the likely short-run losses in revenue.
There is no assurance that the increased likelihood of capital investment will necessarily
yield sufﬁcient beneﬁts to compensate for the forgone property tax revenue and increased
service costs that accompany the abatement award. Thus, depending on shifting on
shifting possibilities, property tax abatement may increase the regressiveness of the
property tax. Burden may fall disproportionately on certain ownership group such as
residential users that do not qualify for abatements. Also, inter-jurisdictional equity
problems may arise when geographically concentrated, exempt activities distribute
beneﬁts in a more spatially uniform manner. This phenomenon imposes disproportionate
burdens on property owners in jurisdictions of exempt to taxable property value.

Thus the remedy is not to entirely eliminate property tax abatement programs, but
instead it is important to control the property tax abatement policy to insure that local
governments only offer abatements that are necessary to overcome local ﬁscal and
economic needs.

For the local government, it is desirable to convert supply-side development
incentives like property tax abatements into demand-side incentives like human and
physical capital investment. Indirect tax expenditures could be transformed into direct

budgetary expenditures such as job training programs and infrastructure enhancement

117

projects. More widespread use of demand-side incentives policies would trade in the
highly speculative beneﬁts of tax abatements for the direct beneﬁts of investing in the
people of a community and improving the ﬁxed assets of the city. Even though cities
have difﬁculties converting to demand-side policies due to the direct political costs of
raising taxes or cutting existing services, if tax abatements could be restricted to use only
in needy areas, it is conceivable that other areas might be more inclined to use demand-

sided development policies.

6.3. Limitations and Recommendations

Though this study has yielded a number of useful observations on the
relationships between local ﬁscal and economic factors and the local utilization of
property tax abatement, several important limitations deserve comment.

First, this study has used only local factors including ﬁscal, economic and local
environmental factors to analyze the variation in the local utilization of property tax
abatement. This study did not consider extensively local political variables. The actions
and behaviors of key institution and actors may be important factors in decision process
to choose economic development policy. While the variables in this study may indirectly
include some of them, the political actor’s subjective interpretations of actual ﬁscal and
economic conditions and their perceptions of city’s goals may be a crucial factor in
explaining the local utilization of property tax abatement. Thus, future study is needed to

examine these political and decision-making process variables.

118

Aside from this issue, some econometric issues in the estimation of regression
models should also be noted. Estimations using cross-sectional data such as ours
frequently involve the problem of heteroscedasticity. In this study, the distribution of
errors may have different variances between growing and declining cities. It would be
useful, if there exists heteroscedasticity, to employ such models as weighted least squares
to resolve the problem. Another possible econometric problem of the current study is the
issue of simultaneity. There might have been simultaneous effects among key indicators
of local conditions such as property tax base, property tax rate, and local public
expenditure levels. It may cause some simultaneous equation bias. An extension of the
study could develop two stage least squares models to correct this bias.

Also, future research efforts should focus on the effectiveness of property tax
abatement on local economies and communities’ well-being. This study demonstrates the
importance of local ﬁscal and economic factors in utilizing property tax abatements.
However, further research on the effectiveness of the property tax abatement policy and
methodological reﬁnements may yield more detailed assessments to evaluate property tax

abatement policy.

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