Selective Tax Abatements: Do They Work?

Published March 16, 1987

Heartland Policy Study No. 14

Tax abatement — a reduction in or forgiveness of property taxes or other taxes, usually for a specific period of time — are just one of many forms of “tax incentives” offered by governments attempting to attract new businesses.

Economist John Beck, an associate professor of economics at Case Western Reserve University in Cleveland, Ohio and policy advisor to The Heartland Institute, describes tax abatement programs in the Midwest; discusses the “theoretical advantages” of selective tax abatements; and explains why those programs don’t achieve their theoretical advantages. Selective tax abatement programs are counterproductive, he notes, because

  • private firms are encouraged to allocate resources to lobbying efforts rather than to real market analysis or to productive activity;
  • location decisions are distorted because private firms are locating on the basis of subsidy rather than markets;
  • inappropriate investment decisions are encouraged by governments that are unable to “pick winners”; and
  • even if tax revenues are increased by discretionary tax abatements, it is not necessarily good that governments should have more money to spend.

Beck concludes, “Governments that can use discretionary tax abatements to attract business may feel less competitive pressure to maintain low general tax rates, and therefore may engage in more wasteful government spending. Selective tax abatement also raises questions of fairness, since uniform treatment under the law is a fundamental principle of justice that selective abatement contradicts. Maintaining uniform low rates of taxes is a historically proven, fair, and reliable way to promote economic growth.”