Increasing the Equity and Efficiency of Tax Abatement Programs

The state role in economic development policy has increased as the federal government has devolved selected programs to balance growth and incomes among different part of the country. Rapid growth in coastal states and the suburban areas around many cities, and stagnation or decline in areas that have remained rural has intensified economic development debate. Within the broad spectrum of economic development policy, significant resources are focused on state industrial recruitment through tax abatements. This article uses the Michigan experience to illustrate how current application of tax abatements may increase geographic income inequality, and that some adjustment in the policy would be needed if policy makers want to rectify the unequal distribution of tax expenditure. We also argue that localities have few incentives to reject or limit, which can lead to overuse of the tool. Relatively straightforward countervailing measures such as a cap on per capita use of abatements, together with payments to localities that do not use their quota of abatements, could improve the effectiveness of overall state economic development policy by increasing the level of local public debate about the use of abatements and making funds available for alternatives to tax abatements.