Communities wanting to quickly increase tax revenues and
support local school districts should not look to tax large breaks to attract
manufacturing plants. Instead they should focus on new residential development
or high capital firms such as health care providers, says a new report from
Ball State University.
Jobs or Attracting People: A miscrosimulation of the local tax revenue impact
of new businesses and households on Hoosier communities,” an analysis
by Ball State’s Center for Business and Economic Research (CBER), found that
manufacturing operations pay significantly lower tax revenues for nearly a decade,
thanks to various tax breaks.
However, the local revenue impact of a new residential
development with 160-180 households is larger than the abated value of a
property of a $100 million business, and the largest local revenue providers
are not typically manufacturing operations, but rather health care providers,
which offer twice the local property tax impact.
“Traditional economic development activities have focused on
business attraction, particularly the location or expansion of footloose
manufacturing plants, to create jobs,” says CBER director Michael Hicks. “These
plants may receive a variety of state and local incentives that decrease the
costs of doing business in a particular location and include reductions in
state and local tax liability. In exchange for these tax and cost advantages,
these plants create or maintain jobs.
“These workers then pay state and local taxes that are
expected, at least in part, to counteract the tax breaks provided to
businesses. However, households are also footloose,” says Dagney Faulk, CBER’s
research director and co-author of the report. “Many workers live in one
community and commute to another for work. Local income tax revenue, school
funding and wheel taxes accrue to the location where workers live, not where
they work. So, depending on the
commuting patterns of workers, a community may receive only a portion of tax
revenue associated with new jobs.”
The report, which conducted a variety of simulations using
Indiana data also found:
- A health care provider would
pay nearly 20 times the taxes over a five-year period than would a
manufacturing firm enjoying tax abatements but with the same annual sales
- Different types of local
governments receive different distributions with the largest share going
to schools under every scenario, except for tax increment financing (TIF)
districts in which 100 percent of new tax revenues remains in the TIF.
- Firms that receive tax
abatements pay much lower tax rates.
Hicks says the findings suggest local and state policy
considerations, including the need for regions of the state to increase tax
revenues, should look to lure residential developments or high capital firms
such as health care providers.
“This is even more starkly obvious when abatements are
deployed in counties, where tax revenues are significantly muted for a decade,”
he says. “Thus, close scrutiny of abatements is warranted for communities that
desire additional tax revenues with new business development.
“Finally, the role of economic development in boosting
school funding is clear. This is a very important policy consideration because
the quality of schools largely influences both population growth and the value
of residential properties.”
Hicks may be reached at 765-716-3625 or firstname.lastname@example.org.
Senior media strategist
Ball State University
Muncie, Ind. 47306