Unpublished Paper
Do local governments use business tax incentives to compensate for high business property taxes? Theory and evidence.
(2016)
Abstract
Why are business property taxes usually higher than local government costs of business services
when competition for economic activities between jurisdictions should, in theory, eliminate
excess revenue? One possibility is that general purpose local governments set statutory property
taxes relatively high to influence locations of businesses through selective incentives that reduce
the effective taxes of the businesses that receive them.
In this paper we examine the geography of approximately 2,800 property tax codes active in
Cook County, Illinois, in 2014 to understand the relationship between tax rates and business tax
incentives. A property tax code defines a constellation of local governments with overlapping
taxing jurisdiction within its region. The county we study includes the City of Chicago and more
than 130 other general purpose local governments. Using these data we conduct statistical
analyses to explain the spatial variation in tax incentives as a function of relative tax competition.
We find strong evidence that incentives are linked to spatial differences in relative tax rates.
Preliminary estimates suggest that property tax competition is highly localized within the
Chicago metropolitan area and that tax codes with high consolidated statutory rates receive more
incentives.
All else equal, businesses benefit from locating in areas with relatively low property taxes, and
consolidated tax rates vary within a municipality depending upon the constellation of
overlapping governments for the particular tax code. Property taxes are levied by multiple
general and special purpose governments, particularly school districts, which creates differences
in tax burden across the codes within a city. Our research suggests that municipal governments
may use incentives strategically to eliminate intra-municipal tax differentials and relieve the
intra-municipal locational inducement for preferred land uses.
Keywords
- tax incentive,
- property tax,
- municipal finances,
- business incentives
Disciplines
Publication Date
2016
Citation Information
Merriman, David, Funderburg, Richard, and Weber, Rachel. 2016. Do governments use business tax incentives to compensate for high business property taxes? Theory and evidence. Presented at 63rd North American Annual Meetings of the Regional Science Association International, Minneapolis, Minnesota, November 10.