Literature Review: Tax Abatement and Economic Development Incentives

Abstract

Incentives offered by cities to attract businesses have been used in America for well over a century, but not until the post-war years did their use become truly widespread. And while the practice of incentives has had at least forty years of intense academic scrutiny, it remains difficult to assertively answer many of the questions that have been put forth: Do tax incentives actually influence the firm’s location decisions? Do incentives result in increased business activity in blighted areas, or do firms simply go to the richest places with the most money to offer? Is incentive use a zero-sum game at the national level, simply re-arranging the pattern of business activity that would have occurred anyway? Are incentives an efficient method of promoting economic development?

These and other issues this paper will attempt to address. It begins with a review of the literature on tax abatements as a specific method of economic development. The focus on tax abatements stems from a desire to examine the economic development practices of Lawrence, Kansas, which currently uses tax abatements as its primary development tool.

Following the discussion of abatements this paper turns to the more general issue of incentives as a method of economic development. It lists the intuitive theories behind tax incentives then reports the findings from several surveys and econometric studies.