Big Business Tax Breaks May Worsen Income Inequality

Cities that lose the most revenue to tax abatements tend to be those with higher levels of income inequality.
by | May 2018
St. Louis, Missouri (Shutterstock)

Early this year, construction began on a $130 million luxury high-rise apartment building in St. Louis’ burgeoning Central West End neighborhood. The development will dramatically alter the area’s skyline, but the city won’t be reaping much tax revenue from it anytime soon. Local officials approved a 95 percent property tax abatement that will be in place for a decade, as well as an exemption from sales taxes on the construction costs of the project. 

These tax breaks coincide with steep spending reductions St. Louis made last year to bridge a budget shortfall. They are contributing to concerns that many neighborhoods and lower-income residents in the city aren’t benefitting from the tax breaks enacted to encourage projects like the luxury apartment complex.

Many other localities aren’t all that different from St. Louis. Early evidence from newly released financial data suggests that local governments most heavily reliant on tax incentives tend to be those with greater levels of economic inequality. 

Governing analyzed revenue losses resulting from property tax abatements, tax increment financing (TIF) and other incentive programs, using data compiled from financial reports by the corporate watchdog group Good Jobs First. Total revenues foregone on a per capita basis for the most recently ended fiscal year were compared to a jurisdiction’s level of income inequality, as measured by the Census Bureau’s Gini Index. Out of 446 cities and counties in our sample, the 100 with the highest levels of income inequality recorded a median per capita total tax abatement approximately double that of all others reviewed.

The data is the result of a new accounting rule from the Governmental Accounting Standards Board that requires the disclosure of how much revenue governments lose to tax breaks.

Many jurisdictions reporting the highest per capita tax abatements were large urban areas. New York City’s tax abatement programs, for example, added up to nearly $3.4 billion in fiscal 2017, dwarfing all other places and representing the fourth-highest amount per capita.

Smaller jurisdictions abating the most revenues generally made substantial use of TIFs, which earmark property tax revenues to fund infrastructure or other development expenses in designated areas.

TIFs can be useful economic development tools, and their use for revitalizing communities may partially explain why high-inequality jurisdictions tend to spend more. The problem is that many larger urban areas use TIFs too broadly, says St. Louis Alderman Sharon Tyus. “It’s supposed to be used for places that wouldn’t get any development,” she says. “Now, they’re being used as a giveaway.”

In St. Louis, 84 percent of TIF incentives between 2000 and 2014 supported projects in the city’s newly revived central corridor, according to Team TIF, a local group that tracks incentives. Other studies have found a heavy concentration of TIF spending for retail projects in wealthier communities outside the city.

TIFs may initially target one or two areas of a city, but over time many expand to the point where just about any neighborhood might have them. “In places like Chicago, tax increment financing for many years was simply a slush fund of the mayor,” says T. William Lester, a professor of city and regional planning at the University of North Carolina who studies tax abatements.

It’s difficult to gauge, given data limitations, the extent to which incentives actually worsen inequalities. Unemployment rates and educational attainment did not correlate with greater use of incentives in our sample.

Research, though, has identified several reasons why business incentives could potentially widen income disparities. In a recent report, Brookings Institution researchers reviewed tax incentive data for four cities, finding that industries receiving incentives paid above-average wages. Black and Hispanic workers, however, were underrepresented in these industries in all four cities. Frequently, the jobs went to commuters who already possessed the required skills or education.

Big businesses often employ many workers at opposite ends of the pay scale. A 2015 study published by the National Bureau of Economic Research found that disparities in wages between high-skill jobs and other positions within a company’s workforce expand as the size of the employer increases. The study further found a link between rising wage inequality and large firm employment growth across a group of developed countries.

It’s these same major corporate players that reap the vast majority of tax abatements. A Good Jobs First report noted between 80 and 96 percent of states’ incentives were routed to businesses that employed more than 100 workers, or weren’t independently or locally owned.

If there’s a type of economic development program that seems likely to worsen disparities, says Greg LeRoy, executive director of Good Jobs First, it’s one that favors capital and technology over labor. Tax breaks for data centers, chemical plants and other large capital-intensive facilities may benefit shareholders, but they rarely yield many jobs. A study conducted at the University of Richmond found that incentives supporting professional and business services companies worsened local income inequality in Virginia, while those attracting manufacturing jobs reduced it.

One often-cited policy tool that could mitigate unequal effects of tax incentives is a community benefits agreement. These agreements, employed in Detroit, Los Angeles and Pittsburgh, among other cities, sometimes include requirements for mixed-income housing or local hiring on the part of the tax break recipient. Some states, however, maintain preemption laws preventing their localities from enforcing the provisions of such agreements.

Ultimately, whether tax incentives escalate disparities depends on how they’re used. Lester, the UNC professor, says most tax breaks don’t spur job creation; they’re just a regressive transfer of funding away from the public sector, often to companies that would have created jobs anyway. “Only offering cash to whoever comes and knocks on your door,” he says, “doesn’t seem like a very equitable or smart thing to do.”

See our related report for more about jurisdictions disclosing the highest revenue losses and our methodology