Property Tax Abatements

Property tax abatements

Property tax abatements, exemptions, and reductions are subsidies that lower the cost of owning real and business personal property by reducing or eliminating the taxes a company pays on it. “Real property” is land and all the things that are attached to it, such as buildings. “Business personal property” is everything else, such as machinery.

When a company receives a property tax exemption, it pays no taxes at all for the length of the deal. When a company receives a property tax abatement, its taxes are abated (reduced) by a certain percentage for however long the deal lasts.

For capital-intensive projects (companies that require a large of investment of money in land, buildings, and machinery) such as auto making facilities, refineries, or data centers, property tax abatements can be one of the most lucrative subsidies. It is not uncommon for a tax abatement deal to last up to 30 years.

How property tax abatements work

Property tax abatements are usually granted by local (city and county) governments, where the lion's share of property taxes are paid. Property tax abatements are often discretionary subsidies, granted on a case-by-case basis to a particular company. They are also sometimes offered as entitlement subsidies, such as in many enterprise zones.

Property tax abatements can be structured various ways. A company may receive an abatement of a certain percent for a specified number of years; for instance, if a company receives a 50 percent property tax abatement for 20 years, it thas to pay half the property taxes that would normally be owed for the next two decades.

A company's property taxes may also be phased in over time. An example of this would be a deal in which a company paid 20 percent of the property tax the first year, 40 percent the second, etc., until after five years it was paying at a normal rate. Property tax abatements may also be given by freezing property taxes at the level they were at when the deal was signed, so that even if the company constructs new buildings and improves the land, its tax bill does not go up until the abatement ends.

In some cases, companies agree to a PILOT, or “payment in lieu of taxes” (sometimes also called a FILOT, or “fee in lieu of taxes”). Under this system, the company makes some fixed yearly contribution to the city or school system, usually at a lower rate that they would pay if it were taxed normally.

In states that prohibit tax abatements, a public entity assumes ownership of private land, then leases it back to the company for a token lease amount.

Accountability and outcomes
Local governments justify tax abatements by arguing that abated taxes are not lost revenue, since the money would not have been in the city coffers had the development not occurred. While this may be true in some cases, it is all too common for property tax abatements to be given to companies that do not really need them, depriving the city of income it would have had without the subsidy.

This is money that would otherwise have gone to fund city services. Using a “but for” test is especially important when granting lengthy abatements, since the city is gambling away up to 30 years of tax revenue (or more) on the assumption that without the subsidy, no company would have located there.

Property tax abatements are especially detrimental to public school districts, which receive a large portion of their funding from local property taxes. For more on this, see Good Jobs First's recommendations for protecting schools from tax giveaways in the key reforms section.

Property tax abatements can be made more accountable through a number of simple reforms, particularly the use of clawbacks and job quality standards in development agreements, shortening the subsidy time, and with increased citizen participation in the subsidy approval process. See the section on Key Reforms for more information.

Researching property tax abatements

Information on property tax abatements is usually contained in the development agreement signed between a project developer and the granting government authority. The agreement will contain information such as the rate and length of the abatement and any conditions the company agreed to meet in exchange for the subsidy. If the company has agreed to pay a PILOT, that information may be in the development agreement or in a separate document.

Property tax records are public documents, so it is possible in most cases to find the actual value of property taxes paid. Most cities and counties are also required to include on their annual spending reports the amount of total revenue foregone due to property tax abatements (Governmental Accounting Standards Board Statement No. 77). Good places to start are Check Good Jobs First’s Tax Break Tracker and Subsidy Tracker.

Assessment Appeals

Another way that companies (and individuals) try to reduce their property tax bill is by challenging the assessed value put on their property. This is not a subsidy but is another way that local governments can suffer a significant loss of revenue. Some companies regularly and systematically challenge their assessments, especially as an abatement is set to sunset.