Tax Abatement: An Economic Development Tool

From what was being said during certain political ads in the primaries of at least one out-of-county race, there appears to be general misunderstanding about the economic development tool called 'property tax abatement' and misinformation about what it means to area economic development, local government, and fellow property tax payers in the community.

Property tax abatement in Indiana is authorized under state law in the form of deductions from assessed valuation; however, a better way of phrasing this would be that it is a tool that allows the increase in property taxes to be 'phased-in' over a period of time, say, ten years. (There is abatement available for such personal property as new machinery, too, but we will tackle only the real estate aspect.)

A property owner who makes improvements to real estate may apply to the local governmental body for property tax abatement. The local governing body could be the City Council, County Council, or the development or redevelopment commission having jurisdiction over the area.

It is important to understand that only the increase in the assessed valuation, which occurs as a result of the additional investment, is eligible for tax abatement. So, no tax money is lost from the existing improvements or structures on the property. The property taxes cannot be lower than the prior year's taxes.

Essentially, local government uses tax abatement to encourage investment in the area, while also ultimately increasing the tax base of the community and the taxes collected from the particular property that has been improved. While this provides an incentive to companies to invest and expand their businesses in the area, the local government has not sacrificed any taxes it currently is collecting, as commonly misunderstood.

The government has only given up a percentage of the 'theoretical' taxes that could have been assessed on the improvements or additions to a property, if the abatement was not given. This is referred to as 'theoretical' because the improvement may have never been brought into reality in the first place without the abatement incentive. In fact, businesses may look elsewhere to other communities willing to offer such abatements. In that scenario, if a community does not offer abatement, they have not only lost the increased tax base, but they may have lost any additional jobs that would have come along with that expansion or relocation to the area too.

As you can see, tax abatement does not put a community in any tax jeopardy. Rather, it is an effective negotiating tool when it comes to promoting economic development. Not using economic development tools because of misunderstanding and misinformation, however, can lead to businesses looking to expand or relocate elsewhere where they are understood.