Compare and Contrast Essay Sample on Tax Abatement Vs. Tax Increment Financing

Introduction

The public administration just like many other forms of administration is concerned with management and supervision of things that are of general interest or that help to serve the public. Most public policies that shape how the economy, social and political layout are enforced or fulfilled through public administration. Public administration can happen both at a national and a local level. Public local government administration continues to be an essential aspect when it comes to enforcing and fulfilling public policies at the grassroots where most systems target. Moreover, local governments have a responsibility of ensuring there is enough economic development in the grassroots to provide enough jobs for the communities.

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Local governments must have proper economic development tools to ensure they achieve their targets and fulfill the expectations of the public. Residential, commercial, and industrial economic development comes when there are proper economic development tools, and through private and public investment. Businesses expect communities to provide water, sewer, parks, public safety such as fire and police and good road. Local governments must, therefore, a balance between the need to collect taxes to support all these services against giving up taxes to promote economic development and create jobs in the process. However, local governments such as the School Board, County, and City have various tools availed to them by the legislature that they can use to offer tax incentives with the aim of promoting economic development. The two primary tools that local governments use are tax abatement and tax increment financing (TIF). The two tools have different purposes and roles within residential governments. This paper will compare tax abatement and tax increment financing (TIF) regarding their mission and effectiveness in local governments.

Tax Increment Financing (TIF)

One of the most widely used economic development tools by local governments is tax increment financing (TIF). This economic development tool was created in the 1970's by the Minnesota legislature and is a form of public funding that aims at subsidizing community -improvement projects, infrastructure, and redevelopment in many local governments (Carroll, 2015). According to Diamond (2014), TIF "uses the increase in property tax revenue that new development causes to finance costs of the development, such as land acquisition, site preparation or public infrastructures such as parking facilities, water, sewer, and streets."

Many local governments use TIF to finance improvement projects that can serve a good portion of the community by floating a general bond that will later be paid back via tax revenue derived from this improvement or development project (Pacewicz, 2012). TIF is based on the premise that tax revenues and new jobs would not occur unless agencies full utilize it. If expensive projects are subsided, they may never be realized meaning that the government will lose potential revenue and new job creation. TIF requires the creation of a TIF district which is a "geographically bound region" intended for a specified economic development project under the TIF (Pacewicz, 2012).

Tax Increment Financing District

A TIF district is a region within a city that is carefully chosen by city's experts and consultants after extensive study to undergo subsidized economic development (Fricke, 2018). The area chosen must "shattered" and without any possibility of attracting investment from the private sector and hence the government is forced to intervene (Fricke, 2018). Before the creating of TIF, this criteria must be met and ensure that funds generated from the TIF will only be used for redevelopment. Nevertheless, not everybody or every agency is allowed to create a TIF district. Some of the most common types of local units within the local government that can generate TIF district are "port authorities, Housing and Redevelopment Authorities, Economic Development Authorities and cities" (Briffault, 2010).

The Process of Creating a Tax Increment Financing District

A city or the Economic Development Authorities or the Housing and Redevelopment Authorities can decide to offer a TIF to a potential developer to attract a particular development such as commercial office building or a manufacturing facility. Similarly, the developer can approach a possible governmental unit and requests to build or start a TIF district. Depending on how the suggested project is likely to increase the property tax value and how well it fits criteria for TIF, the local government can create the TIF as per the law.

There are six steps in creating a TIF district according to Weber (2014). The first step in creating a TIF district is drafting the proposed TIF plan with explicit details about the project. The second step is to recognize the TIF district boundaries. Three is making the application public by publishing it in a local newspaper. Four is allowing the members of the public to assess the TIF plan by organizing a public hearing. Five is declaring that the project would not have occurred it not for the TIF and finally step six is requesting the county editor to formally certify the "current local property tax rates for the TIF District area" (Fricke, 2018).

Funding the Tax Increment Financing

TIF allows local governments to invest in public infrastructures such as roads, water, and parks among others in an upfront manner. The investments made can later be paid when projects become successful. This happens by calculating the future predicted upsurge in tax revenues that the project will generate. According to the World Bank, "this financing approach is possible when a new development is of a sufficiently large scale, and when its completion is expected to result in a sufficiently large increase in the value of surrounding real estate such that the resulting incremental local tax revenues generated by the new project can support a bond issuance" ("Tax Increment Financing (TIF) | Urban Regeneration", 2018).

Types of Tax Increment Financing

TIF exists in two primary forms in the united states that are paid as you go and bond financing ("Tax Increment Financing (TIF) | Urban Regeneration," 2018). Among these two forms, bond financing is the most common type of TIF where a local government gives out bonds supported by a proportion of the anticipated future tax collections that result from increased new business activity or property value within a specific area (Dye & Merriman, 2000). These bonds will pay for the current public improvements during the initial year. The improvements are projected to increase business activity and later on improve tax revenues for over 15 years ("Tax Increment Financing (TIF) | Urban Regeneration," 2018). However, most bonds given are from revenue as opposed to credit.

The second form is the "pay as you go" whereby the government compensates a private developer under the TIF district as the incremental taxes are made (Merriman, Qiao & Zhao, 2018). Unlike bond financing, the developer, in this case, is expected to raise capital for the project but they will be compensated as the plans start to realize its intended goals. The developer will be repaid when the project delivers, and the market begins to absorb it.

Advantages of Tax Increment Financing

One advantage of TIF as a way of financing projects is that it enables local governments to invest in vast developments in communities without depending on other expensive bases of funding such as tax increases or capital reserves. Moreover, TIF reduces negative economic impact is it allows projects to self-finance themselves without straining the economy (Carroll, 2015). This gives local governments a helping hand when it comes to economic development.

Tax Abatement

The second tool used by local government to ignite economic development is tax abatement. Tax abatement was created by the legislature to help the local government enhance economic growth and also as an alternative to the tax increment financing that had its weaknesses (Wassmer, 2007). A tax abatement is a reduction of taxes given by the government to promote economic development (Metzger, 2016). Local government usually reduces tax to attract investors to come and grow the region economically. One of the most common forms of tax abetment is a property tax that is given to businesses as an incentive so that they can come and develop that particular region.

Tax abatement begins with property in its initial status and finds the real value of that property and hence the property tax that is paid by businesses to any local government entity. When this tax is known, the government usually freeze it meaning that the owner of the property does not have to pay it. Services and infrastructure in communities usually attract and retain jobs and people in any local government entity. Established communities usually require tax abatements to create or bring in jobs (Moffitt, 2017). Moreover, tax abatements are capable of providing the much needed economic stimulus while at the same time creating a massive amount of revenue for the local governments.

Moreover, if proposed project either residential or commercial is to be successful in its implementation, it is necessary for taxing jurisdictions to writhe on the short time to reap benefits in the long term (Wassmer, 2014). According to Wassmer (2014), as much as local governments through their taxing jurisdictions "lose some tax dollars in the short -term when abatement is granted, the tremendous gain that each taxing jurisdiction makes in revenues, jobs, and investments in the long-term is ignored." Revitalization and economic development will compensate all the taxes lost because of tax abatements, and in the long run, these businesses will start paying huge taxes since they have expanded (Ferguson, 2015). More taxes and new jobs are bagged for the municipality, fire authority, local district, county, and the state among others. These benefits usually outweigh the taxes lost during the tax reductions.

Role of Tax Abatements

Tax abatements are usually done to create more jobs. Local governments can retain jobs and businesses that would have collapsed were it not for the tax abatements. Moreover, tax abatements usually produce a good working environment for business which knows they can rely on the local governments to support them when they are not doing well financially. Tax abatements also aid in construction infrastructure or public facilities such as streets and roads, phasing or deferring on substantial property tax increase and improvement of blighted areas (Wassmer, 2007). Moreover, tax abatements have been used to provide access to services for the communities or the residence through abetting of retail and housing sector.

Comparing and Contrasting TIF and Tax Abatement

TIF and Tax Abatement are both public subsidies within a local government, but they differ in how they operate. TIF is the ability of a local government to capture and use the majority of the increased property tax revenues in a new project and a specific region for a particular period without taxing jurisdictions interfering (Propheter, 2017). Tax abetment, on the other hand, is concerned with how a local government through the use of taxing jurisdiction captures and uses a part of its property revenue tax within a specific area (Moffitt, 2017). While a tax abetment can be approved by townships, school districts, counties, and cities, TIF is approved by a city.

One similarity between the two is that they both lead to the creation of a better tax base, job creation, and economic development when they succeed. Moreover, if a developer wants to redo an obsolete or substandard building they could utilize t...