LOCATION AND INVESTMENT EFFECTS OF A TAX ABATEMENT PROGRAM

Abstract

Previous research has generally found tax abatements to be unimportant in firm locations, but their popularity is growing. This study uses an expected value approach to establish a criterion for measuring effectiveness and uses primary data to assess the actual effectiveness of a form of tax abatement used in 34 states. The expected value criterion requires that only 8.8 percent of all investment had to be influenced for the community to break even. Since 25 percent of all investments were influenced, communities were rational in using the abatements. However, if the school aid formula is modified so that schools did not receive additional aid when an abatement is granted, then 41.7 percent of all investment must be influenced, making the abatements irrational.