ABSTRACT. This research focuses on property tax-based incentives to stimulate housing growth in Iowa’s 48 largest cities. The study’s roots are in the practical need to provide local government leaders with some insights into the appropriateness and the efficacy of some the development options upon which they have come to rely. Our intention at the outset is not to test theoretical frontiers, the literature is rich on the expected effects of tax incentives on capital formation and the value of property in a region. Given the excellent guidance of that literature, what we wanted to find out was whether there was any evidence that tax abatements for housing were beneficial to the communities adopting them. Our findings suggest that housing property tax abatements do not explain variations in housing growth rates or any significant amount of increased capital investment per housing unit. We raise the questions of tax shifting and the potential net benefits to communities granting the abatements in light of the findings. We also question whether the ordinances are promoting rent-seeking behavior on the part of developers and land speculators as opposed stimulating value added investments benefiting communities and homeowners.  

Over the decades communities have relied on countless gimmicks, gadgets, and enticements for promoting economic growth. Many communities in many states have enacted ordinances granting some type of cash-like incentive to new businesses, industries, institutions, and homes. Many of the incentives have their roots in national urban renewal law. Others are of state derivation. Most of these ideas were designed originally to improve blighted areas or otherwise reverse the fortunes of areas in decline.

These development incentives and inducements were aimed primarily at industrial and business growth, though in recent years, especially in the Midwest, there has been a coupling of concern linking the presence or absence of housing growth with the fortunes of rural communities. The quality of job growth and the impacts of the growth locally as translated into housing growth are now more likely to be linked and scrutinized by development officials (Cobb 1994, Swenson and Otto 1997). Underlying the irrepressible inter-state industrial growth competition is also an intra-state, inter-community industrial growth competition. It is rare to find a community that does not by ordinance possess and apply the entire panoply of development tricks allowed by local, state, or national law.

Most major development incentives employed by communities take the forms of tax increment finance district, self-supported improvement districts, historic preservation zones, and variously defined urban or rural redevelopment zones. There were, historically, alignments with the objective circumstances of a region in need of development or renewal and the overall goals of the community. As Wassmer (1992) noted, local incentives generally are designed to "overcome noncapitalized profit-reducing characteristics (279)." The alignment between incentive policy and the objective characteristics of the community was expressed in a planning document. Much of what constituted urban renewal within states and relied on state or federal assistance or tax benefit authority was rooted originally in federal urban renewal legislation. Specific incentives were to entice certain changes in business or housing locations and otherwise increase the value of land within the redevelopment zone. We could call these approaches zoned development projects because they had a definite bounded territory and a set of specific mechanisms attached to them to induce economic growth.

This categorical and planned approach gave way somewhat to more radical designs during the early 1980s. Conservative critics believed that the billions spent by the federal, state, and local governments on urban renewal were for naught. An alternative suggestion emerged for the declaration of large sections of blighted communities as urban enterprise zones. There were also calls for wider-spread privatization of public functions. Instead of a heavily planned and monitored redevelopment district, the desire was to stimulate private investment in blighted areas through the use of tax and job training incentives. Given such a jump-start, the advocates believed that private enterprise would provide the necessary investment essential to redeveloping blighted areas. The overall goal, however, was no different than the planned approaches: increasing the tax base of the communities by increasing the relative wealth of their citizens through job growth. One way or another, both approaches required public subsidy to attain some longer term growth objective. State and local officials were utilizing federal, state, and local tax policies to stimulate marginal differences in capital and residential investment in their areas.

The efficacy of any of these approaches is not easily measured (Nunn 1994): the nation is enjoying a prolonged period of economic expansion that is favoring nearly all of its regions; sorting out incentive-based from market-based growth would be virtually impossible in many areas. This has made it difficult to isolate types of development incentives that are more or less effective. Regional analysts have a responsibility, though, to try. Absent knowledge of the effectiveness of the various approaches, many communities feel compelled to offer the sun and the moon, fearing that not to do so would make them appear noncompetitive.

While overall job growth may seem strong regionally and nationally, there are quite differential rates of real earnings growth, and ultimately, the rate of housing growth in many of the regions and states. This study assesses the efficacy of housing development incentives in Iowa among communities that use property tax abatements to stimulate housing growth. An abatement is a temporary reduction in property taxes to qualifying residential new construction. We are fortunate in this study to have quarterly housing starts data for the state's forty-eight largest communities over the past 10 years. The period measured represents the state's modern growth period following the drastic declines realized in industrial and rural economies during the early to mid 1980s. The central questions to be answered are straightforward: Do the property tax incentives stimulate higher rates of housing starts in communities with them than in communities without them, and do they make a meaningful difference in the individual growth rates for cities that adopted them? The questions for decision makers are straightforward as well: What are the consequences to their communities of employing such incentives? This research sheds some light on the overall effectiveness of the abatements at stimulating growth in Iowa. We assume that our experiences translate quite well to other communities that offer property tax incentives because most Midwestern states have business and housing incentive structures similar to Iowa’s.

Most of the research on tax incentives and community growth has focused on business and industrial inducements. The conclusions bounce back and forth as to whether, and under what circumstances, tax incentives do stimulate changes in capital growth in a region. Morse and Farmer (1986) cast doubt on the efficacy on these types of programs, though their research suggests that the marginal gains to communities can be quite high. Wolkoff (1985) advises discretion in the application of the incentives because abatements "alone are unlikely to have a major effect on capital investment (311)." Wassmer (1992) suggests that incentives make sense in instances where the undesirable development characteristics are for some reason not fully capitalized into land prices – that the price of land is still too high to attract industrial firms. He, too, allows the need for "stronger state oversight to insure that local jurisdictions only offer abatements that are necessary… (p279-80)." Phillips's and Goos's (1993) "meta-analysis" of the possible effects of state and local taxes on development is an expressed refinement of work done earlier by Bartik (1992) who has found some effect across states and across regions, but noted that the effects were much more pronounced within metropolitan areas. In all of these studies, however, one must wonder whether the simultaneity of the entire process has been properly considered.

When we consider taxes on land, buildings, and houses we assume that higher property taxes, ceteris paribus, yield lower capital values. The value of the tax is capitalized into the property value. The profit making or the capital gains potential of the property is directly affected by the amount of taxes paid on the property. Within communities, if industries are given favorable property tax treatments then tax costs shift to other classifications of property. If the tax liabilities increase among the other classifications of property, the value of their properties decline. The longer term impacts of the taxes are mobile across property types. Favorable tax treatments result in inter-categorical tax impact shifts. Taxes shifted to commercial properties either reduce returns or result in higher consumer prices.

Studies suggest that inter-jurisdictional capital mobility may be a problem also. We know that there are economies of scale in local service provision. Communities undergoing cyclical losses, regional economic restructuring, or communities in decline find that their eroding tax bases must be taxed more heavily to produce public services. Profits are reduced, capital gains curbed, and land prices decline. Net investment in the area declines. Over some period of time a new equilibrium is reached where land prices are sufficiently low to allow for new investment irrespective of the local tax rate. Properly applied and centrally monitored tax incentives, according to Wassmer, can jump-start this process in regions undergoing serious stagnation or in regions in which their comparative position with other jurisdictions is significantly worse.

There is, of course, an offset to all of this in that the perceived value of public services, quality roads and schools, low crime and congestion, along with other desirable amenities increase the value of properties, especially houses. It is this tension between the taxes paid and the value of goods received that marginally influences the value of homes in one area versus another area. High taxes coupled with a low perception of the value of local public goods will yield lower housing values when compared to a community with moderate taxes but a higher valued community environment.

All of this suggests that it is not property taxes per se, rather, it is excessive comparative taxation on property. Analyzing different views of the impact of taxes on capital value, Wassmer (1993) concludes that "greater than average reliance on property taxes reduces property value…(154)." Do and Sirmans (1993), found evidence of this in their analysis of housing values in a district requiring a property tax premium for the expansion of local schools. Despite the benefits of the schools, they found that the tax payments had a negative impact on housing values. The obverse is that temporary tax abatements should have a positive impact on housing values, which we will address in the concluding section of this paper. First, however, we address the more immediate issue concerning the decided belief in the communities we studied that abatement laws will stimulate and focus residential growth. The emphasis in these communities is on community size first and tax base second.

In Iowa, legislation allowing for the use of property tax abatements for housing growth had its basis in urban renewal legislation originating, primarily, in the 1970s. Like other states, Iowa added its own particular brand of sweeteners to try to boost development. Tax incentive approaches involved the use of tax increment finance districts (TIFs) and tax abatement programs (TAPs). TIFs and TAPs were both applied originally to designated districts, primarily within the larger municipalities—those that had been susceptible to suburban flight and core city decay. They also both primarily targeted business and industry, with only occasional provisions for housing development.

In 1987, the state's largest city, Des Moines, decided that it needed to take aggressive strides to stimulate housing starts and improve the community's housing stock. The city was nearly land-locked by surrounding suburbs, and housing starts in the community had been very low for over a decade. In contrast, all of the adjacent or otherwise nearby suburban communities in the MSA were booming. Four of the state's six fastest growing cities abutted Des Moines, but the city's housing stock continued to decline in value comparatively, and the residential portion of the tax base continued to erode.

Feeling a need for action to reverse this trend, the city designated the entire city as an urban revitalization zone. This meant that any new housing construction or any value-enhancing additions to existing housing in the city would be eligible for a ten-year local government tax abatement. The abatement applied to all taxing authorities, not just the city. County government, school government, community college levies, and all other levies were suspended as well. At the time of enactment, the city's consolidated property tax rate was nearly the highest in the state. Savings on just a modestly priced home could have amounted to $2,400 per year (taxable value of a $100,000 home equaled approximately $65,000 at the time of passage, and the consolidated municipal tax rate was just under $37 per $1,000 of taxable valuation; therefore, $60,000 X .0369 = $2,400).

The idea was to promote investment within the city. The plan was originally aimed at stimulating improvements in existing housing stock, with a more modest expectation of enticing new home construction. Because the ordinance was enacted city-wide, residential growth in the pricier parts of town was just as eligible as growth in historically blighted portions. Somewhat cynically, the city was counting on housing growth, expansion, and improvements in its more affluent districts to more than offset significant and perceived irreversible declines in its poorer districts.

On a community-wide basis the trade-offs were basic: city lots were far cheaper than the suburbs, but core city tax rates were significantly higher. By eliminating the comparative property tax penalty paid in the metro core, quality housing renovations or starts could be expected. The metro core could at least for a time compete with the suburbs in housing growth and slowly recovery the value of its residential tax base. Noticeably, the rate and pace of growth in the adjacent suburban communities was so strong that none felt compelled to retaliate with their own tax-abatement ordinances.

There were, nonetheless, a handful of communities that were either in metro counties but somewhat beyond the primary growth ring in the metropolitan zones or that were otherwise struggling to stimulate housing growth but were not necessarily linked to metropolitan growth that found the abatement enticing. Leaders in some of those communities believed that an ordinance similar to that passed in the state's largest city would work in theirs as well. Many had struggled with the hardships of the farm credit crisis; others had lost key industries and were in the process of recovering their base economies; and many had declining populations and were witnessing stagnant housing growth. Some were growing smartly, but believed that a tax abatement ordinance would hasten growth even more. By 1996, of the state's forty-eight largest cities, nineteen had housing tax abatement programs in effect (one community repealed its ordinance at the end of 1996). Most of these communities enacted a six-year declining amount abatement (e.g., 85 Percent abated the 1st year, 60 percent the second, and so on). Other communities used a three-year 100 percent abatement. Others used a 10 year 15 percent schedule. None were as bold as the city of Des Moines with its ten-year abatement for all qualifying properties.

Map 1 shows the distribution of the communities with the abatements. We can see that cities with the ordinance are somewhat clustered in the center of the state as well as along the Mississippi River eastern boundary. Table 1 allows us to introduce the general hierarchy of communities assessed in our study. There are four primary classifications of communities: (1) metropolitan core cities, of which two (Des Moines and Davenport) have tax abatements for homes; (2) cities adjacent to the metro core, none of which have had the ordinance; (3) cities within an MSA county but not adjacent to a metro core city, where two of the four tracked by the state have the ordinance, and (4) all other cities tracked by the state where fifteen had the ordinance in effect in 1996.

A hierarchy is suggested a priori because the original incentive for the city-wide abatement program was the differential growth rates between the city of Des Moines and its suburbs and other nearby cities. We can also see from the table that the highest incidence of abatements is among Iowa cities that are generally beyond the reach of metropolitan markets. Fifteen of the thirty "all other" places tracked had enacted some housing abatement ordinance. Many of the leaders in these communities have become sophisticated regarding regional growth and their respective economic development prospects. Although the highest priority remains industrial and major commercial attraction to the region, many also know that residential growth in and of itself yields a community economic impact due to the marginal gains in captured household spending. Most of these communities have a multiple-tiered development perspective that seek industrial development prospects (and institutional, too – prisons are now very popular) but also vie to consolidate their relative competitive position within their own region. Intra-state migration patterns are decidedly towards larger communities resulting in residential labor force and housing growth in many of these medium sized cities as the smaller cities and counties remain stagnant or decline.

 

Table 1. Tax Abatement Cities by Metropolitan Hierarchy
City  Type	Abatement Program	No Abatement
Metro Core	2	6
Adjacent to Metro	0	6
Non-Adjacent but in MSA	2	2
All Other Cities	15	15
Total	19	29
Source: Iowa Department of Economic Development, Office of the State Economist. Abatement ordinances from phone survey of cities.

The data represent counts of housing starts in the state’s 48 largest cities. All of the cities had populations of 7,000 or more. The original data are reported on a monthly basis. The data in our analysis have been recompiled as quarterly data for the statistical analysis and in some instances annually for reporting aggregate trends. Percentage changes were allocated using 1990 census counts of community single family homes for each of the communities. For example, first quarter 1987 single family home values were the number counted in 1990 minus permits from that point to 1990. Doing this allowed us to get a realistic measure of the rates of change in light of the communities’ original positions.

Over the period measured, 1987 to 1996, the forty-eight communities tracked by the state’s Department of Economic Development accounted for 57.1 percent of the 61,956 single-family housing starts in the state. Nearly 35,400 single family starts are logged for our study cities. Within the study group we find that the vast majority of housing starts originated in the metropolitan and adjacent to metropolitan cities (see Table 2).

Table 2. Single Family Home Growth 1987 to 1996 by Presence of Tax Abatement.
City  Type	Abatement Program	No Abatement
Metro Core	4,157	8,595
Adjacent to Metro	0	10,947
Non-Adjacent but in MSA	1,132	3,660
All Other Cities	2,168	4,721
Total
Source: Iowa Department of Economic Development, Office of the State Economist.

When we look at the growth rates logged by cities that do not use housing tax abatements versus those that do we find interesting patterns. Cities without abatements had much higher rates of growth. Among those adjacent to the metro core cities, those with historically the highest and most persistent rates of growth we find first no communities with abatements and a generally high rate of housing growth of 32 percent over the 10 year period. The rate was twice that, though, in the two communities that are in metropolitan counties but not adjacent to the metro core and which didn’t have an abatement ordinance in effect. Their growth was also more than twice as high as the two communities in that class that had the abatement schedule for housing. Finally among the communities that are outside of the metropolitan counties we see that those with the abatement had just under 4 percent growth over the period measured and that those without the ordinance had a weighted growth rate of 8.5 percent.

We may not deduce from the foregoing that the abatement programs did not work. We may only deduce that those that adopted the abatement ordinances had lower rates of growth than other communities within their particular community hierarchies, which in turn may explain the perceived need for the ordinance.

We need to consider the general patterns, rather than overall housing growth over the period in question to understand the potential value of the ordinances to the communities.

Table 3. Single Family Home Percentage Growth 1987 to 1996 by Presence of Tax Abatement.
	Percentage
City  Type	Abatement Program	No Abatement		All Cities
Metro Core	5.9	8.3		7.3
Adjacent to Metro	N/A	32.0		32.0
Non-Adjacent but in MSA	27.3	64.2		48.7
All Other Cities	3.9	8.5		6.2
Total	5.8	14.1		10.8

We have a chicken and the egg problem. Do the communities with low growth enact housing tax abatements, or do communities with housing abatements actually realize lower growth rates? If the latter were true, then why the ordinance? Couldn’t city officials tell whether it was working? Notwithstanding the growth rates for groups displayed in Table 3, the overall pattern of housing growth among our sample cities has been uneven over the years. In the aggregate, housing growth rates trended upwards between 1987 and 1992. Thereafter, they fell off some but, again in the aggregate, remained above one percent from 1992 to 1996. The pattern for the individual classes of cities demonstrates significantly more variability over time for some of the city groups.

In Figure 1 we see that rates of housing growth were very high among the group of cities that were either adjacent to a metro core city or within the MSA counties, but their respective trends in growth differed remarkably. The cities abutting the metros enjoyed anywhere from a more than 3 percent to a 2.75 percent annual rate of housing growth that trended downward through 1995 before recovering. Among the non-adjacent MSA cities we see that their growth trend was very strong through 1993 before tapering off and then declining some. Although the trend peaked at more than 5.6 percent per year by 1993, the overall rate of growth among this later group, however, is still very high—in 1996 it was just over 4.5 percent.

            The rate of growth among these cities is much greater than those that were either metropolitan core places or those that were not located in a MSA county. Figure 2 shows us that the rate of growth among those places was more modest. Within the metro core cities we see the general trend downward in growth rates after 1992. The trend down didn’t start for the other cities until after 1994.

The foregoing deconstruction of the categories of growth and the trends in growth demonstrate two factors: (1) there are significantly different growth patterns among the different classification of cities, and (2) the rate of change before 1992 and after 1992 is generally different for all groups. These two considerations need to be taken into account as we work to isolate whatever benefits the housing tax abatements may have had. The possible implications of not considering trend within the groups can be illustrated by analyzing individual city performance before and after abatement programs were enacted, for one particular group of cities.

City officials are more likely to evaluate the efficacy of abatement programs based on analysis of their own community experiences before and after abatement programs were put into place. Figure 3 illustrates why these communities might conclude that the programs have been successful.

Figure 3 shows the compounded, average quarterly rates of growth in housing permits for the 15 nonmetropolitan, non-MSA cities that had abatement programs in place for some time during the 10-year study period. For each city, the enactment of the abatement ordinance serves as the cutoff date for the before/after periods. In all but one instance, the average growth rates after the ordinance were slightly higher than during the before-ordinance period. However, we must move beyond this myopic view of individual city performance before concluding that the ordinances were responsible for the improved growth rates in the abatement cities.

In isolating the unique effect of the tax abatement for housing growth we controlled for the unique characteristics of the different groups of cities in the study as well as the dominant growth patterns revealed by the trend analysis. As has already been mentioned, we converted monthly data to quarterly data for our cities. We next calculated estimated 1987 base single family housing units from the 1990 census counts for each of our cities in order to compile meaningful quarterly rates of change reflective of each city’s housing base at the time. A centered, three quarter moving-average was calculated to smooth the noise in the data series over time and to help stabilize the probable relationship between obtaining housing permits and the actual construction of the homes in the cities.

We tested the assumption that the presence of an abatement ordinance in any one quarter, for any one city, would be associated with a higher than average rate of growth. We limited the time period of our analysis to 1992 and later. Most of the abatement programs were enacted between 1991 and 1996. We also have demonstrated that the housing trends before and after 1992 were distinctly different for all city types. In a broader sense, post 1992 analysis seems appropriate because the nation and the state emerged from a brief recession.

We modeled the average quarterly growth rates for all 40 cities based on two categorical variables: ordinance and location. Telephone surveys were made of each city manager or clerk in the study to identify the presence of a tax abatement and the precise date in which the ordinance was enacted in each of the cities. This allowed for dummy coding^* for any quarter in the study and for any city of whether a tax abatement ordinance was present or not. Owing to the very distinct patterns of growth demonstrated in Figures 1 and 2 we simplified the classification of cities to suburban (dummy coded 1) and non-suburban (dummy coded 0). We have excluded the eight metropolitan cities from this analysis. Seasonality has been removed from the quarterly growth rate data.

A General Linear Model of the data was run to compare average growth rates for the four subgroups in our model. The results are shown in Table 4.

Table 4. Average Quarterly Growth Rates in Iowa Cities Controlling for Suburban Locations and the Presence of a Tax Abatement Ordinance.
City Type	No Ordinance in Effect	Ordinance in Effect
Non-suburban	.2216	.1311
Suburban	1.0175	.8440
Variance Explained 46.7%

 

The results of the analysis suggested that location was the most influential variable explaining variance in the quarterly growth rates. The presence or absence of an ordinance coincided with lower quarterly growth rates. Overall, the two variables explained approximately 47% of the variance in quarterly growth rates.

Our previous analysis had revealed that the incidence of highest growth generally occurred in cities that had no abatement programs. Concerned that the ordinance dummy variable was actually measuring the below average performance of the abatement cities in general, we attempted to refine our model. Using multiple regression, we regressed quarterly rates of change on the location and ordinance dummy variables, and added a third dummy variable that classified the cities as abatement or non-abatement cities. Although the ordinance on/off dummy variable and the new abatement dummy variable were highly correlated with each other (one defines the other), we hoped that the equation would allow us to further isolate the effects of the ordinance in specific quarters.

The regression equation was:

Quarterly Change = 0.240 - 0.147 Abatement City (1=Yes, 0=No) + 0.772 Suburban City (1=Yes, 0=No) + 0.0360 Ordinance in Effect (1=Yes, 0=No).

The abatement city dummy variable had a negative sign, suggesting (as expected) that the abatement cities had lower than average rates of growth. The ordinance dummy variable had a very small, positive coefficient. These results indicate a slight improvement in performance when the ordinance was in effect versus when no ordinance was in effect. However, the variable did not add to the variance explained. The total amount of variance explained by this new model (47%) was no better than with the general linear model.

Does this mean that the ordinance has a deleterious or otherwise unanticipated counter effect on housing growth? The answer is probably not. In combination with the location variable, significant amounts of inter-quarter variance is explained by the presence of an abatement ordinance, but the abatement sign is in the wrong direction. Communities passing abatements are expecting growth (a positive sign); they’re getting the opposite. And among those passing the ordinance is a firm belief that they have been successful (see Figure 3, for example).

Communities adopting the ordinance are reacting to their own actual and perceived rates of housing growth. For cities at the low end of a subjective distribution, attaining the group average rate of growth may be a meaningful measure of the shortfall. A city at the group average may find itself lacking when compared to a city at the upper end of the distribution. Communities enacting the ordinance are looking to improve their housing start performance relative to their own experiences. The data thus far suggest that they may, in fact, be worsening their performance.

Another measure of the actual or perceived usefulness of the abatement program is one taken in light of the community’s experiences immediately before and immediately after the ordinance is passed. The community data set was reorganized into three distinct data sets:

1. we measured the average deviation from the group average in the four quarters prior to the passage of the ordinance with the average deviation from the group average in the four quarters following the enactment of the ordinance;
2. next the prior four quarters are compared to the average deviation from the group average in quarters five through eight following the enactment of the ordinance to account for a lagged effect; and
3. we compare the prior four quarters with the average of the eight quarters after.

We have looked at the relative quarterly performance of our communities when abatements were in effect and when they were not. We found that among communities that had the ordinances was a likelihood of lower than average housing growth. On a quarterly basis after controlling for group performance and trend we found that housing tax abatement ordinances did not lead to higher rates of housing growth. We next compared before and after the abatement ordinance was enacted to identify any marginal changes that we might infer to be attributable to the ordinance. Although very slight gains in the average deviation in the group rate of growth was identified, we again found no meaningful influence attributable to the presence of a housing abatement ordinance. We conclude that the ordinances do not lead to any generalizable patterns of improvements in housing growth among the cities that possess them. This is true over the entire period assessed and with regard to immediately before and after the passage of the ordinance.

We might expect some increase in the average value of homes constructed in the communities with abatements versus those without (see for example, Do and Sirmans; Goodman 1983). If taxes are high in an area then housing values will be lower than in a comparable area where taxes are lower. The abatement programs suggest housing value differentials between communities with and without the abatement ordinances. The programs also suggest significant potential housing value differences within communities with the ordinance. Existing homes on the market would suffer a housing price penalty because their taxes were due in full when compared to a newly constructed, tax-abated home.

Our next analysis looks at the declared housing values over the period measured to identify whether there were any meaningful housing price differences in the communities with the ordinance compared to those without. We first compiled average weighted housing values by quarter (smoothed with a three-quarter moving average). The weighted values reflect the experiences of the larger cities (metros and suburbs) more so than the remainder of cities because of the sheer size of growth in those two areas. Because of this we also compiled a set that just looked at the 30 non MSA cities. All of these average values were adjusted for inflation using the residential investment deflator from the National Income and Product Accounts tables. The values were deflated to 1996 amounts.

Once the effects of inflation were removed, average real weighted housing prices were regressed against time and controlled for the presence of an ordinance or not. We first regressed all cities and then only those outside of the MSA counties. The results are displayed in Table 6.

Table 6. Average Real Housing Values Considering the Presence or Absence of a Housing Abatement Ordinances, 1987 and 1996 (In 1996 constant dollars).
	All Cities N=48	Non-MSA Cities N=30
Intercepts	$104,980	$94,224
Trend	1.0725	1.167
Housing Abatement = Yes	$-1,198	$96
Variance Explained	64.0%	54.5%

When we look at all cities the over-riding influence of the very high suburban growth offsets any potential price gains in abated housing prices. All of the adjacent suburban communities had very high numeric, higher-valued housing growth. None of the adjacent communities had abatements in effect over the period measured. In light of this, on a comparative basis, the presence of the abatement indicated a slightly lower average housing price. Overall, the trend variable accounts for nearly all of the variance explained (64 percent).

When we exclude the MSA cities (the metro core, the suburbs and the remaining MSA cities) we are left with 30 cities, and we find a very minor positive price effect attributable to the abatement. The increment to the total variance explained (55 percent) beyond the trend data, however, was miniscule. We are not confident that there is a generalizable and significant housing price difference in communities with the abatement ordinances versus those without.

Nunn’s (1994) dictum that we’d "all be better off if no cities offer tax abatements… (575)" certainly holds in the current environment of cut-throat inter-state and inter-community competition for jobs and homes. When we look at the evidence, we don’t find any conclusions that convince us that housing tax abatements make a difference in the rate of housing growth or the value of housing developed. What we do know is that the abated homes are receiving a subsidy that is shifted immediately and directly to all other home, business, and industry owners in the communities in which they are in effect. We also know that the marginal longer-term gains to communities in enhanced revenues due to an expanded tax base are often greatly over-estimated. They have to be, because the rhetorical argument for these programs is that they provide capital investment in an area that otherwise would not have occurred: we’ve demonstrated how baseless that argument is – the development occurred regardless, perhaps in spite, of the tax abatements.

Previous research by Nunn, and Severn (1992) indicate that community fiscal returns from tax breaks may take quite long periods to be realized. The primary determinant of the rate of return is the appropriate discount rate applied to the marginal net public revenue stream (once it begins) compared to the direct costs of abatements (which begin immediately). In my case study (Swenson 1997) of a suburban city and it’s practice of tax abatement I discovered that using reasonable community growth assumptions and a very low real discount rate (3 percent) that it would still take the community 35 years to recover its total initial housing abatement investments over the first 6 years of the ordinance. In this study I assumed at the outset that the homes would not have been built had it not been for the ordinance. Now we suspect that a large fraction of those homes would probably have been built regardless – that the place was a highly desirable building location with or without the ordinance. One can only conclude in retrospect that large fractions of the subsidy (amounting to approximately $3,000 per home) were wholly unnecessary, constituting a wholesale transfer of tax liability to the remaining residents of the community, the larger school district, and the county. The transfer is increasingly onerous because housing boomed in the area necessitating tremendous increases in public service demands and costs, of which the new homeowners were only paying a very small portion, initially. The losses to the community, though, were less than half the losses to the remaining taxing districts (schools and county government), which were not measured in my case study.

It is interesting to speculate as to the beneficiaries of the practice of abating local housing taxes. Tax abatements like this give rise to rent-seeking (Coffman 1993). As individual homeowners are not organized, the only logical initial beneficiaries are developers and land speculators. Once the programs are passed they tend to be re-authorized. As Coffman notes, rent-seekers will "lobby to secure a set of rules which will act in their favor (595)." Wolkoff (1993) responds that that it is debatable whether "the costs associated with rent-seeking behavior exceed the potential benefits of policy intervention …(599)." This leads us full circle back some of the earlier analysts of tax abatements already cited. Wolkoff and Wassmer both argue for greater discretion if not centralized approval in the granting of these types of incentives.

For our own state the issue is even more complex. We have had rural housing task forces and major legislative studies designed to bolster the fortunes of rural areas by figuring out ways to stimulate housing growth in some of the less urban areas of the state. Legislation has been passed to extend tax increment financing benefits to housing developments (regardless of whether the housing is for low or moderate income or for the more wealthy). If rent seeking is to be a problem, it will expand as demand for housing TIFs increase. Aside from periodic debate over the efficacy of the housing tax abatement programs usually sparked from complaints by existing local taxpayers, there is an underlying fear among local officials that by repealing the ordinances they are sending an anti-growth message to developers and industrial prospects and that they are automatically disadvantaged.

It is important to reiterate, though, that the most consistent and persistent growth rates in homes and commerce have occurred among the state’s prosperous suburban communities adjacent to the state’s metro places. Not one of these places offers housing tax abatements. Alternately, among those places that have enacted the ordinance, perhaps the market has sent price signals that are much more significant than the value of the tax savings. Either way, it is perhaps time for centralized scrutiny of the kinds of incentives offered and their benefits, both intended and realized.

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