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July 30, 2013

KEATING: Use of tax-shifting mechanisms grows unabated

The Wall Street Journal recently listed penthouses available for sale at $2.1 million or more at Philadelphia’s “most prestigious address.” Units were designed by an award-winning architect and are located in a fully staffed building with five-star concierge services. Each sale includes a 10-year tax abatement.

In March of this year, it was reported that the city of Philadelphia mailed new valuations to owners of 580,000 parcels. One owner found that his property, assessed at $86,000 in 2008, was now assessed at $575,000 with taxes due potentially exceeding $7,000 annually.

There remains a large group of people who have never been able to understand the logic underlying property tax abatement. Police, fire and government operations need to be financed through property taxes or government debt. In new developments, streets, sidewalks and curbs must be constructed. How can certain properties be released from taxes without raising the taxes of all other property owners in the community?

The reason for property tax abatements, we are told, is the need for local government to play an active role in encouraging certain activities. In Indiana, tax abatements can be granted only for projects located in an “economic revitalization area” so the government must first define and establish such an area. For example, Indianapolis officials evaluate each applicant for tax abatement and forward their recommendations to the Metropolitan Development Commission.

Assessed value and, hence, property taxes are expected to gradually increase on improved property. This, of course, assumes that there is a market for improved property. Abatements represent a reduction or exemption from taxes for a specified period. The maximum abatement permitted in Indiana exempts all taxes due in the first year due to any improvements followed with reductions in subsequent years such that in the 11th year no deductions remain.

The assumption is that improvements to certain properties would not occur in the absence of abatements; therefore, in the long run, future property tax revenues, employment and local income tax revenues should increase. There is a real cost, however, to the general public from tax abatements, namely forfeiting increased taxes that may have been generated without abatements.

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