PROPERTY-TAX ABATEMENT AND THE SIMULTANEOUS DETERMINATION OF LOCAL FISCAL VARIABLES IN A METROPOLITAN-AREA

A model is given for the behavior of communities and firms in regards to the granting of local firm property tax abatements in a metropolitan area. The model yields a system of simultaneous equations that are estimated using a 1977-87 panel data set from the Detroit metropolitan area. Results indicate that firm property tax abatements are offered by a community to offset noncapitalized profit-reducing characteristics. Property tax abatements are effective at increasing nonresidential property bases, but at costs (decreased home values, increased local property tax rates, and increased state subsidies to local governments) that should not be ignored by policymakers.