What is a Tax Abatement?
According to the Texas Comptroller’s Chapter 312 Frequently Asked Questions webpage, “A tax abatement is an agreement between a local government and a property owner to exempt part of the taxes owed in return for improvements to the property.”
In general, a tax abatement is used to reduce costs for a new development within the jurisdiction of a local government. In the end, the local government gets more tax revenue and the community typically get new services, jobs, shopping options and the like.
The future benefits realized by a local government who grants a tax abatement can be significant:
- Reduction in unemployment. A new business creates jobs. The people hired then spend their money in the community buying goods, services, homes, vehicles, etc. which generates more revenue for the community.
- Strengthen other businesses. A new development may increase traffic to nearby businesses which can increase revenue, create more jobs, etc.
- Increase in tax revenue. Once the new development is completely built and open for business, the tax appraisal value will increase which generates more ad valorem tax revenue for the local government.
- Tax revenue increases long after the terms of the tax abatement have expired. If the business is successful and becomes well established in the community, tax revenues will continue to be realized and may increase. If the area around the business is undeveloped, the success of the business which receive the tax abatement can draw new businesses into the vicinity which will increase tax revenues.
Tax abatements are used, typically, as an economic development tool to bring new businesses into an area. It is believed “lost revenue” during the terms of a tax abatement will be realized later as the business becomes established within the community.
Tax abatements can be risky for the local government. If the new development’s business plan is not realized and fails, the local government has lost revenue. The local government, in granting tax abatements, is now picking the winners in the business community which is inherently risky.
Tax abatements can be positive to the local government in the future but will realize a loss in revenue until the terms of the abatement are complete. Tax abatements should be discussed, risks determined and impact to the local government’s taxpayers, community and job market.
For further information, refer to the Texas Statute Tax Code Chapter 312.