Why cities provide tax breaks even when they are strapped for revenue

Like the state and federal government, local governments offer tax incentives to businesses to help solve economic and/or environmental problems. In this lesson students will explore the web sites of three different cities and determine what incentives are offered and what problems they are trying to solve. They will also be asked to determine if the benefits gained from the incentives offset the costs incurred.

If a city or state officials are in need of more tax dollars to maintain their budget, why would they offer tax breaks to businesses when these breaks will reduce their annual revenue? In this lesson you will explore the tax incentives available for business relocation and/or expansion in three different cities. You will then determine what each city would like to get from businesses in return for the incentives offered.

• List tax incentives offered by state and local governments.
• Determine what economic problems governments are trying to solve by offering incentives.
• Evaluate the costs and benefits of the incentives.

• Wilmington, Delaware Tax Incentives: This web site lists and explains city and state tax incentives available to business owners looking to locate or expand business in Wilmington.
  www.dedo.delaware.gov/Insights/Insights_Taxes.shtml?Insights
   
• Grand Island, Nebraska Tax Incentives: This web site lists and explains the city and state tax incentives available to business owners who want to locate or expand businesses in Grand Island.
  www.grandisland.org/business-recruitment/incentives/local
   
• Chesterfield, Virginia Tax Incentives: This web site lists and explains tax incentives available for businesses in Chesterfield as well as businesses that want to locate there.
  www.chesterfieldbusiness.com/business/assistance/assistance.asp?id=15
   
• Worksheet: Hard copy print out and an Interactive of Tax Incentive Research Worksheet students can use to gather information on the three sites.
  www.econedlink.org/lessons/docs_lessons/273_TaxForm1.pdf
  www.econedlink.org/lessons/docs_lessons/273_TaxForm21.pdf

Most revenue raised by a city government comes from taxes on businesses and individuals. This revenue is used to provide police protection, street maintenance, and other services. As people have requested more services and tax revenues have decreased, several city governments have responded by offering tax breaks for businesses. Why would a city government with decreasing revenues and increasing demands for services respond by reducing the amount of tax revenue they collect from businesses? [By offering tax incentives, cities may attract more businesses. The incentives could be designed to help solve a problem that currently exists.]

Using the copy of the Tax Incentive Research page, have the students go to one of the following web sites and answer the questions on the form:

[NOTE: As you discuss this with your students be reminded that a cost/benefit analysis is the process of looking at the cost of the incentive offered versus the expected benefits gained. Some examples of cost might be: loss of tax revenue, disillusioned voters, other firms leaving, etc. and some examples of benefit might be: more jobs for citizens – from which they use income to pay city taxes, etc…]

• Suggestions:
  • Have the students print out a copy of the Tax Incentive Research page included with the lesson.
  • Assign the students a city to research from the three sites that are given, with an equal number of students assigned to each city.
  • Give the students ample time to research the city and their tax incentive programs. When you feel they have completed their search, have them group together by city researched and compare their answers. Have them select one person who will report their findings to the rest of the class.

After the students have completed the tax incentive research sheet, have them meet with the other students who were assigned to the same city and compare their notes. After they have discussed the comparisons, ask the students as a group to try to reach consensus answers to the questions.

A hard copy print out of the Tax Incentive Research page.
OR
A computer interactive Tax Incentive Research page.

• Suggestions:
  • After the groups have finished comparing their answers, have the reporter report the findings to the rest of the class and discuss why cities offer different incentive programs.

When the groups have reached a consensus they should select one person to be the reporter for their group and report their findings to the rest of the class.

After all groups have reported, discuss as a class why all the tax incentive programs were not the same for each city. [Different cities have different problems that need to be addressed.]

[NOTE: As an extension to the lesson, have the students research the tax incentive programs offered by your town or a nearby town and report them to the class the next day.]

After completing this lesson, the students should understand that tax incentive programs for businesses are an attempt by local governments to correct a problem of the local economy. They will also realize that cities are looking for something in return for these tax breaks.

1. Have the students complete the Tax Incentive Research Form individually.
    
2. Have the students who researched the same city group together and compare their notes and come to a consensus on what each city is trying to accomplish with its tax incentive programs.
    
3. After the groups have reached a consensus, have them share their answers with the rest of the class.
    
4. After all the groups have shared their information, ask the following questions:
   1. What are these cities trying to accomplish with their tax incentive programs? [They want to solve economic problems that the market is not solving.]
       
   2. Is each city trying to solve the same problems? [No, each city has problems that are unique, although there are some similarities.]
       
   3. Why do the incentive programs differ from one another? [The cities are located in different regions, each city has problems that are unique to it, etc.]
       
   4. Do you feel it is the responsibility of the local government to correct these market failures? [Answers will vary and should provide for an excellent discussion.]
       
   5. Do you feel that it is appropriate for governments to offer tax breaks to businesses while imposing taxes on people who don't own businesses to make up for the lost tax revenue? [Again, answers will vary but should lead to a very interesting discussion.]