Association for Public Policy Analysis & Management

Why are business property taxes usually higher than local government costs of business services when competition for economic activities between jurisdictions should, in theory, eliminate excess revenue? One possibility is that general purpose local governments set statutory property taxes relatively high to influence locations of businesses through selective incentives that reduce the effective taxes of the businesses that receive them.

In this paper we examine a comprehensive data set on the geography of approximately 2,800 property tax codes active in Cook County, Illinois, between 2012 and 2014 to understand the relationship between tax rates and business tax incentives. A property tax code defines a constellation of local governments with overlapping taxing jurisdiction within its region. The county we study includes the City of Chicago and more than 130 other general purpose local governments. We use GIS techniques to match community income and demographics to property tax rates and other information about the type of governments operating in each area. Using this data we are able to map relative tax rates change across space.

Using these data we conduct statistical analyses to explain the spatial variation in tax incentives as a function of relative tax competition. We find strong evidence that incentives are linked to spatial differences in relative tax rates. Our estimates suggest that property tax competition is highly localized within the Chicago metropolitan area and that tax codes with high consolidated statutory rates receive more incentives.

All else equal, businesses benefit from locating in areas with relatively low property taxes. Consolidated tax rates vary within a municipality depending upon the constellation of overlapping governments for the particular tax code. Property taxes are levied by multiple general and special purpose governments, particularly school districts, which creates differences in tax burden across the codes within a city. Our research suggests that municipal governments may use incentives strategically to eliminate intra-municipal tax differentials and relieve the intra-municipal locational inducement for preferred land uses.