Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / How Tax Incentives Quietly Drain Public Schools
Transcript
- Lucas: Let's start with a number that feels abstract until you realize it's coming out of your local school's art program. We're talking about roughly three hundred million dollars in annual property tax revenue foregone across just five major metro areas due to aggressive tax abatement programs. Luna: Three hundred million is a lot of paintbrushes and instruments. But where is that money actually going? Is it really just vanishing into thin air? Lucas: It's not vanishing; it's being redirected as a subsidy for private entities under the guise of economic development. Take the recent Buffalo Bills stadium deal. The team got over one billion dollars in public financing, but the real story is the surrounding tax abatements that freeze property values for twenty years. The city gives up millions every single year so the franchise can keep ticket prices lower. Luna: So the taxpayers are essentially subsidizing a sports team while their own classrooms lack basic supplies. That seems like a broken feedback loop. Lucas: Exactly. And it's not just sports stadiums. Look at the industrial parks in Michigan and Ohio. They offer ten-year tax freezes to companies promising hundreds of jobs. When those companies don't hit their hiring targets, the municipality is stuck with the bill. They've sold off future revenue for a promise that rarely materializes fully. Luna: Why do local leaders keep agreeing to this? It feels like they have no other leverage against big corporations. Lucas: It's a prisoner's dilemma on a municipal scale. If City A doesn't offer a tax break, Company X might go to City B. So everyone starts a race to the bottom. By September 2026, we're seeing the cumulative effect of two decades of these deals. The tax base has shrunk significantly relative to the population growth, yet the demand for services hasn't gone down. Luna: I remember reading about a town in Pennsylvania that lost its main employer but kept paying the tax breaks anyway because the contract was locked in. How does that even happen legally? Lucas: Contracts are contracts, right? Once that agreement is signed, it's incredibly hard to unwind it. These are long-term binding commitments that outlast political cycles. A mayor today signs a deal for twenty years, then leaves office. The next mayor inherits a deficit and the inability to raise taxes without killing the few remaining businesses. Luna: It sounds like they're mortgaging the future of the community for a short-term political win. What's the actual return on investment here? Lucas: The ROI is notoriously poor. Most studies show that for every dollar of tax revenue given up, you get maybe thirty cents back in new economic activity. It's a negative return. But the accounting makes it look invisible because it doesn't show up as a line item expense. It just shows up as less income than expected. Luna: That invisibility is the most dangerous part. People see a new factory or a shiny stadium and think it's progress, without seeing the hole in the budget underneath. Lucas: Right. And because it's hidden, voters don't know what they're losing. They just feel the pinch when the library closes early or the roads crack. It creates a weird disconnect between what people see and what they pay. Luna: Do any cities actually manage to turn this around? Or are they all trapped in this cycle? Lucas: A few are trying. Some states have passed laws limiting the duration of abatements. But the federal government stays out of it. This is purely a local and state battle, which means wealthier towns with better negotiation teams can sometimes avoid the worst pitfalls, while struggling towns get crushed. Luna: So the inequality is baked into the system from the start. The towns that need help the most end up giving away the most resources. Lucas: Precisely. It's a regressive subsidy in practice. The burden falls on homeowners and small businesses who can't negotiate exemptions, while large corporations get preferential treatment. Luna: It reminds me of how consumer loans work. You borrow against your future earnings to pay for something today. Eventually, the interest eats you alive. Lucas: That's a great analogy. Except there's no bankruptcy option for a municipality. You can't just declare financial distress and wipe the slate clean. You have to keep balancing the books, even if the books are rigged against you. Luna: Is there any way for citizens to push back on these deals before they get signed? Or is it too late once the ink is dry? Lucas: It's incredibly difficult. These deals are often negotiated behind closed doors by economic development committees. By the time the public hears about it, the terms are already set. There's very little transparency in the initial stages. Luna: That's frustrating. It feels like the game is designed so the average person can't even see the board. Lucas: It is. And that's why we need to talk about the alternative. What would it look like if we stopped giving away free money? Luna: Wouldn't that just scare companies away? If you don't offer incentives, won't they just go to the next town over? Lucas: Maybe. But data suggests that most companies care more about infrastructure, workforce quality, and regulatory stability than a small tax break. If you invest in good schools and reliable roads, you attract business naturally. Subsidies are often a sign of weakness, not strength. Luna: So the real competition isn't about who gives the biggest discount, but who provides the best environment for people to live and work. Lucas: Exactly. Stop competing on price and start competing on value. It's a harder sell politically, because you can't cut a ribbon on a well-educated workforce tomorrow. But it pays dividends for decades. Luna: It sounds like we need a fundamental shift in how we measure success for economic development projects. Lucas: We do. We need to track net fiscal impact, not just gross job creation. If a company brings in ten jobs but costs the city fifty thousand dollars a year in services and lost tax revenue, it's a bad deal regardless of how many people are employed. Luna: That's a much clearer metric. Net fiscal impact should be the headline, not the number of press releases issued. Lucas: Agreed. And until that happens, we'll keep seeing these shortsighted deals that drain our public institutions while boosting corporate balance sheets. Luna: It's a tough pill to swallow for communities that are desperate for growth, but the cost is becoming impossible to ignore. Lucas: Absolutely. The era of easy money is over, and the bill is finally coming due for these municipalities. Luna: Before we dive deeper into the specifics of how these contracts are structured, I want to take a quick moment to acknowledge the support that keeps this show running. Lucas: If walking through the economy with us has made something click, consider supporting us directly. A couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo. It helps us keep the research deep and the ads out. Luna: Yeah, it really does make a difference. We appreciate every listener who decides to chip in to keep the conversation going. Lucas: Thanks for that. Now, let's look at the mechanics of how these abatements are actually calculated, because the math is where things get really interesting. Luna: I'm guessing the calculations are designed to obscure the true cost rather than clarify it. Lucas: They certainly are. Let's break down the concept of Tax Increment Financing, or TIF. It sounds technical, but it's basically borrowing against future growth. Luna: So you freeze the current tax value and use the increase to pay for improvements? Lucas: Exactly. You take a blighted area, designate it as a TIF district, and divert the extra tax revenue from new development to pay for infrastructure. The idea is to kickstart growth that wouldn't happen otherwise. Luna: On paper, that sounds efficient. Why does it go wrong so often? Lucas: Because it assumes growth will happen. If the developer promises a mall but only builds a vacant lot, the city still has to pay for the roads and sewers. The risk shifts entirely from the private developer to the public taxpayer. Luna: So the public takes the risk, and the private sector gets the reward if it works. That seems heavily skewed. Lucas: It is. And over time, these TIF districts consume larger and larger portions of the municipal budget. By the time the district expires, the original purpose is long forgotten, but the revenue stream is still gone. Luna: It's like a zombie budget item. It drains resources without providing any life to the community. Lucas: That's a perfect description. And since these districts can last for thirty or forty years, they create a structural deficit that lasts for generations. Luna: How do we fix a problem that's built into the foundation of local governance? It feels like we're fighting gravity. Lucas: You start by demanding transparency. Require independent audits of every incentive deal. Make sure the public knows exactly what they're getting and what they're giving up. Luna: Sunlight is the best disinfectant. If the numbers were visible, would voters say no more often? Lucas: I think they would. Most people are pragmatic. They'll support a deal if it clearly benefits them. But they won't support a deal that secretly harms their schools. Luna: So education becomes the lever. If we tie incentives to educational outcomes, we might align the interests better. Lucas: Now you're thinking like a policymaker. Linking corporate benefits to community outcomes could be the breakthrough we need. Luna: It's a small step, but it's a start toward making the invisible visible. Lucas: And once we see the full picture, we can have a real conversation about what kind of economy we actually want to build.