When Should The Incentives Stop?

Most cities use tax incentives and tax breaks as inducements to development of depressed areas, to lure businesses considering relocation, and to promote other activities that are viewed as economically or culturally positive for their communities.

Cities try to be judicious and targeted in providing the incentives, but of course there’s no certainty in predicting how economic and cultural forces will play out.  Sometimes the incentive plans work and produce the hoped-for benefits, and sometimes they don’t.

Richard recently wrote an interesting article about one aspect of tax incentives:  if they are successful and work as intended, when should they end?  The subject of the article is the Pearl Brewery area in San Antonio — which, by any measure, has been a fabulously successful use of tax incentives.  The incentives have helped to turn what was once a blighted area into a kind of tourist attraction with fine restaurants, pubs, office space, hotels and apartments.  When Kish and I have visited San Antonio we’ve gone to the Pearl area, and it’s hard to imagine it once was a depressed area.  Most cities would love to have a place like the Pearl Brewery District.

And the Pearl Brewery development has produced more tax revenue for the city:  property taxes for the area were $144,000 in 2003, when the development started, this year, tax revenues hit $6.7 million, of which $783,000 was refunded by the city under the tax rebate agreement.  It’s a classic example of how tax incentives are supposed to work.

Now, San Antonio is trying to decide whether the Pearl Brewery District is successful enough, and mature enough, to stand on its own without the incentives.  Some people in the city say that, with the Pearl having become a high-end, expensive area, the subsidies should stop and development efforts should start to focus on other parts of San Antonio.  The Pearl area developers, on the other hand, say that the tax incentives remain essential if the area is to reach even greater heights — with more jobs, more construction, and ultimately more tax revenue.

It’s a tough call — but it’s also a problem that a lot of other cities would like to have.