tax abatements: overview

What are tax abatements?

Communities that offer tax abatements or exemptions agree to eliminate tax increases or otherwise reduce property taxes for specific properties for a designated period of time in order to stimulate a specified public benefit. In the housing sector, real estate tax abatements or exemptions are most commonly used to provide a financial incentive for the construction or rehabilitation of rental homes. Some communities also offer some form of tax abatement or exemption to developers and buyers of homes in designated revitalization zones and/or rental property owners who participate in housing subsidy programs.

Abatements or exemptions can be structured in a variety of ways including freezing or reducing the property's taxable assessed value, reducing the rate at which a property is assessed, or reducing overall property taxes owed. Communities with budgetary constraints should properly structure any tax abatement program to leverage and maximize the desired public benefit in order to minimize the overall fiscal impact. Tax abatements can incentivize new development to spur additional revenue-producing market rate development, countering any loss in tax revenues and meeting the broader revitalization goals of a community.

What problems can tax abatement solve?

Jurisdictions can design policies to address a variety of community concerns, depending on local conditions and priorities. To encourage rehabilitation and prevent the loss of existing rental homes, for example, cities may offer to limit real estate tax increases for property owners who upgrade or remodel aging structures. Local jurisdictions also may offer tax exemptions as a community development strategy to help stimulate new construction in targeted areas that have experienced disinvestment and decline.  Some communities may benefit from offering tax abatements or exemptions to target the rehabilitation or redevelopment of foreclosed homes and/or vacant properties.

By stipulating the inclusion of affordable units as a condition for eligibility, tax abatement policies can further help to increase the supply of homes available to low- and moderate-income households.  For example, circuit breakers help to reduce the property tax burden for income- or age-eligible households.  Finally, tax abatements can be used to prevent displacement and promote participation in subsidized housing programs (by rental property owners) in areas that saw rising property tax assessments due to the housing price appreciation that accompanied the last housing boom.

Where are tax abatement policies most applicable?

Thanks to the broad range of goals that tax abatements and exemptions can help achieve, they can be successfully applied in both strong and weak markets. Tax abatements can help preserve affordability for residents in areas where housing values escalated significantly during the last housing boom, but can also be used to stimulate new construction and substantial rehabilitation in neighborhoods in need of revitalization.
Solutions in Action
Cooper Street Townhomes
Cooper Street Townhomes, Portland OR -- Photo courtesy of City of Portland, Oregon

Portland, Oregon has a range of tax abatement programs designed to promote development near public transit stations, rehabilitation of rental homes, the construction or rehabilitation of owner-occupied homes in certain "opportunity areas," and nonprofit ownership of affordable rental homes.

As of fiscal year 2006-2007, approximately 13,405 homes received one of these abatements, contributing significantly to the city's objectives for affordable homes and community development.

Click here to learn more about Portland's tax abatement programs.

In developing tax abatement policies, as with any other policy, state and local governments should carefully consider the projected fiscal impact. While abatements generally do not reduce tax revenue, they do limit the additional revenue that may be collected during the term of the abatement.

In communities with reduced housing production due to the economic downturn, tax abatements can be a tool to help stimulate economic activity.  Tax abatements can incentivize home building and home improvement projects that can lead to increased construction jobs and consumer spending, and ease the tax burden for homeowners.  They can help stabilize neighborhoods that have been hard hit by foreclosures by facilitating rehab and redevelopment.

Cooper Street TownhomesLearn more about tax abatements

6 NorthGo back to learn about other policies that can be used to capitalize on market activity

The Center for Housing Policy gratefully acknowledges the input and feedback provided for this policy section by the following reviewers: Miriam Colon, Katheryn Maccracken, Arden Sokolow, Elaine Toribio, and Lisa Yee, NYC Department of Housing Preservation and Development; Candace Stowell, City of Raleigh NC. Please note, however, that the views and opinions expressed on are those of the Center for Housing Policy alone.