Residential property tax abatements: Design features of existing programs

Overview

Property tax abatements are tax incentives that cities, towns, and counties use to encourage the development and rehabilitation of residential properties, among other purposes. These programs reduce or eliminate additional property taxes that would otherwise be owed over a specific period by a property owner that makes improvements to the property through construction or rehabilitation projects. Property owners are generally still expected to pay taxes on the value of the property before the improvements were made. Tax exemptions are a similar tool that incentivize investment by adjusting the value of the property subject to taxation. Learn more about tax abatement and tax exemption programs here.

This brief provides a high-level overview of key features of property tax abatement programs, using seven localities (Muscatine, IA; Maple Heights, OH; Hartford, CT; Independence, MO; Cleveland, OH; Dallas, TX; and Philadelphia, PA, to illustrate design choices that tax abatement programs pose. While not technically an abatement program, an eighth program in Ashville, NC, similarly incentivizes residential investment and is also included in this brief. Asheville refers to its program as a grant program, since the State of North Carolina does not allow localities to offer tax abatements. It works differently than typical abatement programs by refunding rather than abating taxes owed.

The brief presents information in eight categories:

1. Overview and outcomes
2. Abatement details
3. Income eligibility requirements
4. Area eligibility requirements
5. Housing type eligibility requirements
6. Other eligibility requirements
7. Applications details
8. Administration details

The research team compiled information for this brief in early 2023, primarily from publicly available resources. Table information might only be complete if some details were publicly available. Readers should remember that a locality generally will need authorization from the state government – in enabling acts, home rule provisions, or specific legislation – to offer abatements, and those authorizations may have constrained a local government’s design choices.

1. Overview and outcomes

The eight localities examined range from small towns like Maple Heights, OH, with a population of less than 24,000, to large cities like Philadelphia, with a population of over 1.5 million. Some localities use their program to develop affordable housing for low-income households, while other localities incentivize new construction to revitalize certain neighborhoods.

2. Abatement details

Table 2 provides information on the duration of the abatement, percentage of taxes on the additional property value that are abated (for example, a 60 percent abatement eliminates 60 percent of the additional taxes that would be owed because of improvements made), minimum improvements required to qualify for the abatement, and whether the abatement can be transferred upon sale. A 100 percent abatement is the most common among the eight localities. Some localities use declining abatements in which the amount of tax abated is reduced over time until it reaches $0. 

3. Income eligibility requirements

Table 3 summarizes program restrictions based on household income and indicates which localities prioritize their abatements for affordable housing. Dallas, Hartford, and Asheville explicitly restrict their programs to households with incomes below a certain threshold, and Cleveland uses certain incentives to target low-income households, such as easing eligibility.

4. Area eligibility requirements

Another way localities restrict eligibility for an abatement is to only allow them in certain neighborhoods. Table 4 details which localities restrict their program by area and how they do so. Only three of the eight localities’ programs limit eligibility by targeted areas. 

5. Housing types and tenure

Some localities restrict tax abatements based on housing type, such as single-family or multifamily housing, and whether units are rentals or owner-occupied. Three of the eight localities have no restrictions based on housing type or tenure.

6. Other eligibility requirements

Table 6 details the minimum improvement and construction requirements that program participants must meet for program eligibility. These requirements are typically measured as how much an improvement increases the value of a property or how much homeowners or developers spend on projects. This table also includes other miscellaneous requirements among the various programs. 

7. Application details

Table 7 summarizes how each program’s application process works. Most localities’ applications must be submitted before construction starts and by certain deadlines, while some localities have rolling applications. Most applications are extensive – applicants need to provide receipts, as well as information on the house and household members – and engage multiple government agencies, such as the department that determines the value of the project.

8. Administration details

Table 8 describes how each locality administers their program, which local agencies and entities are involved in the process, and whether the abatement is by right or requires discretionary approval. By right programs have clear objective guidelines used to determine eligibility for the abatement, while discretionary programs enable an approving body, such as a city council, to approve or disapprove applications at its discretion.