Why cities provide tax breaks even when they are strapped for revenue


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If a city or state officials are in need of more tax dollars to maintain their budget, why would they offer tax breaks to businesses when these breaks will reduce their annual revenue? In this lesson you will explore the tax incentives available for business relocation and/or expansion in three different cities. You will then determine what each city would like to get from businesses in return for the incentives offered.


In this lesson you will list tax incentives offered by state and local governments, determine what problem(s) the governments are trying to solve by offering incentives, and complete a cost/benefit analysis of the incentive program(s).


Most revenue raised by a city government comes from taxes on businesses and individuals. This revenue is used to provide police protection, street maintenance, and other services. As people have requested more services and tax revenues have decreased, several city governments have responded by offering tax breaks for businesses. Why would a city government with decreasing revenues and increasing demands for services respond by reducing the amount of tax revenue they collect from businesses?

Using the copy of the Tax Incentive Research page, go to one of the following web sites (or the site you are assigned by your teacher) and answer the questions on the form:

Wilmington, Delaware

A web site which that lists and explains city and state tax incentives available to business owners looking to locate or expand business in Wilmington.

Wilmington, Delaware Tax Incentives

Grand Island, Nebraska

A web site that lists and explains the city and state tax incentives available to business owners who want to locate or expand businesses in Grand Island.

Grand Island, Nebraska Tax Incentives

Chesterfield, Virginia

A web site that lists and explains tax incentives available for businesses in Chesterfield as well as businesses that want to locate there.

Chesterfield, Virginia Tax Incentives

After you have completed the tax incentive research sheet, meet with the other students who were assigned to the same city and compare your notes. As a group reach a consensus on the answers to the questions.

A hard copy print out of the
Tax Incentive Research
paper and pen



A computer interactive
Tax Incentive Research

When your group has reached a consensus you should select one person to be the reporter for your group and report your findings to the rest of the class.

After all the groups have reported, discuss as a class why all the tax incentive programs were not the same for each city.


After completing this lesson, you should understand that tax incentive programs for businesses are an attempt by local governments to correct a problem of the local economy. You should also realize that cities are looking for something in return for these tax breaks.


After all groups have shared their information, answer the following questions:

  1. What are these cities trying to accomplish with their tax incentive programs?
  2. Is each city trying to solve the same problems?
  3. Why do the incentive programs differ from one another?
  4. Do you feel it is the responsibility of the local government to correct these market failures?
  5. Do you feel that it is appropriate for governments to offer tax breaks to businesses while imposing taxes on people who don't own businesses to make up for the lost tax revenue?