Do local governments use business tax incentives to compensate for high business property taxes?

Why do municipalities set business property taxes higher than the costs of business services when, in competitive markets, this would result in the inefficient provision of public goods? Statutory tax rates may be set artificially high to allow selective reductions for targeted firms through incentives. We examine the nearly 2500 tax codes—sub-municipal geographic areas—that host business locations in 134 municipalities in Cook County, Illinois. We explain spatial variation in tax incentives as a function of the relative competitiveness of tax codes. Our findings suggest that municipalities apply property tax abatements to offset their own relatively uncompetitive tax rates but use Tax Increment Financing (TIF) incentives to engage in vertical competition in order to capture revenue from overlapping governments.