Tax Incentives

Selective and intelligently designed tax incentives can play a major role in absorbing private sector capital for urban regeneration. Unlike the non-tax-based incentives noted (density bonus, up-zoning, development rights transfers), tax-based incentives involve an indirect exchange of funds between the public and private sectors. The tax incentives could be given to private sector developers or to individual residents of a neighborhood to foster area-based regeneration. In order for tax-based incentives to work properly, a city must have a strong and clear planning regulatory framework and tax collection system.

Traditionally many of these incentives (especially in the United States in the 1980s) started to close the gap between the cost of development in inner cities and the value of the development after construction. They have been widely used in the United Kingdom as enterprise zones, which were primarily structured as a job creation tool in distressed neighborhoods. However they have had moderate success in developing vacant and underused land. Enterprise zones allocate tax exemptions and ease some planning regulations to increase business in distressed areas. Another example of this is the urban development zone (UDZ) in South Africa, which is a tax incentive program launched by the Ministry of Finance and implemented by local municipalities. This national-level law allowed the municipalities to designate UDZs around the “areas of priority” listed in their integrated plans, or areas where “significant fiscal measures have been implemented by that municipality to support the regeneration.” Johannesburg was one of the first cities in South Africa to start using this program in 2004, and the UDZ included its inner city area. The particulars of this tax incentive are detailed in box.

Urban development zone tax incentives in Johannesburg, South Africa