September 14, 2018
By Paul Bubny
Tax Increment Financing (TIF) may not be all it’s cracked up to be when it comes to revitalizing neighborhoods, according to a study from the Lincoln Institute of Land Policy. Reviewing 30 case studies of TIF programs going back over several decades, David Merriman with the University of Illinois at Chicago concludes that “in most cases, TIF has not accomplished the goal of promoting economic development.”
First implemented in the 1950s, TIF was a method of funding economic development in a designated area—i.e. a TIF district—by earmarking increases in future property tax revenues as real estate values in the TIF district rise. The tax revenue can be used for public infrastructure, or to compensate private developers for their investments.
In theory, TIF generates new property tax revenue by spurring development that would not happen otherwise, resulting in a larger tax base. It can serve as the basis for a mutual commitment between local government and developers, and it can facilitate political support for investments by stipulating that taxpayers outside the TIF district will not have to contribute.
Yet, there are pitfalls. TIF often captures some revenues that would have been generated through normal appreciation in property values, even without the TIF-funded investment. This over-capture of revenue diverts resources away from public services citywide. Municipalities also sometimes exploit TIF to obtain revenues that would otherwise go to overlying government entities such as school districts.
In addition, TIF can make cities’ financial decisions less transparent by separating them from the normal budget process. In Chicago, for instance, nearly a third of the city’s property taxes, or about $660 million per year, goes to TIF districts. That makes public scrutiny of these funds more difficult, and prevents elected officials from re-prioritizing the spending.
Last, but not least, TIF carries the same risks as other types of business tax incentives, which can lead to inter-city competition and short-term decision-making, according to Merriman.
Merriman recommends that states track and monitor TIF use, and allow school districts and county governments to opt out of TIF. This would reduce the incentive for cities to use TIF to capture revenues that otherwise would have gone to overlying governments.
At the same time, he recommends that the states take a close look at their own “but for” TIF requirements. Such requirements call for proof that a proposed TIF development would not occur “but for” the establishment of a TIF district, yet the rules are often open to loose interpretation.
“Tax increment financing has the potential to draw investment into long-neglected places,” says Merriman. “But its success requires rigorous analysis, transparency, and oversight to ensure that the expenditure of taxpayer dollars truly benefits the public.”
For comments, questions or concerns, please contact Paul Bubny