Tax Increment Financing Has Unclear Effects

By Casey Barr

Originally used in California in 1952, TIF is the most widely utilized type of economic development program in the nation, with 49 states and the District of Columbia currently authorize its use. Arizona is the only state that does not allow its use. In 2012, California limited the use of TIF after evidence emerged that it was causing budgetary problems for local governments and school districts. In Florida, voters originally defeated a constitutional amendment to adopt TIF in 1976, only to see the legislature approve the practice by statutory amendment the following year. States vary in terms of how often and for what types of projects TIF can be used. Although this financing was initially intended to enable urban renewal of blighted areas, most jurisdictions now also implement it to spur economic development more generally, and some cities adopt TIF in order to compete with neighboring cities for new business investment.

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Figure 1: Basic Tax Increment Financing Model (Source: http://grandriver.fhgov.com/About/Funding.aspx)

Despite its widespread use, TIF’s effects are unclear. Some research studies have found  larger increases in property values in cities that employ TIF compared to cities that do not. Other studies, however, find the opposite – namely, overall property values increase more slowly in the locales that use TIF. A possible explanation for this latter result is that faster growth of property values in a city’s TIF districts may be offset by slower growth in its non-TIF districts. While the effects on property values are mixed, most studies find that TIF fails to promote economic development in the sense that it does not have a meaningful impact on employment growth.

Another concern is that TIF can influence the effective tax rates in surrounding or overlying jurisdictions. If tax increment money is directed to a TIF district rather than spent on police and fire protection, schools, and the like, a tax increase is needed to maintain the level of these services. (Such tax increases are usually minimal and temporary .)

TIF has also been associated with tax competition through subsidies, abatements, and credits by local governments. Local governments offer special incentives to sway firms to locate within their jurisdiction, foregoing tax revenue and hopefully spurring job growth. This result is similar to that of research and development tax credits. Tax incentives for businesses’ R&D spending were found to have zero-sum effects nationally according to a study by economist Daniel Wilson at the San Francisco Federal Reserve Board. Increases in R&D spending in one state come at the expense of reduced R&D spending in other states. Likewise, TIF fails to improve overall economic development and merely redistributes it from one area to another. Cities that neighbor TIF districts are more likely themselves to subsequently adopt one in order to keep up with this competition according to research published in Economic Development Quarterly.

TIF has been and may remain the most widely used economic development tool available to municipalities in the United States. It can bring businesses and developers to areas they may have been overlooked otherwise. Yet the net benefit to taxpayers is yet to be seen. In 2012, California limited the use of TIF after evidence emerged that local governments experienced budgetary problems as a result of TIF, and that the policy may have contributed to inflated property values in cities like San Francisco. In Florida, tax increment financing remains a primary tool for local government redevelopment efforts. Florida’s 217 Community Redevelopment Agencies employ TIF in a manner similar to how it was used in California. Greater monitoring and evaluation of their spending behavior is needed to avoid similar problems.

About DeVoe Moore Center

The DeVoe L. Moore Center is conducts economic research and policy analysis focused on state and local policy issues and is located in the College of Social Sciences and Public Policy at Florida State University in Tallahassee. As an educational institution the DMC provides professional research experience to undergraduate and master’s students through an extensive program of internships and independent study, preparing them for a future in public policy, economic development, public sector accountability and entrepreneurship.
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