Policy Documents

Research & Commentary: Tax Increment Financing

August 31, 2012

Tax increment financing has become a popular tool for encouraging economic development in municipalities across the country. Originally designed to help blighted areas attract businesses, tax increment financing, or “TIF,” has quickly become the subsidy of choice for towns seeking to spur development. TIF allows municipalities to transfer future taxes (property, sales, etc.) collected from a new development, which are traditionally used for public services such as schools, libraries, and fire departments, to subsidize developments.

On the surface, tax increment financing appears to be a good deal for cities looking to encourage growth. TIFs look like free money because the bonds are paid by future tax revenue increases in the improved district that would presumably not exist without the subsidized dollars. Both research and common sense, however, demonstrate that this is not true. TIFs are at their core a gamble: The expected growth in property tax revenues is used to finance bonds for current spending intended to improve the district in ways designed to spur growth. Such plans have no guarantee of success.

In 2003 The Heartland Institute, in a joint project with the Center for Economic Policy Analysis, the Jewish Council on Urban Affairs, and the Statewide Housing Action Coalition, presented a case study of five Chicago-area TIF districts. The study found tax increment financing does not tend to produce a net increase in economic activity; favors large businesses over small businesses; often excludes local businesses and residents from the planning process; and operates in a manner that contradicts conventional notions of justice and fairness.

The study made four recommendations to communities seeking to spur economic growth:

  • Consider alternative strategies before choosing TIF.
  • Provide better information to the public about the effects of TIF.
  • Make TIF decision-making procedures more inclusive and fair.
  • Distribute the benefits of TIF more fairly.

The evidence shows tax increment financing is unwise for several reasons. TIF districts lack transparency, both in how they are implemented and how they utilize taxpayer dollars. Taxpayers have little say in how TIF districts are established. TIF districts lack accountability because residents cannot see on their tax bill how the redirected taxes are used.

Instead of shifting tax dollars away from public services that need them, legislators should focus on attracting development through sound, competitive tax policy.

The following articles examine tax increment financing from multiple perspectives.

The Right Tool for the Job? An Analysis of Tax Increment Financing
http://heartland.org/policy-documents/right-tool-job-analysis-tax-increment-financing-summary-0
The Developing Neighborhood Alternatives project, a joint project of The Heartland Institute with the Center for Economic Policy Analysis, the Jewish Council on Urban Affairs, and the Statewide Housing Action Coalition, presented a case study of five Chicago-area TIF districts. The study examined how these TIF districts were formed and their effects on economic development. The study concluded tax increment financing often fails to produce a net increase in economic activity, which is generally among the primary goals claimed by TIF planners. TIF also tends to favor large businesses over small ones, often excludes local businesses and residents from the planning process, and operates contrary to conventional notions of justice and fairness.

Competing for the Next Hundred Million Americans: The Uses and Abuses of Tax Increment Financing
http://heartland.org/policy-documents/competing-next-hundred-million-americans-uses-and-abuses-tax-increment-financing
George Lefcoe of the University of Southern California Law School examines both the beneficial uses of tax increment financing and the major criticisms leveled against TIF.

Crony Capitalism and Social Engineering: The Case Against Tax-Increment Financing
http://heartland.org/policy-documents/crony-capitalism-and-social-engineering-case-against-tax-increment-financing-0
Randal O'Toole of the Cato Institute identifies the many problems with tax increment financing and recommends municipalities move away from using TIF to finance new development.

Debt Is Debt: Taxpayers on Hook for TIFs Despite Rhetoric
http://heartland.org/policy-documents/debt-debt-taxpayers-hook-tifs-despite-rhetoric
This paper from the John Locke Foundation compares TIFs with certificates of participation (COPs) and general obligation bonds, illustrates the premium local governments pay to use TIFs, and provides an example of how the city of Kannapolis and Cabarrus County, North Carolina, could have accomplished the same result as a TIF through other methods.

Tax-Increment Financing: The Need for Increased Transparency and Accountability in Local Economic Development Subsidies
http://heartland.org/policy-documents/tax-increment-financing-need-increased-transparency-and-accountability-local-econom
In this paper from U.S. PIRG, the authors argue that when used properly and sparingly, TIF can promote enduring growth and stronger communities. Used improperly, however, TIF wastes taxpayer resources and channels money to politically favored special interests.

Time to Throw a TIF: Invisible, Unaccountable Taxes You've Never Heard of
http://heartland.org/policy-documents/time-throw-tif-invisible-unaccountable-taxes-youve-never-heard
The Illinois Policy Institute examines TIF in Illinois and argues for increased transparency and oversight for TIF districts.

TIF at a Turning Point: Defining Debt Down
http://heartland.org/policy-documents/tif-turning-point-defining-debt-down
Joan M. Youngman of the Lincoln Institute of Land Policy writes in State Tax Notes about the especially problematic structural elements of TIF: the dubious definition of blight, the assumption that any future property value increases are caused by TIF, and above all the ability of a TIF district to appropriate the future tax base growth of other, overlapping jurisdictions, most notably school districts.

TIF for Tat: The Folly of Tax Increment Financing
http://reason.org/blog/show/tif-for-tat-the-folly-of-tax-i
Samuel Staley of the Reason Foundation finds many faults with TIF, arguing TIF “should only be considered to fund a long-term public investment, such as roads or other transportation infrastructure that improves access in a local area” and that these investments must have tangible, measurable, and localized benefits.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartlander’s Budget and Tax News Web site at http://news.heartland.org/fiscal, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or mglans@heartland.org.