Study: TIF Doesn’t Work, Hurts Neighborhoods, and Is Unfair

March 26, 2003

Chicago, IL – One of the most popular economic development tools in municipalities across the country, tax increment financing (TIF), often does not work, according to a new study.

The study concludes tax increment financing often fails to produce a net increase in economic activity--generally among the primary goals aimed at by TIF planners. Moreover, TIF tends to favor large businesses over small ones, often excludes local businesses and residents from the planning process, and operates in a manner that contradicts conventional notions of justice and fairness.

The new study, The Right Tool for the Job? An Analysis of Tax Increment Financing, is the culmination of a four-year research effort by the Developing Neighborhood Alternatives (DNA) project--a collaborative undertaking of The Heartland Institute, Center for Economic Policy Analysis, Jewish Council on Urban Affairs, and Statewide Housing Action Coalition. All four are nonprofit organizations headquartered in Chicago.

The DNA researchers studied five Chicago TIF districts and the neighborhoods surrounding them to show how a community-centered analysis can be performed. The case studies offer both qualitative data and interviews with individuals and organizations affected by the TIF districts.

The group also performed a policy analysis, examining TIF law to see what types of development TIF is best able to facilitate, and what types it can perform only with great difficulty. The work provides a basis for public understanding and discussion from the perspective of a community affected by TIF.

“Until now,” notes Arthur Lyons, president of the Center for Economic Policy Analysis (CEPA) and one of the project’s researchers, “little data has been collected and reported to the public about the impact of TIF in Chicago. This project has shown that such analysis is possible and enlightening.”

The DNA report concludes with a set of four recommendations:

  • Municipal planners should consider alternative strategies before choosing TIF.
  • The public should be provided with better information about the effects of TIF.
  • The TIF decision-making process should be made more inclusive and fair.
  • The benefits of TIF should be distributed more fairly.

The five TIF district case studies show that while TIF did tend to increase land values, other economic development goals were less likely to be met. For example:

  • TIF did not consistently increase the number of businesses; of the three commercially oriented TIF districts studied, two experienced a net loss of businesses.
  • TIF did not result in a net increase in the number of jobs. Job losses in the neighborhoods surrounding each TIF district more than offset any increase in the number of jobs inside the TIF district.
  • TIF tended to increase residential property sales, but the impact on housing prices was mixed. In some TIF districts, median housing prices increased faster than the citywide median, in other cases more slowly.

“At best, TIF dramatically increases property values and property taxes, raising and spending millions of dollars simply to shuffle around economic activity rather than create anything new,” said Jason Hardy, research associate at CEPA. “Schools, park districts, and municipalities across the state are losing millions of dollars in revenue because of TIF districts and, in the end, they will come away with very little, if any, net benefit.”

The study also found TIF unfairly takes decision-making power away from long-time community residents and small businesses, putting that authority in the hands of a much smaller group of political and economic interests often located outside the community. TIF thus creates “winners” and “losers.” The losers are small business owners, landowners who face condemnation, and low-income renters forced to leave the community to find affordable housing.

Stacey Flint, advocacy director at the Jewish Council on Urban Affairs, notes, “Existing community members have little or no access to the decision-making process in creating and managing the TIF. The process is usually mapped out by the city, developers, and other stakeholders before the community sees a proposal that leaves little room for them to contribute, alter, or amend.”

In addressing the issue of affordable housing and TIF, Judy Meima of the Statewide Housing Action Coalition commented, “From an affordable housing advocates perspective, the most striking finding related to housing funded with TIF proceeds. In both cases the housing was far more expensive than the current neighborhood market. The net result was that existing residents did not benefit from the housing produced.”

The Developing Neighborhood Alternatives project was funded in part by the Woods Fund of Chicago, the Chicago Community Trust, and the John D. and Catherine T. MacArthur Foundation.