The Impact of Tax Increment Financing Programs on Local Economic Development

By Man, Joyce Y. | Journal of Public Budgeting, Accounting & Financial Management, Fall 1999 | Go to article overview

The Impact of Tax Increment Financing Programs on Local Economic Development


Man, Joyce Y., Journal of Public Budgeting, Accounting & Financial Management


ABSTRACT: The Tax Increment Financing (TIF) method has achieved widespread popularity as a funding source to finance local infrastructure investments and improvements. However, little research has been conducted to evaluate the effectiveness of such programs. This study undertakes a regression analysis to examine the effects of the municipal adoption of TIF programs on local economic development. The empirical results suggest that the adoption of TIF programs has a significant positive effect on local employment.

INTRODUCTION

To revitalize deteriorated sections of many urban areas at a time of declining federal grants-in-aid for urban redevelopment, many states have adopted a variety of innovative mechanisms to help stimulate economic activities within specific geographic boundaries. One such mechanism gaining increasing popularity is the tax increment financing (TIF).

First used as a funding technique in California in 1952, TIF did not achieve widespread popularity as the primary funding source for local development until the 1970s. But by 1993, at least 44 states in the United States had adopted TIF enabling legislation (Forgey, 1993).

The tax increment financing method enables cities to use the increased property tax revenues generated by an urban development (the

tax increment) to pay for public investments and improvements. These investments and improvements may include government spending on water and sewer lines, streets, lighting, parking lots, land procurement, and necessary planning and engineering.

The increasing popularity of TIF programs has also raised several concerns on the use of TIF as an economic development tool. One such concern is over the programs' effectiveness in accomplishing their established goals of stimulating local economic development. In the literature of public policy study, economic development policies have been, and continue to be, a hotly debated subject. This debate is not limited to whether the benefits of such policies outweigh the costs but is also extended to whether those policies have any effect on economic development at all. Much of the existing works on TIF have assessed the planning, legal, political, and administrative issues associated with the implementation of TIF programs (Bingham, Hill and White, 1990; Davidson, 1979; Huddleston, 1981, 1982, 1984, and 1986; Klemanski, 1990; Lawrence and Stephenson, 1995). Anderson (1990) examined the relationship between property value growth and the establishment of TIF districts, but his study did not address the issue whether the growth is induced or caused by the creation of a TIF program. Therefore, this paper conducts a regression analysis to examine the effects of the municipal adoption of TIF programs on local employment.

AN OVERVIEW OF THE TAX INCREMENT FINANCING PROGRAM

Numerous policy issues have been raised in the analysis of TIF. Before identifying and discussing these issues, it is necessary to review briefly the designation process of a TIF program. Typically, a city first identifies and then designates a geographic area, usually a blighted or deteriorating area, as a TIF district. Most states require the establishment of "blight" or "slum" conditions as a prerequisite for the designation of an area as a TIF district. Once the district is established, a base assessed property valuation is determined. Local taxing jurisdictions that have taxing authority within the designated TIF district, such as the county, township, school district, continue to collect property taxes generated from the base assessed valuation, but taxes derived from an increase in the assessed values go into a special tax increment fund to pay for the necessary public infrastructure investments and improvements in the TIF district. The TIF process operates until all the projects are completed and all the debts incurred by the city to cover the costs of public improvements have been repaid. …

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