Friday, May 19, 2006

Are TIF Districts Bad for Our Communities?

by Todd Kuzma

While local municipalities are embracing the use of Tax Increment Financing (TIF) to attract development, school officials have expressed caution. Now, some of those officials are citing evidence that suggests the use of TIF incentives might actually be counterproductive.

During a recent meeting with Peru Mayor Don Baker, members of the Dimmick School Board referred to a November 2000 report entitled “TIF Districts Hinder Growth.” The report is the work of the Institute of Government and Public Affairs at the University of Illinois. It provides a 3-page summary of a much longer paper published in September 1999 entitled The Effects of Tax Increment Financing on Economic Development.

The 1999 paper is the work of Richard F. Dye, professor of economics at Lake Forest College, and David F. Merriman, professor of economics at Loyola University of Chicago. The pair examined a sample of 235 municipalities in northeastern Illinois to determine the impact of TIF on growth rates.

WHAT IS A TIF? Once a municipality designates an area as a TIF district, it can use the tax revenues generated by the increase in property values for improvements within the district. For example, if property in a TIF district is generating $1000 more in property tax per year than when the district was established, that $1000 is placed into a special fund to finance public improvements and reimburse certain private development costs. In Illinois, a TIF district can last as long as 23 years.

One of the controversies in the use of TIF incentives is that municipalities in Illinois typically only receive an average of 15% of property tax revenues. School districts average 60% of revenues, and 25% goes to other local taxing bodies such as county government and park, library, and fire protection districts. So, when a TIF is established, all of the property tax revenue increases within the district are diverted from these other bodies for use by the municipality.

As a protection against abuse of the system, Illinois has a “but for” requirement for TIFs. This means that a TIF district has to show that the area “would not reasonably be anticipated to be developed without the adoption” of the TIF.

DYE AND MERRIMAN’S FINDINGS. Dye and Merriman examined the growth rates of 235 communities in northeastern Illinois both before and after the implementation of TIFs. 81 communities had at least one TIF district. 154 communities had none. Before the adoption of TIFs (1980-1984), the 81 communities that later adopted TIFs had an annual property value growth rate of 4.94%. The other communities had a 4.47% growth rate. After the adoption of TIFs (1992-1995), those communities with TIFs had a growth rate of 4.96% or virtually the same as before. However, those communities without TIFs had a growth rate of 7.38%, a significant increase from before.

Dye and Merriman were concerned that the figures might be skewed by various sample selection factors such as location, population, prior growth, and mean income. So, much of their work consisted of a statistical analysis of the data to remove these variables from the results. They found that the negative association between TIF adoption and growth rate was smaller than the raw data suggested, but the effect was still there. The implementation of TIF districts caused a slower rate of property value growth.

Further examination showed that property growth within the TIF districts themselves actually did increase. However, this increase was offset by slower growth outside the district. TIFs stimulate growth in blighted areas at the expense of the larger town.

IMPLICATIONS. The implications of these findings will depend upon the initial reason for implementing the TIF. Dye and Merriman cite four main reasons. First, the TIF can be used to improve a blighted area. If the area would not increase in value without the TIF, schools and other taxing bodies are not truly losing any revenue by implementation of the TIF. The main consideration in this case is the effect on non-TIF portions of the community.

Second, a municipality may wish to use TIF incentives to overcome “market failures” which inhibit development. For example, relocating a business to an area without existing development might have greater start-up costs than moving to an already developed area. Dye and Merriman found that TIFs used for this reason could cause an “inefficient relocation of development.” That is, incentives are used to move development to an area where it will not be as successful. This results in slower growth than development in another area.

Third, a municipality might use TIF incentives to compete with other communities in a bidding war for development. Unfortunately, when this bidding is done against neighboring communities, schools and other taxing bodies lose revenue for development that would happen in the area even without incentives. This use of TIFs is not consistent with the original intent of the TIF legislation.

Fourth, a municipality might use a TIF to reallocate resources from other taxing bodies. Since municipalities only receive an average of 15% of total property tax revenues, establishing a TIF district allows access to the other 85% for municipal improvements. Without a TIF, the cost of establishing new roads, water, sewer, and other infrastructure would be the responsibility of the municipality and/or developer. With a TIF in place, the municipality can pay for such improvements by diverting tax revenue that would otherwise go to schools and other taxing bodies. If this is done for development that would occur even without TIF incentives, the diversion of revenue is not consistent with the intent of the TIF legislation.

Tax Increment Financing is complicated. The state statute establishing and regulating it is long and often difficult to understand. Developers and TIF consultants who are poised to gain financially from its adoption frequently guide the creation of a TIF district. So, it is often difficult for those interested in gaining a balanced understanding of the advantages and disadvantages of Tax Increment Financing to get clear information. Dye and Merriman’s paper, while often dry and academic, is one such source of information.

You can see Illinois’ TIF statute here.
A .pdf of Dye and Merriman’s article “TIF Districts Hinder Growth” can be found here.
A .pdf of Dye and Merriman’s paper The Effects of Tax Increment Financing on Economic Development can be found here.


Anonymous Anonymous said...

Nice job on your article on TIF's. Although it is a difficult concept to embrace, you put it very succintly and I hope there are lots of readers out there who will take the information to heart. Too bad this can't be sent to municipal leaders before it's too late.

10:15 AM  

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