TIF's: Do They Really Promote Growth?

Economic development incentives are a source of considerable controversy in economic development circles. Do they work in stimulating economic development? What unintended consequences do they have? Do they create more costs than benefits? Are they efficient tools for communities, regions and states to use in jumpstarting local growth? These and other questions continue to echo in city halls and state houses nationwide. As I reported yesterday, incentives are also the subject of international concern. (See February 5, 2003 story on OECD incentive study findigs.)

So what do we really know about incentives? This article reviews a 1999 study of tax increment financing (TIF) districts, which have been considered by many ED professionals to be one of the "safer" tools to use.

Tax increment financing districts (TIF's) are a popular incentive used by local government to encourage economic development. While some consider TIF's to be less costly and more efficient than outright tax abatements, some researchers find fault with TIF's from the standpoint of their actual impact on growth.

What is a TIF? It is an economic development incentive that is often used to help finance public improvements related to an economic development project. A TIF district's expenditures are financed out of “incremental” local property tax revenues generated by the project. To qualify for TIF designation, an area usually must meet a state statutory definition of “blighted” status.

Richard Dye, Lake Forest University, and David Merriman, Loyola University, Chicago, say: "in contrast to the conventional wisdom, we find evidence that cities that adopt TIF grow more slowly than those that do not. We test for and reject sample selection bias as an explanation of this finding. We argue that our empirical finding is plausible and present a theoretical argument explaining why TIF might reduce municipal growth." Dye and Meriman did a study in 1999 examining growth impacts and trade-offs within municipalities using TIF's. They examined the issue of whether TIF's promote new growth or simply shift growth within the community from one possible location to another.

Their findings surprisingly find that TIF's may trade off higher growth in the TIF district for lower growth elsewhere in the community. This is called growth-shifting. The researchers claim that their empirical evidence, used in an econometric model, suggests that TIF adoption has a real cost for municipal growth rates. Municipalities that elect to adopt TIF stimulate the growth of blighted areas at the expense of the larger town. The researchers doubt that most municipal decision-makers are aware of this tradeoff or that they would willingly sacrifice significant municipal growth to create TIF districts.

The researchers conclude: "Our results present an opportunity to ponder the issue of whether, and how much, overall municipal growth should be sacrificed to encourage the development of blighted areas."

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