Skip to content

The Economic Shell Game of ‘Tax Increment Financing’

2 min readBy: Andrew Chamberlain

The Des Moines Register has been running an excellent series of articles on the growing use of “tax increment financing” (TIF) by state and local governments.

TIF has been around for decades, but it’s become ubiquitous in recent years. Here’s how it works: Lawmakers issue debt, using the proceeds to subsidize economic development—including malls, parking garages and street landscaping—on the theory that development projects will increase future property taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. revenue by enough to repay the debt with a profit.

Sounds like a great deal, right? The only problem is that state and local governments almost never keep score on the costs and benefits of projects, which often end up a net loser for taxpayers.

One of the better Register pieces asks the question, “Do TIFs really attract new businesses?” Not surprisingly, they answer in the negative:

While tax increment financing has helped booming suburban cities expand their tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. s and pay for costly infrastructure needed to lure businesses, there is little evidence to suggest such local incentives actually influence where new businesses locate, researchers say.

“In fact there is a growing amount of research indicating the vast majority of businesses would have located in the winning jurisdiction nonetheless,” an April 2006 study released by Iowa State University found.

Peter Fisher and Alan Peters, two University of Iowa researchers, studied special incentives given in economic development zones in 13 states. The two found little evidence that economic development grants or tax incentives did much good.

“We figured, if they were working, the zones given the larger incentives would do better than those given trivial ones. That wasn’t the case,” Fisher said. “Often growth in the area was determined by other factors: crime, access to rail, the labor market. Even when they were successful, it didn’t mean residents in the zone were helped. That’s because the employers would draw workers from the whole metropolitan area.”

Almost 6 percent of Iowa’s total property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. base is being used to finance TIF-related projects. In spite of that substantial investment, little empirical evidence exists suggesting the financial tool alone is fueling population growth.

Read the full piece here.