The Economic Shell Game of ‘Tax Increment Financing’

August 18, 2006

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 tax 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 bases 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 tax 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.

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