Tax Increment Financing: An Evaluation Based on Criteria Relating To Equity, Effectiveness, and Efficiency

Municipalities throughout the nation are experiencing problems related to the migration of taxpayers and firms from the city core to outlying areas. This migration appears to occur partially because developers claim that redevelopment of areas within the city's existing core is considerably more difficult and costly than new development in outlying areas. This new development activity in outlying areas of the city perpetuates urban sprawl. Assuming this type of development activity is taking place in the same taxing jurisdiction, it also causes the city to invest in the additional infrastructure needed to facilitate the new development. Given that municipalities could possibly recoup these infrastructure costs associated with the new development through developer exactions or impact fees, it would seem that their infrastructure financing problem is solved. This may be true, but when new development occurs in outlying areas, the existing core of the city usually suffers from blight and deterioration due to the lack of redevelopment activity.

To encourage redevelopment, municipalities are attempting to make the existing core of their municipalities more attractive to developers through the improvement of existing infrastructure. To pay for these infrastructure improvements, some municipalities are using a revenue source called tax increment financing (TIF). TIF is a method where municipalities use the property taxes generated by new redevelopment activity to pay for infrastructure costs, generally through the issuance of bonds. The additional property taxes, or tax increments, of all taxing jurisdictions within an established TIF district are used to pay for the TIF bond debt service.

This study evaluates TIF as a municipal revenue source from a public policy perspective using criteria relating to equity, effectiveness, and efficiency. Specifically, a three-page survey instrument, calling for responses to 18 items, was received from 189 municipal officials throughout the United States. The municipal officials surveyed answered questions relating to their city's economic base and population level. This also provided information relating to their city's financing of economic development activities and usage of TIF. A logistic regression model is used to explain which municipalities are most likely to use TIF. This model statistically compares information collected from the municipal officials to determine which municipal demographic characteristics are associated with TIF usage. An assessment of why certain municipalities do not use TIF, a summary of activities funded with TIF revenues, and general recommendations for TIF use are included as part of the study.