Thursday, 09 April 2015 13:44

Does Tax Increment Financing Deliver Economic Development?

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How a TIF works

Tax Increment Financing began in 1952 in California and is now used throughout the United States, with the exception of Arizona. The power to designate a TIF resides with local government, though the criteria for designation vary from state to state. In general the picture is that a TIF will be declared in a rundown neighbourhood or for “conservation”.

Different administrations vary the rules and regulations about what money can be spent on within a TIF and how long the TIF designation will last. However the common and fundamental point is that property tax monies raised within the boundaries of the TIF district are divided between the municipality’s general funds and a TIF fund for that area, known as the increment.

Over the duration of the TIF, the amount of money directed into the municipality’s general funds stays the same. Increases in property tax revenues accumulate in the increment over the duration of the TIF while the amount of money being directed into the municipality’s general funds remains unchanged. In other words the TIF steers some of the taxes, and especially income that rises as property values grow, directly into the neighbourhood. This enables borrowing to fund investment in infrastructure against this future income, hence the notion that “TIF is economic development on a credit card”.

Chicago

Chicago has been prominent in use of TIFs since 1977.  A TIF designation in the city has a 23-year duration and around 160 are now in operation. This proliferation partly reflects the city’s politics where ward Aldermen expect that in return for their votes, their ward will get a share of whatever spending or initiatives the city has to offer. In our book we focused in particular on the TIF in a Mexican-American neighbourhood called Pilsen. The TIF covering just over 900 acres was designated in 1998. This TIF was proposed to stimulate the economic redevelopment of an old industrial area and redevelop the location “as a planned and cohesive industrial and employment district providing sites for a wide range of land uses, including manufacturing, distribution, assembly, warehousing and research and development uses”. There was a strong emphasis on the retention of industrial jobs.

However, in 2005, despite substantial community opposition, a group of 19th Century warehouses and residences on one of Pilsen’s major streets, were demolished to make way for Centro18, a mixed-use 400 unit housing and retail development.  Due to the recession, the project had not been constructed. The housing construction company went bankrupt and Pilsen was left with two blocks of vacant land from which, just a few years previously, fruit wholesalers had distributed watermelons. Not surprisingly, property-led regeneration on marginal sites has proved difficult in the present economic climate.

The “But for…” case

The conflicts in the Pilsen TIF are not untypical, especially of neighbourhoods where TIF has been used as a means to gentrification. Similarly, an article in the journal of the highly respected Lincoln Institute has argued that TIF districts supporting commercial development actually reduce the growth in commercial property values in non-TIF parts of the same municipality. Now, in a presentation to the World Planning Schools Congress, Bill Lester from the University of North Carolina has cast further light on the overall success of TIFs in Chicago.

Lester’s work has focused on the “But for…” argument. One of the tests in declaring a TIF is the need to show that redevelopment will not occur in the designated area “but for” a TIF. Lester is analysing data for Chicago city blocks from 1990 to 2008 using GIS. He asks whether TIFs can be shown to have increased employment and private sector real estate development more than would have been the case without them? He finds that the TIFs have had no impact on total employment across the city as a whole, and nor do they seem to have had any statistically significant effect on overall property investment. In respect of retailing, the analysis shows that there is even a slight negative relationship, though for manufacturing and services there is a slight positive effect.

Lester’s conclusion is that in Chicago TIF designation by itself has not created jobs, nor has it been a catalyst to spur private development of land and property. As indicated in the previous paragraph, the evidence is somewhat mixed but the overall impact appears to have been weak. However, the plethora of TIFs has disaggregated debate about the need for city-wide economic development goals. Lester’s work supports the view expressed in the Lincoln Institute article: policy makers should be cautious in using TIFs: a TIF does not change the opportunities for development or the skills of those doing the planning.

 

Read 597 times Last modified on Thursday, 09 April 2015 13:51

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