Improving Tax Increment Financing (TIF) for Economic Development

Tax increment financing (TIF), a popular economic development tool across the United States, often falls short of its promise to revitalize struggling neighborhoods. TIF earmarks property tax revenue increases (or “increments”) in a designated area that are expected to result from new development and real estate appreciation generated by the TIF. Enabled by the state, city governments typically create new TIF districts and specify their goals, permitted expenditures, and terms of operation. This practice allows cities to divert revenues of overlying governments—such as counties or school districts—to fund economic development, rationalizing that diverted revenues would not exist “but for” the economic activity TIF funds. Therefore, in theory, there is no loss to overlying governments, and developers receive no subsidy unless they spur development. Indeed, TIF’s power lies in its potential to bring together private- and public sector actors to stimulate growth. Local governments should provide extensive, easily accessible information about TIF use, revenues, and expenditures, and they should document progress toward clearly articulated goals. TIF spending is fundamentally different from other government spending; districts are often not subject to ordinary democratic controls, thus meriting much more reporting and transparency. Furthermore, municipal legislators should be able to make evidence-based adjustments to TIF districts, such as limiting durations or dissolving those that do not meet the jurisdiction’s objectives. Researchers should study, document, and explain the mixed outcomes of TIF and expand knowledge about the types of TIF expenditures that best promote economic development. To date, academic studies of TIF document mixed outcomes but do not clearly identify factors that explain variations in outcomes of TIF use in various geographic areas.