Struggling Neighborhoods and Property Taxes

Tax-increment financing, or TIF, may require some reconsideration, according to a report published by the Lincoln Institute of Land Policy. In the study, titled "Improving Tax Increment Financing (TIF) for Economic Development," University of Illinois at Chicago Professor David Merriman reviewed over 30 studies in TIF communities, and found that the economic development tool that has often fallen short of its promise to revitalize struggling neighborhoods through its use of property tax increases.

TIF was originally developed in the 1950s as a way to fund economic development in a designated area, or a TIF district, through "earmarking" the anticipated property tax revenue increases from increases in real estate values in the district. In theory, TIF generates new property tax revenue by spurring development that would not otherwise occur, resulting in a larger tax base. But the Lincoln Institute notes that TIF is still prone to several pitfalls.

Merriman concluded that "in most cases, TIF has not accomplished the goal of promoting economic development."

"Tax increment financing has the potential to draw investment into long-neglected places, but its success requires rigorous analysis, transparency, and oversight to ensure that the expenditure of taxpayer dollars truly benefits the public," Merriman said.

For example, TIF captures some revenues that would have been generated through normal appreciation in property values, diverting resources away from public services citywide. TIF also runs the risk of being exploited for revenue by cities. Lincoln Institute also notes that TIF can make city budgets less transparent, as it divides budgets into two separate chunks.

According to Merriman, several changes are needed in order to improve the TIF process. He proposes that TIF should be monitored at the state level, and states should give counties, school districts, and other overlying local governments the option to opt out of TIF, reducing the incentive for cities to use TIF to capture revenues.

"While further research is needed, there are clear steps cities and states can take now to improve the performance of TIF," said Lincoln Institute Senior Fellow Joan Youngman, head of the Department of Valuation and Taxation. "In some cases, policymakers might opt to develop alternative tools for financing infrastructure, affordable housing, and economic development."