Competing for the Next Hundred Million Americans: The Uses and Abuses of Tax Increment Financing

Abstract

Demographers predict that the US population will grow by one hundred million in 2050. Newcomers will settle in suburbia, particularly to the fast growing big cities of the south and west, cities in the resurgent heartland of the country, exurbia and ‘superstar cities’.

Communities eager to appeal to these newcomers will use tax increment financing for public improvements such as stadiums, museums, plazas and promenades. These public improvements are often integrated into signature private redevelopment projects carefully designed to achieve environmental and planning objectives by being pedestrian-friendly, high density, and mixed use, accessible not only by automobile but public transit as well.

After illustrating the beneficial use of tax increment financing, I describe six major criticisms often leveled against tax increment financing (TIF). (1) TIF helps outer suburbs lure jobs from center cities and inner suburbs; (2) TIF should be confined to seriously blighted areas and is not; (3) TIF is often used to subsidize the increased supply of retail development in markets where demand is static, achieving little except the displacement of sales from other locations; (4) cities sponsoring tax increment projects unfairly and inefficiently drain property tax revenues from other taxing entities including schools and counties; (5) There are few serious obstacles preventing local governments from sponsoring TIF projects in places that would have attracted private development anyway, or bestowing subsidies greater than necessary upon firms agreeing to locate in marginal areas; and (6) Many local governments don’t bother to analyze whether TIF projects are net tax revenue producers or assess periodically whether actual yields match initial projections.