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Study Provides National Perspective on the Role of Tax Increment Financing

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October 12, 2011

By Ares G. Dalianis and Scott R. Metcalf

For those interested in learning more about Tax Increment Financing (TIF), an article published in the University of Chicago Law Review sheds light on the history and dramatic rise of TIF in the United States.  “The Most Popular Tool: Tax Increment Financing in the Political Economy of Local Government,” by Richard Briffault, professor at Columbia Law School, traces the development of TIF and explains why TIF has evolved into the most important economic development tool for local governments.  While the article takes a national view of TIF, many of the examples of TIF in action come from Illinois.

Laying out the basics of TIF districts, the paper observes that TIF began in California in 1952 as a method of raising the local contribution required by a federal urban renewal program.  Over the years the use of TIF has exploded, with 49 states currently utilizing TIF in one manner or another.  There is no national registry of TIF districts; however, studies suggest there are thousands of TIF districts nationwide today. 

While there are variances in each state’s approach to TIF districts, there are also common legal and economic issues.  The common legal issues include the use of public funds to encourage private development, whether TIF implicates uniformity of taxation requirements, and whether TIF districts constitute a circumvention of municipal debt limits.  The economic questions raised by TIF districts largely defy straightforward answers.  The most important question, whether the benefits of a TIF district justify the cost, is largely unanswered in the academic literature.

Perhaps most interestingly the article attempts to explain the popularity of TIF as an economic development tool.  The author identifies several characteristics of TIF districts that each contribute to the popularity of this development tool.  First, TIF  is subject to almost complete control by the local government officials that create them.  This makes TIF decision-making largely unencumbered by significant bureaucracy.  Second, the explicit reason for TIF districts is to increase the tax revenue available to local governments.  Given the other constraints on the revenues available to local government, TIF offers a method to pay now for future growth in revenues.  Third, there is natural competition between neighboring municipalities as well as between overlapping governments for resources.  TIF is a tool that can be used secure resources from these competing units of local government.   Finally, the author concludes that TIF aligns with the entrepreneurial nature of contemporary public sector economic development activities.  In particular, TIF fits well within the context of increasingly important public-private partnerships.

Richard Briffault’s article is worth reading for those interested in a more complete understanding of the history and policy of TIF.  The article can be accessed here

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