Research Raises Questions about TIFs

One of the issues being debated in North Carolina concerning Amendment One, a ballot measure that would authorize the issuance of public debt without a public vote, is whether tax increment financing really works as advertised.

This is an empirical question. In recent years, several academic studies have closely examined the issue. This research suggests that TIFs as typically used produce few, if any, of the benefits claimed. Indeed, in some circumstances they may actually be counterproductive.

In 2002, David Swenson and Liesl Eathington of the Iowa State University Department of Economics released a study on their state’s experience with TIFs.

Iowa had traditionally allowed TIFs only to address urban decay. In 1985, however, it liberalized its laws to allow TIFs for economic development purposes. In response, the number of TIFs in Iowa dramatically increased, with 323 municipalities using them in 1999, compared to only 126 a decade earlier. The increase in the number of TIF districts over the same 10-year period was even more staggering; in 1989 Iowa had 185 TIF districts, in 1999 2,469. In 1999, 7.1 percent of Iowa’s urban tax base was in TIF districts; in 1989, it was only 1.7 percent. The value of land and property tax collections in TIF districts also increased several fold over the 10-year period.

The Iowa State researchers also examined the relationship between the use of TIFs and desirable outcomes, such as population growth, job growth, increased retail trade, and higher housing valuation. What Swenson and Eathington found could best be described as a lack of correlation. Only changes in manufacturing jobs was correlated at even a moderate level with TIF collections, hardly a surprising finding given that TIFs were often used to lure exactly such jobs.

From this, Swenson and Eathington concluded that “on net, however, except for the increment to manufacturing jobs, there is no evidence of economy wide benefits (trade, all nonfarm jobs), fiscal benefits, or population gains.”

The authors also noted that “it seems apparent that the ease with which TIF district designation can be done in Iowa, along with the multiplicity of uses that TIF districts can be put, that the law now has become a de facto entitlement for new industry and housing development in the state with little or no evidence of overall public benefit or meaningful discussion of the mean cost of the practice.”

Ironically, North Carolinians for Jobs and Progress, the main lobbying group in support of Amendment One, uses selective portions of Swenson and Eathington’s data in arguing for TIFs.
On its website (www.amendment one.org/qanda.html), the group has a question-and-answer section that includes, “How have the bonds worked in other states?”

The answer given is “There is little, if any dispute, among those studies that there are significant increases in jobs, private investment, property values and tax revenues within the development districts.” The webpage then notes the rapid increase in property values and tax collections in Iowa TIF districts between 1989 and 1999. It makes no mention, however, of the large increase in the number of TIF districts over the 10- year-period or the authors’ conclusions.

North Carolinians for Jobs and Progress did not respond to an e-mail seeking comment about the use of the information.

Swenson and Eathington’s paper is at www.econ.iastate.edu/re search/webpapers/NDN0138.pdf.

A 1999 paper by economists Richard Dye and David Merriman used a more statistical approach to examine the impact of TIF districts in the metropolitan Chicago area. The results, like the Iowa State paper, question the value of TIFs.

Dye and Merrimans’s paper aimed at figuring out why cities choose to create TIFs or otherwise make use of economic development incentives. Is the real goal to redevelop rundown areas, address some problem the free market by itself cannot solve, to engage in bidding wars to attract new businesses or perhaps to attract money from other levels of government? To get at the question, the two researchers developed an econometric model to explain local government actions and outcomes.

One area of special interest involved communities that adopted TIFs during the late 1980s and how they fared compared to municipalities that didn’t adopt TIFs. While the researchers found both groups of towns grew at the same rate in the early 1980s before some adopted TIFs, their economic trajectories changed dramatically after TIFs were adopted. In the early 1990s, the communities with TIFs saw their assessed property values grow by 0.79 percent per year less than those communities without TIFs. The difference was even more marked in the non-TIF area of towns with TIFs compared to towns without TIFs; property values grew 1.31 percent per year faster in the towns not using tax increment financing.

Rapid property valuation increases do occur in TIF zones, though this can create something of a trap. Policymakers may perceive only what’s happening in the TIF zone and not the negative impact on the community as a whole and thus come to an invalid conclusion about TIF’s effects.

An additional question is whether TIFs cause lower growth rates or whether cities that experience, for some other reason, slow growth resort to TIFs. Dye and Merriman reject the notion that TIFs are a choice of communities where growth has otherwise stalled as their model accounted for location, fiscal structure, and community type. The use of TIFs, the authors concluded, is what was reducing growth rates.

They also note that this outcome can be explained using standard economic assumptions. The model also suggested that local officials’ decision to adopt TIFs was primarily motivated by a desire to eliminate blight.

“In summary, the evidence suggests that TIF adoption has a real cost for municipal growth rates,” concluded Dye and Merriman. “Municipalities that elect to adopt TIF stimulate the growth of blighted areas at the expense of the larger town. We doubt that most municipal decision-makers are aware of this tradeoff or that they would willingly sacrifice significant municipal growth to create TIF districts.”

The paper is available at www.igpa. uillinois.edu/publications/workingPapers /WP75-TIF.pdf.

Lowrey is an associate editor at Carolina Journal.