Tuesday, July 7, 2009

Is there an optimal rate for municipalities to use tax increment financing?

Tax incremental financing (TIF) is the most widely used economic development tool of local governments in Wisconsin. TIF uses future property tax revenue to provide up-front assistance for real estate developments. Notable projects such as Grand Avenue Mall and the recent redevelopment of Bayshore Mall relied heavily on TIF assistance. TIF plays an integral role in our region’s economic development.

While TIF use is growing throughout the state, its benefits and the extent to which communities should use TIF are still hotly debated.

The work of the Forum’s 2008-2009 Norman N. Gill fellow, John Kovari, has resulted in a research brief Too Much or Not Enough?: A Statistical Analysis of TIF in Wisconsin, which adds to the debate and takes a closer look at TIF and its economic benefits.

Specifically, the report explores the relationship between TIF and property values at the local and regional level using economic data from all Wisconsin municipalities between 1990 and 2006. Economic, statistical modeling provides an estimate of the average impact of TIF on property values in a way that might be useful for local officials in making economic development decisions.

The report’s key findings:

* TIF Growth. TIF utilization in Wisconsin municipalities has grown considerably (400%) since 1990, especially in the southern and central areas of the state. More than one quarter of the municipalities using TIF are now over the statutory TIF value limit.

* Who Uses TIF? Medium-sized municipalities (under 50,000 residents) and those with growing property tax bases are using TIF more often than those with lower rates of property value growth, including Wisconsin’s biggest cities. Although TIF was originally intended to spur economic development in struggling areas, TIF is being used more frequently by communities that are experiencing economic growth.

* TIF Benefits. TIF has the potential to be a useful economic development tool for villages and cities in redeveloping “blighted” properties and raising property values. On average, for every $1 increase of TIF value, total property value is estimated to increase by $6.

* Differences Across Communities. Differences in TIF use exist between Wisconsin’s largest metropolitan cities and outlying municipalities. On average, outlying localities are at risk of over-utilizing TIF. Statistical modeling estimates that if the average Wisconsin suburb were to increase its TIF amount by 10% (keeping all other factors constant), then its total property value would likely decrease by 0.2%. Meanwhile, Wisconsin’s largest cities appear to under-utilize TIF: the model indicates that a 10% increase in TIF value would likely increase property values by 2%.

* Regional TIF Effects. Within Wisconsin’s metropolitan regions, greater TIF investment in suburban communities may impair property value growth in the corresponding central city (i.e. Wisconsin’s largest cities). According to the model, a 10% increase in suburban increment value would likely result in an estimated 1.1% decrease in central city property value.

Overall, using historical data to model estimated TIF impacts suggests that excessive TIF use has the potential to negatively impact the economies of individual communities as well as Wisconsin’s largest cities. In other words, excessive TIF use (especially in outlying municipalities) may potentially create a scenario in which property value growth in the state is impaired.

At the same time, TIF can be a successful tool in redeveloping areas in Wisconsin’s largest cities. The model suggests that these cities (those over 50,000 residents) have not utilized TIF at the ideal rate to maximize property values.

Local and state officials are encouraged to look at TIF in a way that asks whether their communities are using TIF “Too Much or Not Enough.”

Special thanks to the Gill family for their generous support of this project through the Norman N. Gill Fellowship.


Tim Z said...

John- Nice post. Some early thoughts:

- the headline teases me with the question of "Is there an optimal rate for..." but doesn't provide it. I smell a hedge. So - answer it - is there a good formula for cities/towns to use when trying to determine if and how many TIFs to use?

- If overuses of TIFs can be harmful for some areas, are there better mechanisms out there that they can use that will provide the benefits they hope to yield with a TIF? I know - perhaps another study.

Keep up the good work-


Steve Erbach said...

Interesting that this study included statistics through 2006...just before the real estate bubble burst.

I'd love to see an evaluation of TIF success in Wisconsin communities on a case-by-case basis. For example, comparing the success of TIF in Neenah and Menasha side-by-side. The report stresses the differences in TIF success and utilization in central cities vs. outlying cities...but what about neighboring cities that are not suburbs of some central big city? Kaukauna to Neenah is a stretch of cities that are not suburbs of each other; just a collection of small towns that each grew independently.

Anyway, the TIF debate is, indeed, very interesting. The success of them depends greatly on how well the businesses fare in the TID. If they don't do well then watch out!

Steve Erbach
Neenah, WI

Ivan said...


I definitely agree with your findings.

I looked at your policy options, and I think the most effective tool would be to change the state TIF law so that TIF projects would really be for blighted areas and to make sure appropriate TIF value limits are in place.

My question would be with a downturn in the economy and commercial vacancy rates on the rise are there any TIF districts that are in jeopardy of not getting repaid?


Anonymous said...

Interesting. Very pertinent to current economic times and city's near future budgeting and planning.