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.

What's Wrong With Local Competition?

Do regional economic development initiatives have plenty of gloss but little substance? That’s a question some are asking after a recent Journal Sentinel report that our own regional initiative, the M7, is shifting its strategic focus. The M7 commissioned a study to outline a strategy for recruiting some businesses that might like to relocate to the region. The study suggests that the M7 focus on recruiting from two industrial sectors: control and instruments technology and food processing.

While the report is a useful planning tool, it brings attention to the fact that M7 has yet to draw a major corporation to the area. We should commend the 5-year-old M7 for acknowledging that reality and announcing a new tactic. But, there’s a broader question here about regional cooperation as a strategy to attract new businesses. From a public policy perspective, are these sweeping regional cooperative efforts the best option?

Informal regional cooperation and governance initiatives similar to M7 became popular in the 1990s after a cycle of more formal regional governing institutions that sprang up during the 1960s and 70s, such as Unigov in Indianapolis and the federated tier system in Miami-Dade.

Unfortunately, there has been little empirical evidence linking regional cooperation initiatives or regional governing bodies with clear economic benefits. Local competition among municipalities appears to work just as well. In fact, there is much economic research, based on the “public choice” theory of Charles Tiebout, that argues that local competition is more efficient than regional cooperation.

More recent research shows that strong, tangible incentives from individual municipalities (along with state tax breaks) draw the first-class corporations, like Boeing moving to Chicago.

Regional efforts have more success in building regional infrastructure projects, which arguably have the largest economic benefits of all kinds of public spending. Regional cooperation in building specific infrastructure projects, such as public transit or intermodal freight stations, has been found consistently to raise local property values.

All this calls into question the appropriate goal for M7: should they continue to focus on business recruitment or should our regional efforts also concentrate on funneling local investments into larger regional projects?