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A Model of Tax Increment Financing Adoption Incentives
Author(s) -
Dye Richard F.,
Sundberg Jeffrey O.
Publication year - 1998
Publication title -
growth and change
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.657
H-Index - 55
eISSN - 1468-2257
pISSN - 0017-4815
DOI - 10.1111/1468-2257.00077
Subject(s) - equity (law) , revenue , incentive , public economics , government (linguistics) , tax revenue , finance , government revenue , business , legislation , economics , tax policy , public finance , tax reform , microeconomics , macroeconomics , political science , linguistics , philosophy , law
With tax increment financing (TIF) a municipality pays for economic development expenditures out of future increases in tax collections. If the development expenditures are the sole cause of the increased tax collections, TIF is a fair and reasonable policy. If not, TIF can distort choices and redistribute resources. This paper develops an economic model of TIF as a choice by the sponsoring municipality with an impact on an overlying government. The analytic framework isolates the impact of key variables, permits analysis of the payoff from TIF to each government, and helps inform discussions about equity. The model clearly shows that while the special nature of TIF causes it to favor projects that generate significant tax revenue, that revenue need not be truly incremental with respect to the project alone, and projects therefore need not be efficient to be financially viable to municipalities. In fact, the projects that best fit the goals of TIF legislation may be impossible to finance through TIF. Alternative government programs may be required to help towns develop areas most in need.