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Tax increment financing is sold by supporters as the closest thing to a free lunch mankind ever invented. We differ.
Tax increment financing districts are downright dangerous. Anytime someone promises a free lunch, you should silently mutter an economic truism: TANSTAAFL—There ain’t no such thing as a free lunch.
Tax increment financing is a widely used economic development tool in Indiana. It allows a board to issue bonds backed by future tax revenue from new property in the district. The board can spend the funds raised from the bonds on almost anything that suits its fancy.
The theory is that this will generate private development—and tax revenue—that would not have taken place “but for” the new project. But the “but for” is impossible to prove. Any growth in the TIF district might have taken place anyway, if not in the actual TIF district then somewhere nearby.
One thing is certain: Any benefit a TIF confers could be directed to other parties in other locations.
Members of TIF bodies are typically neither bankers nor elected officials, and they are not playing with their own money. Members may be well-intentioned, but they have little background in assessing risk, and voters have difficulty holding them accountable.
Developers, various financial consultants and other interested parties stand to make a great deal of money from the deals, so the whole process has the potential for incompetence, cronyism—or worse.
TIF advocates present anecdotal evidence that the districts generate great results. Many local commentators can tell stories that are less flattering.
But we now have new analytical evidence on Indiana TIFs. A recent study by Michael Hicks and colleagues at Ball State University looked at whether Indiana counties that make more extensive use of tax-increment financing have better economic outcomes than counties that use it less.
Their conclusions: Counties that use TIF extensively have slightly higher taxable property values, but also higher tax rates and lower employment. That’s after controlling for a number of other relevant variables.
It could be that high-cost communities that have high tax rates use TIF more extensively. But it seems much more plausible that higher tax rates result because TIF lowers the tax base for traditional public services such as police and fire.
When free-lunchers promise painless ecstasy, just remember that if it is too good to be true, it almost certainly isn’t true.•
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Bohanon is a professor of economics at Ball State University. Styring is an economist and independent researcher. Both also blog at INforefront.com. Send comments to ibjedit@ibj.com.
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