Is Tax Increment Financing a Fiscal Bane or Boon?

Abstract

Among urban planners, tax increment financing (TIF) is a popular economic development financing tool. Critics, however, claim that TIF is a fiscal bane, reducing property value for affected jurisdictions, especially school districts. TIF regulations in Iowa—on annual base values, returned excess increments, and protected debt service levy—provide the opportunity to test this argument. Using eighteen years of TIF district-level data, this study finds that TIF was most likely a fiscal boon for school districts. Given this finding, the study also provides several implications for TIF use and economic development planners in Iowa and elsewhere.

The Fiscal Effects of Tax Increment Financing on Rural School Districts: The Case of Iowa

“…Operating tax rates decrease while capital rates increase; both rate changes occur in later years of TIF use and are proportionally smaller than TIF-induced increases in tax bases. These findings are consistent with Nguyen-Hoang’s (2021) finding that while Iowa school districts’ total operating property tax levy increases slightly at best (and decreases at worst), their capital property tax levy increases significantly.…”

“…This 1.3% reduction in operating R is smaller than the 7.8% increase in V G . This finding for Year 11 and onward, together with insignificant results in pre-11 years, implies that rural school districts’ operating property tax levy is likely to benefit from TIF during the sample period, which is consistent with Nguyen-Hoang (2021). If rural school districts’ expenditures are assumed to fully reflect changes in revenue, 17 this result seems to contradict Nguyen-Hoang’s (2014) finding of a negative relationship between TIF use and schools’ operating spending.…”

“…The TIF-induced benefits for school districts’ general funds are likely small, ranging from − 0.3% to 3.6% of their total non-TIF property tax levy. Nguyen-Hoang’s (2021) simulations also show that TIF-induced benefits account for 5.8% to 11.8% of the school districts’ total non-TIF property tax levy for capital purposes.…”

“…Private and public investment as well as institutional and operational knowledge (proxied by density and age of TIF districts) can have a positive impact on property value (Bland & Overton, 2016). Nguyen-Hoang (2021) finds that TIF districts in Iowa are likely to generate fiscal benefits for affected entities, including school districts. The TIF-induced benefits for school districts’ general funds are likely small, ranging from − 0.3% to 3.6% of their total non-TIF property tax levy.…”

“…TIF is controversial because it brings both fiscal benefits and losses to school districts. Two extant studies explore TIF effects on Iowa school districts’ expenditures and property tax levy (Nguyen-Hoang, 2014, 2021). This study complements these studies with three unique contributions.…”