Studies in Fiscal Federalism and State–local Finance series
Edited by Dick Netzer
2. The eﬀect of tax increment ﬁnancing on land use Richard F. Dye and David F. Merriman 1 INTRODUCTION A municipality may use tax increment ﬁnancing (TIF) to promote economic development by allowing certain areas, designated as TIF districts, to use the tax revenue generated by increases in the assessed value of properties within them for investment in the district.1 Unlike some other development incentives, TIF requires no explicit expenditure of local tax revenues. Also the opportunity to pledge incremental revenues provides access to borrowing that might otherwise not be available. In recent years TIF has become extremely popular among state and local governments around the United States. (For a general introduction to tax increment ﬁnancing, see Klacik and Nunn, 2001, or Chapman, 1998.) Despite the virtues mentioned above, TIF is controversial for a number of reasons. In most states overlapping local governments share the property tax base. In Illinois, for example, school districts, municipal governments and county governments all levy property taxes. Economic development that is favored by one type of government (for example, a municipality) will not necessarily beneﬁt others (school districts). Illinois municipal governments can establish TIF districts with little input from other units of government. Some analysts have expressed concern that TIF may allow municipalities to appropriate school district revenue for their own purposes. A second, even more fundamental, concern about TIF is that it may simply change the location of economic development rather than stimulate new growth. After state enabling legislation makes TIF...
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