Topic: Miller College of Business
January 29, 2015
Tax increment financing (TIF) is a popular but ineffective economic development tool for Hoosier communities, and it needs more stringent state oversight, says a new policy brief from Ball State University.
“Some Economic Effects of Tax Increment Financing in Indiana,” an analysis of TIF districts in Indiana counties by Ball State’s Center for Business and Economic Research (CBER), found that TIFs are associated with less employment, less taxable income and slightly higher tax rates.
TIF districts were created by the Indiana General Assembly in the 1980s and are run by redevelopment commissions. These were designed to allow local governments to redevelop downtrodden areas by making infrastructure improvements, such as new roads and sewers. TIFs provide incentives to attract businesses or help existing companies expand without tapping general funds or raising taxes.
CBER examined TIF districts in Indiana from 2003-2012, evaluating the impact of TIF districts on capital growth, employment and tax rates in counties.
“Overall, TIFs are not an effective economic development tool,” said CBER director Michael Hicks, who co-authored the study with Dagney Faulk, CBER’s research director, and Pam Quirin, a CBER graduate assistant. “In fact, we found that in the average county, creation of a TIF district led to fewer jobs in manufacturing and retailing as well as a slight drop in the number of businesses.
“This may happen because when businesses start up operations or move into the TIF districts, it shifts the number of jobs while others in the region suffer the job killing effects of higher tax rates,” he said. “TIF districts also have no discernible statistical impact on sales taxes in counties. This may be because retail activity simply shifts from non-TIF districts to TIF areas.”
Local governments appear to be shifting the tax burden from TIF to non-TIF taxpayers to maintain constant levels of public service, Faulk said.
“While we cannot conclusively report that TIFs are the cause of higher tax rates on existing taxpayers, that is a very likely effect,” she said.
Such districts have little impact on economic development other than increasing assessed value of property within the district, Hicks said.
The report found the state’s aggregate net assessed value in TIFs increased from about $10 billion in 2003 to about $19 billion in 2012. Researchers also discovered that counties are accumulating debt to manage such projects. Indiana’s TIF districts have about 20 percent of the state’s $12 billion outstanding debt in 2013.
The study also recommends the following policy considerations:
TIF usage should be reviewed by the state legislature since the average district has no meaningful impact on county economies.
County leaders considering TIFs should evaluate the consequences of shifting taxes to non-TIF regions in light of the effects of property tax caps and the need to make quality of place improvements.
TIF reporting could be improved to include criteria for evaluation of the impact on tax rates, employment and capital investment before and after the project.
The study also recommends that the state legislature should limit the use of TIFs in some counties.
“We believe in precluding the use of TIFs in counties with pension liabilities that are les than 80 percent actuarially funded, school districts that have requested transportation waivers in the last five years and in counties or municipalities lacking an adequate rainy day fund,” Hicks said. “Tax increment financing is used as a budget management tool. Its use should be limited to communities with a history of effective local fiscal policies.”