NCPA - National Center for Policy Analysis

The Case against Tax-Increment Financing

May 23, 2011

Tax-increment financing (TIF) works by allowing cities to use the property, sales and other taxes collected from new developments -- taxes that would otherwise go to schools, libraries, fire departments and other urban services -- to subsidize those same developments.  While cities often claim that TIF is "free money" because it represents the taxes collected from developments that might not have taken place without the subsidy, there is plenty of evidence that this is not true, says Randal O'Toole, a senior fellow with the Cato Institute.

  • First, several studies have found that the developments subsidized by TIF would have happened anyway in the same urban area, though not necessarily the same location.
  • Second, new developments impose costs on schools, fire departments and other urban services, so other taxpayers must either pay more to cover those costs or accept a lower level of services as services are spread to developments that are not paying for them.

Moreover, rather than promoting economic development, many if not most TIF subsidies are used for entirely different purposes, says O'Toole.

  • First, many states give cities enormous discretion for how they use TIF funds, turning TIF into a way for cities to capture taxes that would otherwise go to rival tax entities such as school or library districts.
  • Second, no matter how well-intentioned, city officials will always be tempted to use TIF as a vehicle for crony capitalism, providing subsidies to developers who in turn provide campaign funds to politicians.

Source: Randal O'Toole, "Crony Capitalism and Social Engineering: The Case against Tax-Increment Financing," Cato Institute, May 18, 2011.

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