J.

OF PUBLIC BUDGETING, ACCOUNTING & FINANCIAL MANAGEMENT, 16(3), 394-412 FALL 2004

A COMPREHENSIVE APPROACH TO THE ASSESSMENT OF

TAX INCREMENT FINANCING (TIF) PROJECTS
Thomas G. Johnson and James K. Scott*

ABSTRACT. One of the most popular economic development incentive tools

used today is Tax Increment Financing (TIF). Proponents of TIF argue that
these incentive programs have fostered new investment and increased property
tax revenues in areas that would otherwise have experienced negative growth.
Opponents argue that TIF is now used in non-blighted areason projects that
could have been completed with no special government subsidies. This paper
describes a number of perverse incentives that are inherent with TIF projects. It
then outlines a comprehensive framework for estimating the net future fiscal
impacts with and without proposed TIF projects for all affected jurisdictions.
Finally, it illustrates how the framework can be used to reach better economic
development policy decisions at both the state and local levels.

INTRODUCTION
Competition between states and communities for jobs, investment
and economic development continues to intensify. This competition has
fueled (and is fueled by) a significant increase in the use of state and
local incentive programs. One of the most popular incentive tools used
today is commonly known as Tax Increment Financing (TIF). First used
in California to foster redevelopment in blighted urban areas, TIF
programs have been adopted by forty states, and they are being
developed in rural and affluent suburban areas (Klemanski, 1989). The
use of TIF programs has long been the subject of debate and
-----------------------
* Thomas G. Johnson, Ph.D., and James K. Scott, Ph.D., are Frank E. Miller
Professor, and Associate Professor, respectively, Harry S Truman School of
Public Affairs, University of Missouri-Columbia. Dr. Johnsons research
interests include rural and regional economic development and local public
finance. Dr. Scotts research interests include rural and regional development
policy and public involvement in local governance.

Copyright 2004 by PrAcademics Press

A COMPREHENSIVE APPROACH TO THE ASSESSMENT OF TIF PROJECTS 395

controversy.1 Proponents of TIF argue that these incentive programs

have fostered new investment and increased property tax revenues in
areas that would otherwise have experienced negative growth.
Opponents argue that TIF is now used in non-blighted areason projects
that could have been completed with no special government subsidies.
They also argue that TIF projects proposed by cities reduce badly needed
future revenues for other government jurisdictions such as school
districts. Despite the controversy, political pressure to support job
creation suggests that TIF projects will continue to expand in the future.
In Missouri, recent legislation allows some TIF projects to capture
additional State revenues generated by a new development to pay for
certain public development investments. This provision, known
informally as Super TIF2 requires an assessment of the fiscal impacts
that proposed TIF projects will have on the State before each project is
approved. This same statute also requires that all local TIF districts
formally assess the fiscal impacts of proposed TIF projects for all
government jurisdictions affected.
This paper proposes a comprehensive approach to the mandated TIF
impact assessments. The paper is organized in four brief sections. First,
it defines TIF programs, and describes the features that are unique in
Missouri statutes. Second, it describes a number of perverse incentives
that TIF programs create for their proponents and administrators. Third,
it develops and recommends a comprehensive assessment framework
with which program administrators can assess the impact of particular
TIF programs. Fourth, it illustrates how the framework can lead to better
economic development policy decisions at both the state and local levels.

HOW THE TIF PROGRAM WORKS IN MISSOURI

The objective of Tax Increment Financing is to harness the power of
public investments to increase the future tax base of declining localities.
Future increases in tax revenues are captured and earmarked for the
repayment of investments in public infrastructure and economic
development incentives. TIF allows municipal governments to sell
bonds and to make public investments before the tax base comes on-line.
TIF programs are typically applied to blighted or economically stagnant
areas.
The TIF device is designed to distribute the costs of the public
investments across the various taxing authorities in proportion to the
396 JOHNSON & SCOTT

benefits (tax base increases) they realize. Once a redevelopment area is

identified, the existing property tax base is identified and the tax
revenues generated by all taxing jurisdictions frozen within the area. The
TIF area will typically be a part of several taxing authoritiesa
municipality, a county, a school district and, often, other special purpose
taxing authorities such as water, sewer or community college districts.
Following the creation of the TIF district, the various taxing
jurisdictions continue to collect tax revenues at the pre-TIF program
level. Taxes on increases in the tax base following the establishment of
the TIF district, the tax increment, go to the TIF authority. (The TIF
authority may give a prescribed percentage of the tax increment back to
the taxing authorities if it isnt needed). These revenues may be used for
prescribed uses such as the repayment of bonds. The TIF continues to
exist until the bonds are retired and there are no longer any TIF related
expenses. While the TIF is in force, the TIF authority may use all of the
tax increment or it may return some or all of the tax increment to the
other taxing authorities in proportion to their claim on the tax increment.
In September 1997, the Missouri Legislature approved a statewide
supplement to the local TIF programs known as Super TIF. Super TIF
makes certain state revenues available for economic development. Super
TIF funds are available to areas within enterprise zones, Federal
empowerment zones, central business districts, or urban cores. Under
the legislation, up to 50 percent of state sales taxes and income tax
revenues generated by an approved TIF project can be allocated back to
the TIF district. The participating municipalities must dedicate up to 100
percent of their property tax increments and 50 percent of new economic
activity taxes (EATS).3
The Missouri legislation also requires that an economic impact or
cost-benefit analysis be done for every project. This analysis must
examine the impact of each taxing jurisdiction within the TIF district.
The analysis, conducted by the municipality, must include an estimate of
new state sales tax and income tax revenues expected from the project.
The Missouri Department of Economic Development (DED)
administers the Super TIF program. There is a statutory program cap of
$15 million annually. Approved projects will receive state revenues for a
maximum of 15 years. The program is intended to facilitate
development programs that create new economic growth in the state. In
other words, it is intended to exclude cases where growth would have
A COMPREHENSIVE APPROACH TO THE ASSESSMENT OF TIF PROJECTS 397

happened with or without the TIF funds, projects which simply move
activity from one part of the state to another, and projects which displace
other economic growth elsewhere in the state.

A HYPOTHETICAL CASE
The nature of the Missouri TIF program can be best illustrated by
introducing a hypothetical TIF district in Missouri. In Figure 1, County
A is in a predominantly rural part of the State with $100 million in
assessed property value. School District B has $70 million in assessed
property value but $10 million of that is located in an adjoining
County. City C is the county seat, with half of the Countys assessed
valuation - $35 million. Assume that the city establishes a TIF district
that includes $10 million in assessed valuation. Assume that the city
develops a new industrial park in the TIF district and repays the bond
with revenue generated by the tax increment.
The tax increment finance program freezes tax bases within the
district at their level at the time of the imposition of the TIF. The tax
increment is the tax revenues collected on the incremental tax basenew
taxable property in the TIF, increases in the assessed value of existing

FIGURE 1
Taxing Districts Affected by TIF Project

County A

School District B

TIF

City C
COUNTY A
398 JOHNSON & SCOTT

property in the TIF, and increases in the tax rate on all property in the
TIF. This implicitly assumes that the tax base would not have increased
without the investments made possible by the TIF program. The
organizers of the TIF in this case, City C, argue that without
improvements the growth rate in property tax base inside the TIF would
be zero over the life of the project. Any growth that would have
occurred without the proposed industrial park is lost to both County A
and School District B for the duration of the TIF program.
At the local level only property tax revenues are affected by TIF. In
Missouri, cities and counties derive a relatively small portion of general
revenues from property taxes. On the other hand, school districts rely on
these taxes for a major source of funds to support public education. In
effect, the TIF authority is investing other peoples moneythat of
taxpayers in City C, County A, and especially School District B.4
Missouri law requires a local TIF authority called a TIF Commission.
However, representation from School Districts, or any other taxing
authority affected, is not required.

CONTROVERSIES AND PERVERSE INCENTIVES

TIF has always been controversial, because it is difficult to assess the
extent to which the program really generates new economic growth. Its
also very difficult to determine precisely who is paying the bill for new
infrastructure or other project investments. Under Super TIF legislation
the program will likely generate more controversy, because communities
will compete for the limited amount of state funds earmarked to support
TIF projects. This section illustrates the main sources of controversy
surrounding TIF.
The hypothetical case above reveals several incentives that, from the
perspective of the larger public, are perverse in the sense that they lead to
counter-productive behavior on the part of the jurisdiction that creates
the TIF.

Incentive to over-use TIF funds

Each tax year the TIF authority has the option of returning some of
the tax base (and thus tax revenues) to the taxing authorities, but has little
incentive to do so. They, in fact, have an incentive to spend the funds on
anything that has any positive marginal value, even though the funds
A COMPREHENSIVE APPROACH TO THE ASSESSMENT OF TIF PROJECTS 399

may have much higher marginal value (a high opportunity cost) if used
by other taxing authorities.

Incentive to Displace Expenditures from the General Fund

These tax revenues are fungible. As long as there are uncommitted
TIF funds, the TIF authorizing jurisdiction has an incentive to reduce the
expenditures from general funds in the TIF area and replace them with
TIF funds. This frees up the jurisdictions general funds so that they can
be applied to the non-TIF areas of the jurisdiction thus reducing,
somewhat, the overall tax rate (or increasing public expenditures) in the
jurisdiction and shifting some burden to other taxing authorities.
Incentive to Create TIFs in Areas With Growing Tax Base
Ironically, there is a strong financial incentive not to organize TIFs
in areas with declining tax base, but rather in areas where the tax base is
likely to grow. TIFs created in areas of declining tax base must reverse
the decline before they can generate any increment in the tax revenues.
In growing areas, on the other hand, TIF revenues can be generated
without any investment at all.

Incentive to Make TIFs As Large As Possible

There are several advantages to making TIFs as large as possible.
First, if there is a blighted or other targeted area within the jurisdiction,
the jurisdiction has an incentive to incorporate as much growing area as
possible in order to ensure the best possible tax increments. Second,
larger TIFs place more tax base under the authority of the TIF. A third,
more subtle, reason is that by creating larger TIF areas the TIF forces
other taxing authorities affected by the TIF to raise their tax rates more to
compensate for the lost revenue. Raising tax rates in other jurisdictions
leads, in turn, to increased revenues for the TIF.

Incentive to Use TIFs to Support Retail Development

In Missouri, TIF districts use local property tax revenues to pay for
project improvements. However, city and county property tax levies are
low. Increasingly, local governments rely on sales tax revenues to
finance public services. This gives cities a perverse incentive to use TIF
programs to improve their retail base. In a broader context, taxpayers
outside the jurisdictions then pay disproportionately for TIF
400 JOHNSON & SCOTT

improvements; and new retail outlets in the TIF will likely displace sales
in other jurisdictions as well.

Incentive to Limit Public Participation

When added together, these incentives encourage TIF authorities to
limit input from the jurisdictions most affected by their decisions in
this case, school districts. In addition, it is to the advantage of the TIF
authorities to limit public policy debate on the net benefits and the
distributional effects of TIF projects. Inevitably, limitations on policy
debate reduce the value of public services and block the development of
more effective public policy.

A COMPREHENSIVE ASSESSMENT FRAMEWORK

The above incentives lead to much of the suspicion that county and
school district officials have about TIF projects. However, if carefully
planned and administered, TIF projects can improve the economic
conditions in certain communities. To assure that a new TIF project is
effective, efficient and equitable, at least three strategies must be
employed.

A Comprehensive TIF Impact Modeling System Designed To

Estimate Future Effects of TIF Proposals on All Jurisdictions
Affected
This section describes a model that calculates TIF impacts for all
jurisdictions involved, including the impacts of Super TIF on state
revenues and expenditures. Lawrence and Stephenson (1995) carefully
develop a conceptual basis for monitoring a TIF project. They begin by
distinguishing the actual tax increment from the natural increment. The
natural increment is that increase that would have occurred in the
absence of the TIF project. Next they introduce the concept of ex-
increment basethat portion of the jurisdiction that is outside the TIF
district. The ex-increment base often bears the burden of higher taxes if
the TIF district captures natural increases in revenues. It is assumed that
a jurisdiction will increase the tax rate to totally replace lost revenues.
(In reality, a jurisdiction my reduce services rather than increase taxes
but the impact is roughly of the same magnitude in reduced value of
services). With these relationships in hand, Lawrence and Stephenson
A COMPREHENSIVE APPROACH TO THE ASSESSMENT OF TIF PROJECTS 401

(1995) develop expressions which calculate the incidence of costs and

benefits to any number of jurisdictions affected by the TIF project.
For this paper, the framework described by Lawrence and
Stephenson was used to generate a spreadsheet. The spreadsheet was
subsequently adapted to include retail sales taxes, and the States Super
TIF program.
Since both state and local governments rely on sales tax revenues to
fund Missouri public services, it is important to model changes in local
and regional retail sales. The need for estimating changes in retail trade
patterns in turn requires the capacity to model changes in regional
commuting patterns and labor market activity. The same theories and
techniques can be applied to developing an integrated TIF modeling
system to estimate the benefits and costs to affected jurisdictions.
Missouri has such an integrated modeling system in the Show Me model.
The Show Me model was developed by researchers at the University
of MissouriColumbia (Johnson, Scott and Ma, 1995). It is a cross-
sectional econometric model of Missouris counties. It has two
interrelated modules. The first models the local labor markets and
predicts changes in employment, unemployment, labor force, in-
commuters, out-commuters, and population. The second module
predicts changes in local government revenues (including property tax
and sales taxes) and expenditures.

Realistic Baseline Projections of Natural Changes in Property Tax

and Other Revenues, As Well As Expenditures for Affected
Jurisdictions for the Duration of the TIF Project
Next, the TIF simulator and the integrated modeling system can be
used to generate reasonable baseline projections of key fiscal conditions
for all jurisdictions involved. Disagreement over expected natural
changes in these conditions over the life of a TIF project can lead to
significant conflict between jurisdictions. Missouri TIF now assumes no
natural growth in property tax base for TIF districts. Any growth that
occurs apart from the TIF project is captured by the sponsoring authority,
and lost to other jurisdictions. These losing jurisdictions are then forced
to raise tax rates and/or cut services to compensate. The modeling
system outlined above will allow all jurisdictions the opportunity to
reach consensus around reasonable growth rate assumptions, before a
TIF proposal is brought to the table.
402 JOHNSON & SCOTT

Clear Criteria and Standard Procedures Used to Evaluate TIF

Impacts
If TIF is to meet its original policy objectives, eligible districts must
be confined to blighted areas only. Standards on what constitutes blight
can be drafted, reviewed, and adopted. Limiting TIF districts to blighted
areas will eliminate most of the perverse incentives that currently exist.
Local TIF authorities must also demonstrate by established
standards that without the TIF project, economic development in the
area would not occur. (This is described in most state TIF statutes as the
but, for provision). If a proposal does not fit this standard, there is no
good justification for public investment.
Consideration of particular TIF projects must also account for
expected displacement effects. For example, except in special
circumstances, a TIF project to support retail development would result
in no net gain in sales for the state or trade area. Often, a new retail
outlet will lead to a net reduction in employment and income for a
region.5 Other projects, such as industrial or residential developments
involve displacement of economic activities, which need to be
considered in impact assessments.
Evaluation and approval of Super TIF projects will involve several
steps. A request for Super TIF will generally come from a community
looking to secure additional financing for a development project. It will
often be presented in conjunction with a potential developer. The
proposal should include specific information on the project to be
completed. Some of the data that will be required include jobs created,
wage level, standard industrial classification (SIC) code, and investment.
These data elements will be used as inputs into the impact model.
Additional information will be used to determine the feasibility of
using Super TIF for the project. This includes data related to the
economic conditions of the community seeking financing. Indicators
such as unemployment, assessed valuation, taxable sales, and income can
be used to determine how the proposed project will potentially impact
the community. This is due to the fact that identical projects can have
significantly different impacts in different locations.
It is important that any proposal be comprehensive in defining the
project scope. Any and all complementary development needs to be
included in the project description. This includes any infrastructure
A COMPREHENSIVE APPROACH TO THE ASSESSMENT OF TIF PROJECTS 403

needed for the development. However, potential benefits from any

speculative development should be included as part of a real option
evaluation process. In this approach, future speculative benefits are
clearly presented, and probabilities are assigned to these options, before
they are included in quantitative analysis.
This information will be used to determine the impact of the project.
While the net economic impact will drive the eventual decision to
provide financing, qualitative aspects of the project will also be
considered.
Once DED receives the proposal, they will examine the project in
terms of how it fits with objectives of the Super TIF program. This
assessment is above and beyond the quantitative economic impact of the
proposed project. These are characteristics of the project that will help
determine the value of the public investment in the project.
One important aspect of the project is job creation and wage level.
These need to be compared to conditions in the community. For
example, are the salaries associated with the new jobs above the current
community average?
Another factor that needs to be examined is the project location. Is
the proposed location underdeveloped or blighted? Are there excessively
high costs for development at this location? It is critical to make some
determination of the likelihood that there will be similar development in
this location without public assistance. This evaluation needs to include
an examination of the economic conditions in surrounding areas. This
examination should look for evidence that the TIF district is or is not in a
position to experience development without the Super TIF subsidies.
Another important factor in determining the feasibility of using
Super TIF is the ability of the project to generate leveraged investment.
This leveraging can be a part of the specific project under consideration
or other investment in the community that would not occur if not for this
project. In either case, the Department will look for evidence that the
subsidy will be a catalyst for private sector investment.
The final decision on whether or not to support the project will take
into consideration several factors. The project will have to meet
objectives of the program as well as those of the Department of
Economic Development. Once the project has been determined to meet
these objectives, the assessment will turn to the net economic impact.
404 JOHNSON & SCOTT

The net economic impact to the state must be positive for the project to
be approved. This net impact will take into consideration the direct and
indirect benefits of the project as well as the costs. This will likely be the
most important criterion when making the determination.
One of the most important aspects of the project is also one of the
most difficult to evaluate. That is the probability that the project would
not occur but for the subsidy. Unfortunately, the answer to this
question is not easily attained. Only with an examination of both the
quantitative and qualitative impacts of the project can a proper decision
be made. The decision will eventually come from the DED director with
extensive input from the staff. Of course, political considerations will
often be a part of the decision making process. However, requiring a
formal and standard process for assessing the fiscal and economic effects
of the Super TIF on all affected jurisdictions will limit political
discretion, and likely lead to a higher return on public resources.

Collaboration from All Affected Jurisdictions in TIF Projects

A final condition for successful TIF projects is the involvement of all
local jurisdictions in the planning and impact assessment stages.
Representatives from each of the jurisdictions affected should be
consulted to reach consensus around initial assumptions of the cost of
proposed TIF projects, and the increments needed to service TIF debt.
This type of participation will increase the likelihood that the distribution
of TIF benefits and costs is equitable and appropriate. It will also
facilitate continuing participation in TIF decisions regarding the
distribution of excess revenues in given years, or regarding new or
expanded projects for the future. When implemented, these steps will
not only meet the new statutory requirements to assess the impacts of
local and Super TIF districts. They will also enhance public dialog on
economic development strategies and improve economic development
policy for the State of Missouri.

RESULTS AND DISCUSSION

In this final section, we use the TIF simulator described above to
demonstrate the potential outcomes of a TIF project under different
assumptions about growth with and without the project. The following
tables summarize the impacts of a TIF program on the hypothetical
community described above, which includes the city in which the TIF
A COMPREHENSIVE APPROACH TO THE ASSESSMENT OF TIF PROJECTS 405

district is located, the county, and the school district which includes the
city, parts of the county and parts of a second county.6 Table 1 shows the
assumed changes in property assessment in each of the jurisdictions.
Table 2 shows the assumed changes in retail sales and sales tax revenues.

TABLE 1
Assumed Property Assessments
Base Year Property Portion within TIF Portion within City
Tax Base District
TIF District $10,000,000 $10,000,000 $10,000,000
City $50,000,000 $10,000,000 $50,000,000
School District $80,000,000 $10,000,000 $50,000,000
County $100,000,000 $10,000,000 $50,000,000

TABLE 2
Assumed Retail Sales and Sales Tax Increments
Base Year Increment in Retail Sales Increment in
Retail Sales Retail Sales Tax Rates Retail Sales
Taxes
TIF District $50,000,000 $250,000
City $100,000,000 $400,000 2.00 $8,000
School District $125,000,000 $500,000
County $125,000,000 $500,000 2.00 $10,000
State $125,000,000 $1,000,000 3.50 $35,000

Tables 3 to 8 summarize various scenarios (sets of assumptions). In

each scenario the growth in tax base is assumed to be $4,000,000, which
generates $180,000 in new tax revenues (in most cases the tax
increment).
In the first scenario, it is assumed that the entire growth in tax
assessment is due to the TIF project investments. Without the TIF,
growth would have been zero. In this very simple case, $180,000 in
property taxes is generated. In addition, $18,000 in new sales taxes is
generated, of which $8,000 goes to the city and $10,000 goes to the
406 JOHNSON & SCOTT

TABLE 3
All Growth due to TIF Project
Distribution of Responsibility Revenues
Paid by Property Valuation Gain $180,000
Paid by Natural Increment $0
Paid by Super TIF $0
New Sales Taxes $18,000
Cost to City -$8,000
Cost to School District $0
Cost to County -$10,000
Total TIF Revenues $180,000
State Tax Increment $235,000

county. In this case the TIF district gets exactly the $180,000 generated
by the TIF investments. Since the school district does not levy a local
sales tax, it receives no new revenues. Thus, all jurisdictions, except the
school district, benefit from the TIF project.
Table 4 describes results from a very different scenario. In this case,
the growth in tax revenue would have occurred entirely without the TIF
project. Here, the incidence of costs and benefits is quite different than
in the first scenario. In this scenario, the entire TIF District revenues are
made up of costs to other jurisdictions. The city bears almost $36,000,
the school district over $112,000 and the county assumes over $19,000

TABLE 4
Natural Growth
Distribution of Responsibility Revenues
Paid by Property Valuation Gain $0
Paid by Natural Increment $12,372
Paid by Super TIF $0
New Sales Taxes $0
Cost to City $35,897
Cost to School District $112,500
Cost to County $19,231
Total TIF Revenues $180,000
State Tax Increment $235,000
A COMPREHENSIVE APPROACH TO THE ASSESSMENT OF TIF PROJECTS 407

of the costs. In addition the natural increment in assessed property (in

this case the entire $4,000,000) itself bears over $12,000 because of
higher tax rates necessary to recoup the revenues lost to the TIF District.
Table 5 illustrates an intermediate case where half the increment in
the tax bases (or $90,000) is due to the TIF investments. The other half
of the increment is generated by natural growth. In this case the TIF is
again a net cost to all of the local jurisdictions. However, since the
school district does not levy a sales tax, and relies on property taxes for
local support, it bears a disproportionate share of the costs.

TABLE 5
Moderate Natural Growth
Distribution of Responsibility Revenues
Paid by Property Valuation Gain $90,000
Paid by Natural Increment $3,213
Paid by Super TIF $0
New Sales Taxes $9,000
Cost to City $14,919
Cost to School District $58,065
Cost to County $4,804
Total TIF Revenues $180,000
State Tax Increment $235,000

In the last two scenarios we introduce the Super TIF. We assume

that the TIF District still requires the $180,000 in revenues and that the
Super TIF revenues are used to reduce the amount collected from the
local taxing authorities. This essentially redistributes the State funds to
the local authorities in proportion to their involvement in the TIF. This,
in turn allows the city, county and school district to reduce their property
tax rates. Table 6 shows that the Super TIF funds will provide almost
two-thirds of the TIF districts requirements. In this case the school
district is the largest beneficiary of the program.
Finally, in Table 7 we demonstrate the outcome if the jurisdictions
were to conduct a careful analysis and then negotiate an agreement that
assures that none of them will subsidize the TIF district. This scenario
assumes that the without TIF growth in taxes (natural tax increment) is
408 JOHNSON & SCOTT

TABLE 6
Impact of Substituting Super TIF Funds for Local TIF Funds
Distribution of Responsibility Revenues
Paid by Property Valuation Gain $85,954
Paid by Natural Increment -$834
Paid by Super TIF $117,500
New Sales Taxes $18,000
Cost to City -$12,812
Cost to School District -$15,199
Cost to County -$12,609
Total TIF Revenues $180,000
State Tax Increment $235,000

predicted and used as the basis for negotiations between the taxing
authorities regarding the portion of the tax increment to be paid to the
TIF authority. In other words the simulator calculates the exact level of
transfer necessary to leave the other tax authorities unaffected by the TIF
program. This means that in Table 7, the Taxes Paid by Natural
Increment is zero. Because of the careful analysis, no jurisdiction has
been hurt by the TIF. The City and County get the new sales tax
revenues making their cost negative, the school district breaks even, and
the TIF collects more revenues than under other assumptions.

TABLE 7
Impact of Adding Super TIF Funds and Using Impact Analysis to
Calculate TIF Benefits and Costs
Distribution of Responsibility Revenues
Paid by Property Valuation Gain $86,787
Paid by Natural Increment $0
Paid by Super TIF $117,500
New Sales Taxes $18,000
Cost to City -$8,000
Cost to School District $0
Cost to County -$10,000
Total TIF Revenues $204,287
State Tax Increment $235,000
A COMPREHENSIVE APPROACH TO THE ASSESSMENT OF TIF PROJECTS 409

CONCLUSIONS
This paper describes Missouris current TIF program and identifies
some potential problems with the program. Specifically, it describes a
number of perverse incentives that are inherent with TIF projects. In
light of these perverse incentives, it outlines a comprehensive framework
for estimating the net future fiscal impacts with and without proposed
TIF projects for all affected jurisdictions. Finally, it illustrates how the
framework can be used to reach better economic development policy
decisions at both the state and local levels. TIF is a policy tool that has
come under increasing public controversy. However, this paper
demonstrates that it is possible, using careful analysis and negotiations
involving all affected jurisdictions to target the use of TIF to the most
appropriate areas, and to devise win-win solutions for all jurisdictions
involved. Specifically, it requires careful projection of the likely
economics of the district in the absence of the TIF program, including
the tax revenues and needed public expenditures. It also requires a
careful analysis of the incidence of benefits and costs among the various
jurisdictions. On this basis, the affected jurisdictions can negotiate the
details of the program so that all jurisdictions (and thus taxpayers)
benefit. Furthermore, the proposed approach assures that the identified
incentives for abuse are all but eliminated. Projects which do not
generate sufficient net benefits will not be undertaken, because at least
one of the jurisdictions will be made worse off by the TIF. There will be
little incentive to develop TIF programs for growing areas because the
natural increment will not be available to the TIF authority. Similarly,
there would be little incentive to enlarge the TIF district or include non-
blighted areas. Finally, and possibly most importantly, it will make all
impacted jurisdictions supporters of sound projects and will reduce the
political and transactional costs of regional development programs.

ACKNOWLEDGEMENTS
The authors wish to thank George Rafael, formerly Director of
Research for the Missouri Department of Economic Development for his
assistance during research for this article. We also appreciate the helpful
comments of three referees. University of Missouri Outreach and
Extension provided general support for the project.
410 JOHNSON & SCOTT

NOTES
1. The debate over the benefits and costs associated with TIFs is part of
a much larger controversy among analysts and policy makers over
the use and abuse of various economic development incentives.
Extensive research shows that state and local incentive packages are
largely ineffectual in attracting new business or industrial
investments (Cf. Bartik, 1991; Lynch, 1996; Johnson and Bailey,
1996). Some researchers describe the competition between states
and localities in the use of various tax incentives as a race to the
bottom (Brueckner, 1997) that severely limits governments
capacity to deliver necessary public services. For purposes of this
paper, the authors choose not to engage this controversy, in order to
respond to a more immediate and particular policy research request.
2. See Missouri State Statute 99.845.
3. Economic activity taxes are the total additional revenue from taxes
which are imposed by a municipality and other taxing districts, and
which are generated by economic activities within a redevelopment
area over the amount of such taxes generated by economic activities
within such redevelopment area in the calendar year prior to the
adoption of the ordinance designating such a redevelopment area,
while tax increment financing remains in effect, but excluding
personal property taxes, taxes imposed on sales or charges for
sleeping rooms paid by transient guests of hotels and motels,
licenses, fees or special assessments.
4. Many Missouri school districts find it very difficult to gain voter
approval for a property tax increase. Typically, a reduction in
anticipated growth in the property tax base in a particular area will
lead to a reduction in services to constituents throughout the District.
Not all states require school districts to subsidize TIFs to this extent.
For example, the State of Minnesota commits additional State funds
to compensate Districts affected by TIFs for the life of the project
(State of Minnesota, Office of Legislative Auditor, 1996).
5. Retail development often enhances the quality and range of services
available to community residents, which makes the area a more
attractive place to live. However, for these purposes, it generates no
net fiscal or economic benefits for the State or region.
A COMPREHENSIVE APPROACH TO THE ASSESSMENT OF TIF PROJECTS 411

6. This analysis is presented for illustrative purposes. It does not

include other local jurisdictions, such as library, ambulance or other
special districts which are also affected by TIF projects. The method
described here can be readily extended to assess these effects.

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