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Did Tax Increment Financing Help Municipalities Recover from the Great Recession?

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Joshua Drucker and Rachel Weber
May 4, 2020

As the economic impacts of the novel coronavirus are being forecast and debated, it makes sense to recall the lessons learned in the Great Recession of 2007-2009, which shattered the economies of most United States cities. Nationally, output, consumption, investment and employment dropped more during the Great Recession than for all other downturns since 1945. To combat job losses at that time, most municipalities turned to well-worn incentive strategies to recruit and retain business. Strapped for cash and with their bond ratings damaged, many used Tax Increment Financing (TIF), an economic development tool. It works by allowing municipalities to pledge future property tax revenues to pay off investments in commercial real estate and infrastructure made in the present.

How effective was this strategy at speeding economic recovery?

To find out, we studied the use of TIF in municipalities in the large metropolitan regions of Illinois, Michigan and Wisconsin (Chicago, Detroit, Grand Rapids, Madison, and Milwaukee). The three states shared similar histories before the recession (e.g., a legacy of heavy manufacturing, slow growth). All three elected Republican gubernatorial administrations prioritized economic development after the recession, Michigan and Wisconsin in 2010 and Illinois in 2014. Yet they differed in how their municipalities used business incentives, reflecting varying fiscal capacities, state-level constraints and adaptive strategies to the economic conditions brought about by the Great Recession.

We first examined the types of municipalities that chose to use TIF, and then we assessed how the use of this incentive tool impacted employment and business expansion. To conduct these investigations, we constructed measures of employment change, establishment formation and business relocation at the municipal level from the National Establishment Time Series (NETS) database. We combined these with a unique dataset of TIF districts, TIF revenue and municipalities’ socio-economic, geographic and fiscal characteristics.

Despite the economic and political similarities among these states, we found much dissimilarity in the kinds of municipalities using TIF. Cities of all types in Illinois had been using TIF for years, applying the flexible tool toward a variety of development goals, whereas Wisconsin municipalities greatly expanded their use of TIF after the recession. In Michigan and in Illinois, smaller municipalities are less likely to use TIF; these communities may lack sufficient government resources or expertise to administer the incentive program. Overall, the profile of incentive-using municipalities in Illinois is much different than those in Michigan and Wisconsin, perhaps due to the transformations of fiscal policy that took place in the latter two states, lowering state corporate income tax rates and restricting the ability of municipalities to raise property taxes in response to the economic crisis.

Michigan’s Brownfield TIFs (directed specifically at remediating and redeveloping former industrial sites) and TIFs in general in Wisconsin tend to be used by lower-income suburbs with low unemployment rates and better-educated residents. TIFs are not used more frequently by municipalities with greater employment density or manufacturing employment, however. This implies that TIFs are not implemented mainly to create and retain jobs; they are more popular with governments possessing substantial administrative and financial capacity that likely are converting formerly industrial sites into mixed-use, retail, or perhaps even residential projects.

Once we controlled for other factors likely to affect employment change in these Midwestern municipalities, we uncovered few substantial effects of TIF on post-recession employment. Yet our examination still produced markedly different accounts across the three states. TIF use is negatively related to job creation in Illinois, where it is associated with fewer expansions, relocations and to some degree less new business creation. We think that TIF already was in such widespread use in Chicago and its suburbs prior to the Great Recession that TIF provided municipalities little to no comparative advantage vis-à-vis their competitors. In contrast, TIF appears to spur retail growth in Wisconsin and Michigan and office jobs in Wisconsin.

In none of the three states does TIF use align with manufacturing jobs, a surprising discovery in Midwestern states that have managed to retain a substantial portion of their manufacturing industrial bases. Moreover, in all three states, TIF activity ties more closely to increases in the number of establishments than to employment growth, suggesting that municipalities may be using TIF to support business attraction, retention and real estate development rather than job generation per se. The amount of TIF revenue collected is not influential, possibly because property values in TIF districts declined significantly after the Great Recession.

These findings add to the body of existing empirical research that cautions against using incentives to encourage employment growth. They also allow us to qualify this advice with a greater understanding of how local economic development strategies interact with the unique employment dynamics and characteristics of municipalities in the period following the Great Recession.

Authors: Joshua Drucker and Rachel Weber, with doctoral students Andrea Craft and Geon Kim, are the authors of articles published in Growth and Change and forthcoming in Urban Affairs Review from which the material in this essay is drawn. The research was funded by the Ewing Marion Kauffman Foundation. Drucker and Weber are in the Urban Planning and Policy Department at the University of Illinois at Chicago and members of faculty advisory panel for the Government Finance Research Center at UIC.

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