The effect of tax increment financing on spillovers and school district revenue

Over the years the urban development financing tool known as Tax Increment Finance (TIF) has been a controversial topic as it relates to fiscal impacts on school districts. This study addresses an important question related to this issue. Does TIF affect non-TIF district property value within the school district? The question is explored by developing a theoretical model that describes the relationship between TIF and school finance and estimating an empirical model that tests the hypotheses stemming from the theoretical model. Although the results are mixed, there is some evidence that TIF does affect non-TIF district property value in the school district. The theoretical model describes the spillover effect of TIF on non-TIF district property values, permitting non-linear spillover effects on the growth rate of non-TIF district property values. Testable hypotheses that flow from this model indicate that at lower levels of TIF intensity the spillover effect is positive, but at higher levels the spillover effect is negative. This theoretical result leads to exploration of the optimal TIF intensity that maximizes the positive spillover effect. Using data from Minnesota school districts for the years 1992 through 2007, I estimate the relationship between non-TIF district property value growth for school districts and a measure of TIF intensity. Five regressions have statistically significant results supporting the theoretical model\u27s testable hypotheses. Using the coefficient estimates from estimated equations, the optimal TIF intensity was 21 percent in 1993, 15 percent in 1996, 10 percent in 2000, eight percent in 2002, and six percent in 2003. These results indicate that over time the optimal TIF intensity decreased. Consequently, TIF positive spillover effects appear to have dissipated over time. The actual average TIF intensity of the school districts over these years was generally well below the estimated optimal values and has been decreasing over time. Based on average TIF intensities, it appears that during these years most school districts in Minnesota have benefited from positive spillover effects on non-TIF district property value