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A recent report from Indiana advances our understanding of how tax increment financing (TIF) affects economic development and provides an example of a high-quality tax incentive evaluation. This post is part of an occasional series examining state and local reports evaluating economic development incentive programs.

Tax increment financing and economic development

The Council of Development Finance Agencies defines TIF as:

a financing tool that allows local governments to invest in infrastructure and other improvements and pay for them by capturing the increase in property tax revenues (and in some states, other types of incremental taxes) generated by the enhancements. Several steps are required to ensure value is added and an increment can be captured. (Tax Increment Finance State-By-State Report, CDFA 2015, p.2)

In Indiana, TIF was established to help local governments address blighted areas and to spur economic development. TIF proceeds may be used to pay the principal and interest on bond issues, reimburse jurisdictions for expenditures on infrastructure improvements, or pay for expenses incurred in training employees.

Does it work in Indiana?

Yes. Research conducted by Indiana’s Legislative Services Agency (LSA) found a statistically significant impact on property values, growth in property values and the average number of jobs by establishment in TIF areas compared to non-TIF areas.

However, these impacts are rather small:

Source: 2015 Indiana Tax Incentive Evaluation, Office of Fiscal and Management Analysis, Indiana Legislative Services Agency, p. 105.

How do they know?

The report authors had access to parcel-level data and supplemented this data with their own research, which enabled them to analyze 123,000 parcels in 579 TIF areas in the state. Indiana’s Department of Local Government Finance began collecting data in 2012 (to comply with a state statute) on revenues received, expenses paid, fund balances, amount and maturity date for all outstanding obligations, amount paid on outstanding obligations, and a list of all parcels in each TIF area. The Legislative Services Agency (LSA) itself has access to property tax data beginning in 2004. LSA collected data on TIF initiation dates as a separate step for this project.

The authors developed an econometric model to isolate the effect of TIF designation on the economic development outcomes. The researchers recognized that summary statistics comparing TIF areas and non-TIF areas were inadequate to assess the impact of the TIF designation because we know that many other “socioeconomic, demographic and policy characteristics . . .typically influence growth in assessed values and employment.” The analysis controls for characteristics that influence the probability of TIF adoption in the first place and then estimates the effect of TIF on the selected outcomes. The process involved identifying comparable non-TIF parcels based on a set of fiscal, economic, structural and Census control variables.

Part of a larger tax incentive evaluation process

Indiana’s legislature passed a bill in 2014 requiring a review, analysis and evaluation of tax incentives in the state in order to determine their cost and efficacy. The general assembly intends to use this information to determine whether each tax incentive should be continued, amended or repealed.

The Office of Fiscal and Management Analysis in the Legislative Services Agency conducts these reviews according to a five-year schedule. The 2015 evaluation report analyzed 13 tax credits, deductions and exemptions plus tax increment financing. These tax incentives are not limited to economic development activities, but cover a wide range of activities and may apply to individuals, businesses or community development.

You can access a copy of the full report here: 2015 Indiana Tax Incentive Evaluation.