The Effects of Tax Increment Financing on Economic Development

Local governments attempt to influence business location decisions and economic development through use of the property tax. Tax increment financing (TIF) earmarks property tax revenues that result from growth in assessed valuation. The TIF revenues are to be used for economic development projects but may also be diverted for other purposes. Using data for the Chicago metropolitan area that includes information on property value growth before and after TIF adoption, we find evidence that cities that adopt TIF grow more slowly than those that do not. We test for and reject sample selection bias as an explanation of this finding.