Impact of Tax Increment Financing on School District Revenues and the Spillover Effect

Abstract

Tax Increment Financing (TIF) is used by local governments to promote economic growth using “revenue diversion” from overlapping tax jurisdictions. The controversy of TIF arises from the debate whether the captured revenue would have occurred without the incentives of TIF. The school district is of particular interest as it levies the largest tax rate on the property value of TIF districts among all taxing entities. This study examines the fiscal impact of active TIF districts and expired TIF districts on school district revenues by also incorporating potential spillover effects. Using various sets of measurements, empirical evidence in Cook County, Illinois, reveals that school districts with intensive use of TIF received less revenue and that school districts received promised windfall upon the dissolutions of TIF districts.

Keywords:

• TIF
• spillover
• school district finance

JEL Classification Codes:

• H3
• H70
• R11
• R30
• R52

Notes

1 Few states allow school districts to have the option of participating in TIF projects.

2 Note that not controlling for windfall effect will not bias TIF impact either because they are independent.

3 Intuitively, given the original intention of creating TIF is not to raise any tax rate, the TIF variables and the tax rate should be uncorrelated. In addition, Pearson’s Correlation test shows only a 0.06 correlation, and the coefficient of the interaction term between TAXRATE and the TIF dummy variable when added to the model also suggests nonsignificance with a 0.354 p-value.

4 Instead of using the absolute size of TIF districts, (SIZERATIO_it), defined as the ratio of the size of all TIF districts over the size of the school district, is used to better capture the relativity of how much area within a school district is subjected to revenue capturing and cannot be levied taxed on.

5 When the determinants of property values are properly controlled for in the specification, the assignments of TIF districts are as good as random and β₁ represents the true spillover effect.

6 Both newly designated and expired districts affect the size of non-TIF portion in the school district.

7 One might be concerned that the aggregated EAV of an area might not be evenly distributed throughout the area. For example, if houses are more clustered in the south of the area than in the north, the aggregated EAV in the south is likely to be higher than in the north. Given those time-invariant location factors are removed by the fixed effects, the concern is addressed.

8 Again, an alternative way to solve the endogeneity issue is to use the lag of the tax rate as an instrument and perform a 2SLS regression. However, the first stage of the 2SLS in this specification is slightly different from the previous specification, given the prerequisite that lag of tax rate is assumed to be uncorrelated with the error term in the EAV determinant’s function is slightly different with the prerequisite in the previous specification, where the lag of the tax rate needs to be uncorrelated with the error term in the revenue function.

9 There is also another possible outlier, Rosemont School District 78, which is essentially an offshoot of O’Hare International Airport. Regression results do not vary with the exclusion of District 78.

10 ACS also provides ACS 1-year data, which, however, only provides data for areas with populations of 20,000+, with the earliest available year being 2014.

11 The coefficient of the interaction term is neither economically nor statistically significant.

12 Cook County TIF map is available at http://cookviewer1.cookcountyil.gov/tifViewer/. When Chicago Public School District is removed as an outlier, the TIF districts of the remaining Cook County are distantly scattered.

Additional information

Notes on contributors

Chaoran He

Chaoran He is at the Southwestern University of Finance and Economics in Chengdu, China.

Kiana Yektansani

Kiana Yektansani is at the University of Illinois at Chicago.

SeyedSoroosh Azizi

SeyedSoroosh Azizi is at Purdue University Northwest, in Hammond, Indiana.