On the relationship between tax increment finance and property taxation

Abstract

The purpose of this research is to examine the inter-jurisdictional and dynamic relationships between the use of the tax increment finance development tool and property taxation. Tax increment finance can move large portions of the tax base off the general fund tax rolls. Further, over time there is a reallocation of revenue streams away from the non-municipal overlying jurisdictions to the municipal government, and these resources are used to subsidize development. Over time local authorities may therefore adjust tax rates in response to changes in the tax base. Using data from nearly all Wisconsin municipalities over the 1990-2003 period, we find that the use of tax increment finance leads to increases in property tax rates in non-municipal overlapping jurisdictions while reducing rates in municipal governments. The tax burden reallocation appears to be temporary; non-municipal tax rates fall and municipal tax rates increase when tax increment finance districts close. This research shows that the burden of covering the tax increment finance development subsidies results in explicit changes in tax rates across jurisdictions. These findings serve to more fully inform the decision makers of the implications of using the tax increment tool.