Fiscal Pressure, Tax Competition and the Adoption of Tax Increment Financing

Tax increment financing (TIF) has been widely adopted as an economic development tool by municipalities. This study estimates a structural probit model of municipal TIF adoption decisions using data drawn from cities in Indiana. It provides empirical evidence that factors such as fiscal pressures, tax competition, economic distress, industrial composition, availability of alternative programmes and the expected gains in property values from the use of TIF exert significant influence in a city's decision to adopt a TIF programme. After using an accurate measure of prior growth, this analysis finds no empirical evidence to support the contention that growing cities are more likely to adopt TIF.