Redevelopment for Who? How TIF Redistributes Public Funds to the Wealthy

If you’re standing on any street corner in Chicago, there’s a one in three chance you’re standing in a TIF district. TIF, short for Tax Increment Financing, is a strategy to spur redevelopment in areas that are “blighted”, i.e., an area that has experienced significant economic decline. Typically, these areas have a lot of shuttered businesses, abandoned homes, and deteriorating infrastructure. In a supposed effort to revitalize these areas, the City of Chicago has been creating TIF districts since 1984. Despite their ubiquity, TIF districts as a method of urban renewal have received intense criticism, particularly over the past two decades. There is strong evidence that TIF is misused: districts are often created in areas that are far from meeting anyone’s definition of blighted. This had led critics to claim that TIF largely benefits the more affluent parts of the city while siphoning away funds from public services such as schools. Even when used in areas that appear to fit the definition of blighted, TIF funds tend to focus on projects in areas that are at risk of gentrification, potentially contributing to the displacement of lower income families and individuals. The ideal version of TIF would attract development to disinvested communities in Chicago, creating more opportunities and providing more resources for those living in those neighborhoods. While the City of Chicago has made some attempts to reform TIF based on these criticisms, reforms have not gone nearly far enough. TIF, by and large, continues to be used as a tool to redistribute public funds to the wealthiest in Chicago.

What is TIF?

TIF works by diverting revenue from property taxes to fund development projects. A TIF district is created with a baseline level of property tax revenue, i.e., the most recent amount the city collected in property taxes in the district. Then, any property tax revenue collected above that baseline is put into a TIF fund, which can be used to subsidize development projects within the district. Cities often sell bonds to fund projects upfront and use the revenue from the district to pay back the debt, since the development is expected to raise property values (and thus tax revenue) in the district. Generally, a rule of thumb for the creation of these districts is the “but for” test: the idea that development wouldn’t happen in the district without this public investment. Ideally, this means bringing investment and resources to low-income areas that could, in theory, benefit the residents of those areas. Through the nineties and aughts, the use of TIF proliferated in Chicago: 185 TIF districts have been created since 1984, generating over five billion dollars in subsidies and funding nearly 700 projects.

TIF districts currently cover about one-third of the City of Chicago. Source: Chicago Data Portal.

Does TIF work?

TIF generally promises two things: 1) that it will spur development in an area that wouldn’t have occurred otherwise, and 2) that development will end up paying for itself. The evidence on both accounts is mixed. Many studies throughout the 1990s and early 2000s found positive associations between TIF districts and increases in property values and business activity (Greenbaum and Landers, 2014), suggesting that TIF areas do see economic growth. However, many of these studies raised questions about whether the areas designated as TIF districts would have seen that growth anyways. A study in 2013 used propensity matching to compare TIF districts to similar areas and found no evidence of increased employment or private investment (Lester 2014). More recent studies have yielded similar results, especially regarding employment and business activity (Greenbaum and Landers, 2014). As for whether TIF districts pay for themselves, most studies on the subject find that the increase in property taxes does not cover the cost of investment, although this doesn’t consider any economic gains outside of increased property values (Greenbaum and Landers 2014).

Is TIF used Equitably?

Whether TIF is capturing or creating growth has been contentious in Chicago. Many critics have pointed to it being widely used in whiter and higher income areas that are far from “blighted.” A report by the Chicago Reader in 2015 found that nearly half of the money generated by TIF was being spent in the Loop and its surrounding areas, which are more economically prosperous and have a higher percentage of white residents compared to the city as a whole. Additionally, a 2016 study of Chicago’s TIF districts found a negative correlation between TIF spending and its impact on both Black and Hispanic populations (Knight 2016). Beyond TIF not being used as intended, critics point out that the increase in property taxes in those more prosperous districts would have gone to funding services and schools in Chicago. Instead of being invested in economically disadvantaged communities in need of more resources, TIF funds are being redistributed to already affluent areas, primarily benefitting wealthy residents. This trend led to protests over a development in Lincoln Yards being funded by the creation of a new TIF District (Cortland and Chicago River) in 2019 within the Lincoln Park neighborhood. With nearly 80% of its residents being white and a median household income above $115,000, Lincoln Park is among the wealthiest and whitest areas in Chicago.

Chicago has directed far more TIF spending to census tracts in the top third of the city in the proportion of white residents than in the bottom third. Sources: Chicago Data Portal and United States Census Bureau. 

Even when TIF is used in economically disadvantaged areas, critics have raised concerns that this simply leads to gentrification and the displacement of the communities living in those neighborhoods. Whether TIF contributes directly to gentrification is a challenging question to answer. While TIF districts often lead to increased property values and higher rents in the district (often a sign of gentrification), the “create or capture” question makes it hard to know whether gentrification would have happened anyways. Adding to that difficulty is the challenge of measuring gentrification in the first place. There is no universally agreed upon measure as to what counts as gentrification. Some measures of gentrification just look at increases in home prices or income, while others combine an array of indicators in addition to housing and income, including changes in community-level educational attainment, racial makeup, and occupation (Firth et al 2020). Many of the areas that have seen large investments from TIF funds, such as the South Loop, Near West Side, and Logan Square, were also defined as gentrifying according to the report. However, these areas have other advantages that might have attracted investment, such as their proximity to downtown in the case of South Loop and Near West Side and a large amount of housing stock and proximity to public transit in the case of Logan Square. In either case, regardless of whether TIF investments contributed to gentrification or whether the two are simply correlated, they are largely benefiting wealthier Chicagoans when applied to more economically distressed areas.

TIF districts have generally been placed in either predominantly white neighborhoods or neighborhoods adjacent to predominantly white areas. Sources: Chicago Data Portal and United States Census Bureau. 

Transit TIF

Perhaps in answer to some of the criticisms of TIF districts, the Chicago City Council approved a new type of TIF district in 2016: the Transit TIF. The key differences with these types of districts are 1) they are specifically designated to raise money for transit projects, and 2) they do not divert funds from Chicago Public Schools. The first Transit TIF approved was the Red-Purple Modernization Project on the city’s north side. In this case, the city once again seemed to be more interested in using TIF to advantage the white and wealthy. The district stretches through the neighborhoods of Lincoln Park, Lakeview, and Edgewater, all majority white and (in the case of the first two) far above the median household income. The city, however, is now attempting to create a TIF district to help fund an extension to the Red Line: extending the current line from its terminus on 95th street all the way to 130th. The proposed extension would benefit a largely minority population, and a review in 2019 of transit-oriented development found little evidence that investment in transit led to gentrification (Padeiro et al 2019). Indeed, a study of TIF districts in Chicago found that while subsidies for commercial development increased property value, investments in infrastructure did not (Kane and Weber 2015). This makes sense since property values generally increase with gentrification. The Red Line Extension is perhaps an example of how TIF should be done: investment for neighborhoods that need it that may increase opportunities for those living there.

Affordable Housing

Another approach for TIF to combat the displacement caused by gentrification while still subsidizing development is the creation of affordable housing. In 2011, a coalition of community organizations  wanted 20% of all TIF funding to go to affordable housing, but settled for a compromised solution in the end. The resulting ordinance covers half the costs of housing developments using TIF funds if at least half of the units are affordable housing. Since the ordinance passed, TIF funding has created 3,286 affordable housing units and roughly 9% of TIF funds have gone to projects that include affordable housing (City of Chicago 2022). Neither of those numbers are negligible, but the Department of Housing found that in 2021, Chicago had a shortage of roughly 120,000 affordable housing units. While including incentives for affordable housing in TIF subsidies might help some, it’s clear that it’s not doing enough to combat gentrification and displacement.

Future of TIF

While Chicago has made attempts to improve Tax Increment Financing, Chicago is still using these subsidies in whiter and higher-income areas instead of more diverse and low-income neighborhoods. It’s unclear whether TIF could benefit these communities, but a study done in 2019 found that TIF districts in Chicago that were in blighted and predominantly non-white areas tended to outperform other TIF districts in increasing property values (Larnell and Downey 2019) and projects like the Red Line Extensions at the very least could provide meaningful services. TIF remains controversial and at best the current fixes in place have made the use of TIF “less bad” rather than a force for good. If Chicago wants to use TIF for good, it needs to stop using it to fund developments in already wealthy areas and evaluate if it can help the communities that need more investment.

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Blackmond Larnell, T. ( 1 ), and D.C. ( 2 ) Downey. 2019. “Tax Increment Financing in Chicago: The Perplexing Relationship Between Blight, Race, and Property Values.” Economic Development Quarterly 33 (4): 316-330–330. doi:10.1177/0891242419877944.

Firth, Caislin L., Daniel Fuller, Rania Wasfi, Yan Kestens, and Meghan Winters. 2020. “Causally Speaking: Challenges in Measuring Gentrification for Population Health Research in the United States and Canada.” HEALTH & PLACE 63 (May): 102350. doi:10.1016/j.healthplace.2020.102350.

Greenbaum, Robert T., and Jim Landers. 2014. “The Tiff over Tif: A Review of the Literature Examining the Effectiveness of the Tax Increment Financing.” National Tax Journal 67 (3): 655–74. https://search-ebscohost-com.proxy.uchicago.edu/login.aspx?direct=true&db=edsjsr&AN=edsjsr.24369919&site=eds-live&scope=site.

Kane, K. ( 1 ), and R. ( 2 ) Weber. “Municipal Investment and Property Value Appreciation in Chicago’s Tax Increment Financing Districts.” Journal of Planning Education and Research 36, no. 2 (June 1, 2016): 167-181–181. doi:10.1177/0739456X15600034.

Knight, Jared F. 2016. “Is Tax Increment Financing Racist: Chicago’s Racially Disparate TIF Spending.” Iowa Law Review 101 (4): 1681–viii. https://search-ebscohost-com.proxy.uchicago.edu/login.aspx?direct=true&db=edshol&AN=edshol.hein.journals.ilr101.49&site=eds-live&scope=site.

Lester, T. William. 2014. “Does Chicago’s Tax Increment Financing (TIF) Programme Pass the ‘But-for’ Test? Job Creation and Economic Development Impacts Using Time-Series Data.” Urban Studies 51 (4): 655–74. https://search-ebscohost-com.proxy.uchicago.edu/login.aspx?direct=true&db=edsjsr&AN=edsjsr.26145744&site=eds-live&scope=site.

Padeiro, Miguel, Ana Louro, and Nuno Marques da Costa. 2019. “Transit-Oriented Development and Gentrification: A Systematic Review.” Transport Reviews 39 (6): 733–54. doi:10.1080/01441647.2019.1649316.