Inter-City Competition for Retail Trade: Can Tax Increment Financing Generate Incremental Tax Receipts?

Tax increment financing (TIF) is an increasingly common form of economic development incentive used by local governments to encourage private sector investment. In this study, we focus attention on a specific TIF proposal in the City of Dallas. In the empirical section, we present a regression analysis of retail spending across North Texas cities. We estimate the extent to which the growth in retail sales in a given city can be explained by the growth in retail sales in surrounding cities. Next, we solve for the "critical" cannibalization rate for retail sales within the City of Dallas such that a proposed TIF would be in the City's economic interest. In particular, we find that for any cannibalization rate less than 93 percent, the City of Dallas would benefit from the proposed TIF. Next, we estimate the cannibalization rate for various geographic markets containing Dallas. We find that the cannibalization rate for a geographic market that contains the City of Dallas is 34 percent - that is, 66 percent of all new sales in that area are incremental to that area. Because the cannibalization rate for Dallas must be less than the cannibalization rate for a larger geographic market that contains Dallas, and because the estimated 34 percent cannibalization rate is less than the critical level of 93 percent, the City of Dallas should endorse the proposed TIF from the standpoint of revenue maximization. We also present a case study of a TIF used by the neighboring city of Frisco, with a special emphasis on the economic effect of that TIF on the City of Dallas.