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public subsidy. Therefore, any resources expended on TIF are a pure subsidy to developers. The pure attribution theory sees TIF as a necessary incentive to lure businesses to areas that would likely never be developed, at least for a period of several years. Any resources going to TIF are merely investments that will likely payoff handsomely in the future. My research takes a different approach to this topic. Using a proba- bility-based analysis technique called Monte Carlo simulation, I investigated the probabilities of a positive financial outcome fronl TIE By sim.ulating nlY model under various scenarios, I was able to answer the following important questions concerning TIF: 1. What is the likely effect of TIF proj- ects on local government financial conditions? 2. Are TIF projects good investments for local governm.ents (Le., are they likely to produce rates of return that justify their use)? 3. U.nder what conditions are the best financial results from TIF obtained? This study was jointly funded by the Minneapolis Planning Department and by a grant froIn CURA's l~aculty Interac- tive Research Program. With this support and with the assistance of a graduate research assistant provided through CURA, I .was able to compile an annotated bibliography of TIF resource materials for use by the Minneapolis Planning Department, collect and analyze property tax records from Hennepin County and the Minneapolis Community Development Agency, and develop a deterministic simulation model that the city of Minneapolis can use to assess the financial effects of proposed TIF projects. This article will provide a brief explanation of how TIF works in theory and practice, describe the nlethodology for the simulation Inodel used to assess the financial effects of TIF projects, discuss the results of this siInulation, and offer conclusions and policy impli- cations stemming fronl this research. What Is Tax Increment Financing? How TIP Works. 'I'he nature of tax increment financing varies from state to state. In Minnesota, a local government Cover photo: Calhoun Square, located in the Uptown neighborhood of Minneapolis, was constructed in the 1980s using tax increment financing. 2 CURA REPORTER or its designated redevelopment authority determines that an area of (or a specific property in) the community is econonlically challenged due to some factor or set of factors-although often this determination emerges out of a request by a developer for a subsidy. 'The local government or other redevelop- ment authority then goes through a process to designate a tax increment district (TID) that includes the area targeted for redevelopnlent (in Minnesota there are seven types of districts that can use TIF including rede- velopment districts and mined under- ground space districts). The assessed value of the TID is then "frozen." This means that all future revenues from properties in the TID are split between two different destinations. Future tax revenues derived from the value of the frozen assessed value continue to go to the various local governments as they did before the I'll) was designated. However, taxes derived from increases in the assessed value above that frozen value go to the authority in charge of the TID to pay for development costs (the additional revenue is the tax increment). These development costs can include physical development of propelties as well as disposition of the properties at below market prices, or write-downs. 1 Table 1 and the sidebar on page 4 briefly document the history of the use of TIF in Minnesota. The Economic Impact of TIF. Tax increment financing affects the pattern of both revenue and expenditures for local governments. On the revenue side, Tn~ mostly inlpacts the growth rates of assessed market value for parcels of property in and out of the 'TII), as well as altering the number of properties froln which the local government derives revenue for basic city services. On the expenditure side, the increase in economic wealth in the jurisdiction (reflected in the increase in assessed market value) is likely to cause increases in demand for public goods, thereby raising expenditure demands. In the theoretical model that was developed for this research project, the variables with the most effect on the finances of local government were the following: .... the pre- and postproject growth rates of properties located inside or outside the tax increment district 1 In SOIne if not most states, TID authorities can issue bonds, the principal and interest on which are repaid from the tax increment. . .... the probability that the properties in a TIF district would have been devel- oped without the use of TIF .... the elasticity of demand for expendi- tures on local government services with respect to changes in assessed valuation .... the direct operating subsidy provided by the local government to a TIP district Study Methodology The uncertainty inherent in the deci- sion to use TIF mitigates against the use of simple models to analyze financial effects. It is easy to see that if a property is likely to be developed without the use of TIl~ the revenue effect for the city is negative. The relevant policy question is, What is the amount of the revenue effect, on average? If it is likely that revenue will be greatly reduced through using TIF, cities may want to consider other means of financing projects, or perhaps not offer the projects full local government support. However, if the implementation of TIF will likely cause only a slnallloss of revenue or even revenue gains (through increases in the market value of other properties in the jurisdiction), local governments should seek all possible opportunities to use this redevelopment tool. Three factors make it difficult to predict the fiscal inlpacts of TIE First, little research had been done on the effects of TIP on economic development. 'There have been only a handful of attempts to address the question of rela- tive econolnic growth rate and the results of these studies are split, with some finding a positive effect on economic growth and others finding no effect or even a negative effect. Second, it is not possible to objectively determine the probability of future development without TIF before the decision is made to use TIE Finally, it is possible only to estirnate future growth rates of properties and the future elasticity of demand for public services. Therefore, these are sources of uncertainty for potential policy prescriptions regarding TIE In order to address these issues, I used a Monte Carlo simulation. Monte Carlo simulations were first developed in the 1940s during the Manhattan Project and are currently used in fields ranging from quantum physics to finance. The simulations allow an analyst to predict potential future values for a theoretical model by entering a large number of random inputs and then recording outputs generated from