News Release

Fiscal incentives for urban regeneration – will they work in the UK?

Peer-Reviewed Publication

Economic & Social Research Council

There is growing interest from the UK government in the potential of ‘tax-based measures’ to encourage urban regeneration – not just standard tax breaks but also ‘hypothecated’ taxes (those raised for clearly specified local purposes) and voluntary forms of self-taxation in so-called ‘business improvement districts’. New ESRC-funded research is making a valuable contribution to that emerging policy agenda by studying recent experiences with such measures in Ireland and the United States.

The research confirms that tax breaks and other incentives for developers, investors and residents could play a significant role in improving the physical and economic environment in our cities. But it also warns that any tax-based measure needs to operate within a clear planning and regulatory framework. And it is essential to recognise the different ways such measures may operate under different national and local taxation regimes, as well as the relative performance of national and local economies and the parallel performance of local property markets.

The research – by academics at the University of Dundee and the University of Ulster –assesses the effectiveness and outcomes of tax-based approaches to urban regeneration in three cities – Dublin, Chicago and Los Angeles:

The Irish experience

In Dublin, fiscal incentives to encourage residential and commercial development were put in place in designated geographical areas in the 1980s. The move was influenced by the need to respond to the long-term consequences of urban decline and the reality of limited financial resources in the public sector, but the measures actually took off as the national economy boomed.

The research shows that:

  • The tax measures lifted confidence in the Dublin property market, stimulated property-based urban renewal, focused developer and investor interest in locations and encouraged new markets that otherwise would not have existed. The International Financial Services Centre in Customs House Docks is a prime example.
  • It is particularly important to encourage real ‘pioneers’ in the urban regeneration process – in this case, the end-users and notably the owner-occupiers who bought into the inner city in the early 1990s and kick-started demand.
  • As initially applied within Dublin, the tax incentives were relatively blunt, and there is evidence of some dead weight and displacement – projects that would have gone ahead anyway enjoying tax breaks or prior projects being displaced. But the incentives were capable of delivering major development and levering investment in the property sector with economic gain and employment spin-offs.

The American experience with TIFs and BIDs

‘Tax incremental financing’ (TIF) is a hypothecated tax that uses the increased revenues to stimulate ‘redevelopment-from-within’ through improvements in a designated area. In Chicago, there are 105 TIFs and there are some important lessons from this approach. The research suggests that:

  • The location for a TIF is very important and the availability of the tax provisions is unlikely to work in areas where there is a lack of market pressure. There has to be certainty about what revenues can be used for, such as rehabilitation of old buildings, write down, public infrastructure improvement, environmental clean-up, training and other activities. TIFs work well within a clear planning framework.
  • There is generally little evidence of dead weight: without TIF, some good projects may have gone ahead but the scope of the development and scale of impact would not have been as comprehensive.
  • TIF is widely acknowledged as being a prime reason for substantial investment coming back into the city, though displacement effects can occur as in Chicago's North Loop.

Business Improvement Districts (BIDs) represent a local self-help initiative and funding mechanism for coalitions of business interests and property owners. BIDs are a voluntary form of self-taxation for hypothecated purposes, usually the physical improvement of the defined locality based on the principle of stake-holding in the local community.

The intention is to enhance the residential, commercial or retailing values of the BID area. Supplementary functions include security and police enforcement, maintenance and sanitation improvements and facilities, provision of promotions and special events. The BID revenue can also be used to provide capital improvements, such as street furniture, landscaping and street signing.

The research indicates that BIDs have the potential to achieve a range of regeneration outcomes. But they also involve problems: they are time-consuming to set up, operate and renew –much time and effort must be spent on effective communication to stakeholders in the BID area to avoid wasteful conflict between groups.

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