Tax Increment Financing for Optimal Open Space Preservation: an Economic Inquiry

We extend the previous land manager’s model by incorporating a budget
constraint that the investment cost of open space is not greater than the collectable
portion of the increased tax revenue due to appreciated land value within a planned
financing period. Denote the property tax rate by τ. The tax revenue before preservation
is the total current property value multiplied by property tax rate, τP(a⁰)(L-a⁰); the tax
revenue after preservation is the total post-preservation property value multiplied by
property tax rate, τP(a + a⁰)(L - a⁰ - a). Within a finance period T, the present value of
aggregate increased tax revenue with the discount rate δ is

∫ [τP(a + a⁰)(L -a⁰-a) -τP(a⁰)(L - a^a)]e^-δtdt                    (8)

0

Suppose the property tax represents the total of property value-based tax revenues that
are collected by overlapping local jurisdictions such as the school district. Practically,
this total increased tax revenue may not be available for preserving open space.
Depending on the specification of the zone for tax increment financing (TIF), only a
portion of the aggregate increased tax revenue may be used for preserving open space.
Therefore, we introduce a factor w to capture the actual amount of tax increment that can
be used to finance preserving open space:

∫ [τP(a + a⁰)(L - a⁰ - a) -τP(a⁰)(L - a⁰)]we^-δtdt          (9)

0

Integrate (9)

—(1 - e^-δ )τw[P(a + a⁰)(L - a⁰ - a) - P(a⁰)(L - a⁰)]       (10)

δ

which represents the total budget for preserving an incremental amount a of open space

—(1 - e^-δ)τw[P(a + a⁰)(L - a⁰ - a) - P(a⁰)(L - a⁰)] ≥ P(a⁰)a     (11)

δ

12

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