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

themselves, and sold the houses for more than the total cost of buying the land and
building the houses. A recent issue of New York Times reports the St. Joe Company,
Florida’s largest private landowner holding 800,000 mostly inland acres in the scrubby,
unremarkable pine forests of the Panhandle, is pushing “new ruralism” by low-density
development and providing large amounts of open space in neighborhoods to attract city
and suburban dwellers who are weary of civilization (Goodnough 2005).

All these examples suggest the possibility that open space can be paid for by its
preservation. In fact, the public sectors of local governments have used tax increment
from assessed property value to finance local economic development, especially in the
1980s and 1990s, when there were declines in subsidies from federal and state grants
(Anderson 1990, Chapman 1998, Dye and Merriman 2006). A natural question is what is
the condition that open space preservation can be self-financed. Does there exist a
socially optimal amount of open space that can maximize the value of developable land
in a community and that can also be self-financed? Studies have found the appreciated
property (land) value induced by open space preservation exhibits a spatial pattern, which
is related to the spatial characteristics of preserved open space, such as size, shape, and
spatial location. How do these spatial factors of open space affect the possibility of using
property tax increment to finance the acquisition of open space land? What is the optimal
structure of open space that can be self-financed? In this study, we focus on economics
of self-financed preservation of open space. More specifically, we develop a model to
formally explore the possibility of using property tax increment to finance public
investments in open space. We formulate our model within a context that local residents
value and are willing to pay for open space in their neighborhood. Consequently, local

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