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

land managers may increase the value of community land and thus tax revenue by
systematically investing in open space, and the fiscal gain by appreciated property value,
in turn, will be used to cover these public investments.

This paper is organized as follows. Section 2 develops a model to help
understand how open space can potentially raise local property value, which provides a
theoretical basis for public investment in open space. More specifically, we identify the
conditions under which the public investment in open space is socially optimal in terms
of the maximized net value of developable land in communities. Section 3 introduces a
budget constraint that the expenditure in open space preservation is fully covered by
property tax increment due to amenity-induced property value appreciation, and
examines the condition under which the socially efficient level of open space can be fully
covered by increased tax revenue. Since property value may exhibit a spatial pattern
depending on the spatial distribution of open space amenities for communities or
neighborhoods of large scales, we examine the effect of spatial heterogeneity in open
space amenities on the conditions for tax increment financing in Section 4. Section 5
uses simulation to explore the effect of spatial configurations of preserved open space.
The policy-relevant formulation of the spatial aspects examined allows implications on
the optimal structure of the socially efficient, self-financed level of preserved open space.
We conclude this economic inquiry in Section 6.

II. Land Value and Optimal Open Space Preservation: A Theoretical Model
Consider residential communities or towns in a metropolitian area with varying average
distance x to the central business district (CBD). These residential communities are

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