Improving local development incentives

Local governments across northeastern Illinois commonly provide incentives to businesses and developers to encourage development. However, without a clear strategy and purpose, incentives can have higher costs and lower public benefits than intended.

ON TO 2050 — the region’s long-range plan — recommends reforming development incentives to better achieve local and regional goals. CMAP supports incentive reform by developing recommendations that encourage equity, transparency, fiscal sustainability, and non-financial incentives.

Local development tax incentives in northeastern Illinois

Over 75 percent of the region’s municipalities use incentives. CMAP looked at how communities use four types of incentives — tax increment financing, sales tax rebates, property tax abatements, and Cook County’s incentive classifications — and how they affect revenues. The Local development tax incentives in northeastern Illinois report also recommends ways to reduce the need for incentives and improve incentive use where they prove necessary.

A guide for development incentives

CMAP created a guide to help local governments, businesses, and communities benefit from incentive use. This technical guide presents strategies and practices that are tailored specifically to northeastern Illinois. Local governments — including municipalities, counties, school districts, and other special taxing districts — should implement these recommendations to help make the region a national leader in effective incentive use.

Examples of tax incentives 

There are five tax incentives commonly used in northeastern Illinois.

  • Tax increment financing (TIF): Created to fund development projects in blighted or conservation areas. Property tax rates applied to increases in property value that occur after the district is established (the tax increment) are used to fund projects, reserving a portion of tax revenues for economic development rather than general governance.
  • Sales tax rebates: Municipalities and counties can enter into revenue-sharing agreements with businesses and developers to rebate a portion of sales tax they collect. Local governments may rebate their local share of the state sales tax and/or any local option sales tax that exists.
  • Property tax abatements: Any local government that extends a property tax can abate (or decrease) any portion of its taxes for specific properties to incentivize development.
  • Business district tax rebates: Illinois municipalities may designate business development districts and administer an additional tax on goods and services sold within the district. The additional tax can be used to pay for development costs or can be rebated to a business or a developer for improvements within the district.
  • Property tax incentive classes: Cook County assesses commercial and industrial property at a higher percentage than residential property. Commercial and industrial properties awarded an incentive class are assessed at a lower rate for a 10-year period, which is renewable for certain classes.

Challenges with using incentives

Local governments have valid reasons for pursuing incentives, but research has indicated that incentives are less effective than they seem. Local governments should be aware of their drawbacks and implement practices to address or avoid common issues.

  • Limited impact: Incentives often have limited impacts on business decisions. Research has found that they usually don’t sway the recipient’s final decision.
  • High costs: Incentivized developments, especially large projects, can create indirect costs (such as new burdens on public infrastructure) that are larger than the revenues they generate.
  • Diminishing returns: Regardless of the effectiveness of any individual incentive, local governments’ willingness to use incentives to compete within the region can lead to bidding wars with diminishing fiscal returns.

Questions to consider when using incentives

Before using these tools, local governments must ask whether tax incentives are the most effective way to achieve their community’s goals — and if so, carefully consider the costs and benefits of each incentive type. No matter the type, consider these best practices:

  • Use incentives to meet community needs and advance equity
  • Consider non-financial incentives first
  • Design incentives to create living-wage jobs for local workers
  • Collaborate — don’t compete — with other local governments
  • Establish business commitments with clear performance targets

Past work

CMAP’s work builds upon many years of research, including: