Illustrating the Effects of Business Improvement Districts on Municipal Coffers

Among the different types of submunicipal governments, business improvement districts (BIDs), have become increasingly popular in the United States and elsewhere. According to Leah Brooks and Rachel Meltzer, there were about 7,000 BIDs operating in 400 U.S. cities in 2008. A BID can be initiated voluntarily by property owners in a commercial district who want to improve local public goods such as security, street cleaning, and marketing. When the BID is formed, it acquires the authority to tax all property owners, including dissenters, to finance service improvements. BIDs may affect the fiscal health and behavior of their home municipality in three scenarios: (1) BIDs’ services are substitutes for municipal services; (2) their services are complements; and (3) BIDs increase their proportion of the tax base. Due to data limitations, Brooks and Meltzer run simulations using estimated data about the number of BID firms and total BID spending for 275 cities. Because their model relies heavily on information from New York City and Los Angeles, they simulate only upper-bound impacts.

Their simulation results show insignificant impacts of BIDs in all three scenarios. When BID services replace municipal provisions, the reduction in public spending is estimated to be small and has little welfare impact on non BID members. When the public goods supplied by BIDs and municipalities are complementary, public spending on BID properties is estimated to be higher than on non BID properties. The differential is small (about 3 to 5 percent of public spending per establishment), causing no significant impact on total municipal expenditures. In estimating BID effects on local tax bases and revenues, Brooks and Meltzer project that BIDs could increase total sales tax revenues by about 2 to 5 percent. They add no more than 7 percent of property taxes to total collections. BIDs do shift tax liabilities from non BID to BID members. But the calculated impact is less than 5 percent of the average tax liability of the non BID firms. Overall, simulation results suggest that BID impacts on expenditures, revenues, and tax shares between BID and non BID members are negligible at the municipal level.

This paper was presented at the Lincoln Institute’s Land Policy Conference of 2009 and is Chapter 10 of the book Municipal Revenues and Land Policies.