Association for Public Policy Analysis & Management

This paper examines the development of the tax increment financing (TIF) sales-tax sub-form and the incidence of optimism bias and strategic misrepresentation in the realm of major infrastructure projects. Framed in the context of Kentucky’s most significant TIF project to date, the KFC Yum! Center in Louisville, the paper situates the case analysis in the broader literature of sales-tax increment finance before evaluating the arena through the infrastructure underperformance model of Flyvbjerg et al. (2009). As it stands, revenues from the two of the three sources intended to service the arena debt, including the TIF zone, have substantially underperformed projections and the arena has been left in a position where a default is quite possible unless the parties substantially restructure. The working argument is that the projections and geography made sales tax increment overly exposed to volatility in business movement and that these outcomes arose in large part as a result of both optimism bias and strategic misrepresentation on the part of proponent actors. Specifically, the key failing was that the TIF design made the arena hostage to impacts miles away with no realistic relationship to the arena’s presence. Thus the KFC Yum! Center should be seen as a cautionary tale for sales tax increment financing, and a lesson that if used in the sports facility context, sales tax increment should be carefully designed to reduce the project’s vulnerability to impacts with no reasonable connection to the venue. Likewise, the arena is another instance of an underperforming megaproject that largely conforms to the model of Flyvbjerg et al., with the alarming caveat that this underperformance has occurred despite the project seemingly incorporating a number of the risk mitigation strategies suggested by the authors.