Matthew Yglesias » Using TIF to Spur Development

Aug 21st, 2008 at 11:16 am

Using TIF to Spur Development

On the subject of vacant buildings and creating incentives for “early mover” development, a reader sends a link to the Center on Wisconsin Strategy’s paper on “Efficient and Strategic TIF Use”. TIF stands for “tax increment financing.” The basic idea is that a municipality can provide forgivable loans to homeowners for exterior improvements and to business startups that would be paid back out of the future tax revenues generated by the new development. I imagine that, in practice, getting the details right is hard but that’s definitely one way of helping early movers capture some of the positive externalities of their actions.

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14 Responses to “Using TIF to Spur Development”

James Gary Says:
August 21st, 2008 at 11:33 am
I respectfully request to the blogger that he reduce his use of that particular photo–perhaps to less often than three times in a single week.
sluggo Says:
August 21st, 2008 at 11:41 am
The problem with TIFs is that they starve schools and municipalities of any future tax revenues brought on by the improvements. Columbus Ohio has just approved a TIF for 20 years to revitalize it’s underutilized downtown. But the school system won’t see a dime from any of the tax revenue collected as a result of the revitalization over the next 20 years.

Unless they get structured to hold school boards, who don’t have a say in the TIF, harmless from loss of revenue then they are robbing schools to pay off businesses.

This is, of course, part and parcel of financing schools through local property taxes. Changing that structure, even if good policy, is a different issue. Schools who rely on local property taxes have to play by the rules set out for them - lets not screw them and, in turn, homeowners who will be asked to pick up the slack.
pedestrian Says:
August 21st, 2008 at 11:51 am
TIF is anathema to the concept of “commonwealth”.
- g Says:
August 21st, 2008 at 11:53 am
I don’t know about how other places do it, but in Florida TIF is a bit more complicated (and controversial).

Here, a municipality essentially draws all tax monies for a given area including taxes they would not otherwise collect. Here, that might include County dollars and any Special District dollars that are collected through the property tax mechanism (but, interestingly, not School District dollars).

Here, municipalities have the power to use TIF vis-a-vis the creation of a CRA, something that the other governments with overlaying taxing authority cannot directly stop. Hence the controversy.

This is only heightened by the fact that that TIF has often been misused, being designated in places where, by the spirit of the mechanism, it should not have been applied.

All of this is to say, TIF often is a sore spot between governments.
boffo Says:
August 21st, 2008 at 11:54 am
I think it is unclear how forgiving taxes on currently vacant properties takes money away from schools. Right now, the vacant properties aren’t making any money for schools. And it is true that if a business moved in and they taxed it the schools would have *more* money. But if no businesses move in, then there is still *no* money.

I don’t think this piece of policy does any harm, and will possibly build up a more solid tax base of homeowner, and will eventually build up a solid business tax base. Furthermore, if not being able to tax something is that bad, a community could always bump the sales tax and recoup some of the dollars being spent at the new business.
Franklin Says:
August 21st, 2008 at 11:55 am
Certainly the big box stores have figured out TIF financing can assist them. Not the types of projects I want to see funded. Click for to go to a report on TIF Subsidies to walmart in Colorado
ks Says:
August 21st, 2008 at 12:08 pm
a critical column about how TIF’s are working in chicago:

http://blogs.chicagoreader.com/politics/2008/02/13/truth-and-taxes/
Jake Says:
August 21st, 2008 at 12:22 pm
Having worked in development, I’ve noticed that TIFs are kind of like communism. They’re a great idea in theory.

The problem with TIFs are that the extra tax revenue is taken from future property tax revenues that will be higher. Taxes will be higher because developed property is, of course, worth more than undeveloped property.

BUT… municipalities are often so desperate to spur development in areas that need it that they will often offer any and every incentive that a developer will ask for. As a result, TIF deals are often packaged with Tax Abatement, freezing property tax levels at pre-development rates for decades.

So, you get a development loan out of the public kitty that will never be paid back because property taxes are frozen before the tax rate can go up. It’s much better to use tools like the Federal Historic Tax Credit, which has been proven to put more money back in public funding than it takes out (something like $9 for every $1 in credits).
sluggo Says:
August 21st, 2008 at 12:35 pm
Boffo

A TIF diverts any growth in tax revenue from a specific area toward the development. Your are assuming that there would be no growth in taxes from a specific area without the spur of a TIF which is not the case for several reasons. Even though the growth in tax revenue would likely be less than without the TIF, the growth would certainly be greater than zero. Saying the schools get “*no* money” without a TIF is oversimplifying and wrong on its face.

Property values in given business districts increase according to market conditions. Even if vacant, if a district is generally increasing in value in tandem with the commercial market, then the property taxes from that district will increase as well.

A TIF district normally holds many properties that are in decent shape. The TIF diverts taxes from all properties in the district to pay for improvements.

I think it would be problematic to find a tight correlation between granting a given TIF and increase in the homeowner tax base.

Homeowners will be asked to pay more taxes to make up for the hole in revenue to the schools. This will increase the proportional contribution from homeowners and reduce that of business.

The argument isn’t against development. It’s against using crude financing techniques that starve schools of revenue especially when they have no representation in the process.
dbt Says:
August 21st, 2008 at 12:48 pm
In Chicago, TIF is short for “alderman’s slush fund”
larrybob Says:
August 21st, 2008 at 2:23 pm
ben joravrsky’s TIF archive (use “the google”) over at the Chicago Reader is the definitive source on the abuse of said policy in Chicago. what was once a good policy, at least in theory, has become an unmitigated disaster with no oversight and perverted incentives. no, no, no this is not a policy road worth taking; even with the greatest transparency, the temptations are too great to prevent this policy from devolving into a huge developers’ subsidy.
if an independent US attorney is ever appointed again to chicago, the tif accounts will be the downfall of the municipal government.
leo Says:
August 21st, 2008 at 4:04 pm
Complete catastrophe in Chicago. Don’t let this genie out of the bottle.
Mark D Says:
August 21st, 2008 at 4:38 pm
Kansas City has handed out TIFs like candy in recent years, and its become quite the topic here.

But while the theory is to get homeowners and small businesses into a depressed or distressed area and make it a viable community, KC has tended to give it to huge corporations, or in areas that, quite frankly, didn’t really need it (like the Country Club Plaza, a tourist trap/rich people shopping district).

Some other not-so-highlights of KC’s TIF execution (from the aforelinked article):

Kansas City has agreed to divert, over decades, about $3 billion in general tax revenues to TIF projects — six times more than the TIF subsidies approved in either Milwaukee or St. Louis, other cities where TIF is used aggressively.

KC’s TIFs are not performing nearly as well as they’ve been touted. While the city’s economic development agency claims TIFs have created about 23,000 total new jobs, The Star’s analysis shows it’s likely that TIFs have created about half that number.

•The city has ended up focusing TIFs in a few areas such as downtown, leaving large parts of the city with little TIF investment. For instance, of the $232 million in TIF tax dollars the city had actually spent through 2005 in TIF districts, the Northland and the Country Club Plaza received $112 million, or almost triple what’s been spent across the entire East Side and Southland.

In other words, the areas that don’t really need it are getting the bulk, while the truly economically-distressed areas (especially the East Side) are getting the crumbs.

TIF is just another one of those things that seem great on the academic level, but often fail horribly in reality.
jeff Says:
August 21st, 2008 at 7:57 pm
No,no,no. TIF use is so fraught with exploitive potential. Chicago is the municipality that uses TIFs more than any other municipality, and it is nothing short of a disaster. A hat tip to the reader who pointed out Javorsky’s Chicago Reader work, must read stuff.

TIF policies are the city equivalent to private equity, with littl to no transparency. They are generally couched as vehicles for uplifting troubled neighborhoods but generally used to increase the coffers of corporate/business development.

For instance, Chicago’s loop is the largest recipient of TIF funds and qualifies as an underdeveloped locality, depriving schoolchildren and communities the funds they so desperately need.

Tread cautiously with TIFs, my friend.