Tax incremental financing is sometimes hailed as the greatest thing since sliced bread. Other times it’s denounced as a poison pill for local government budgets.
TIF, a taxing method to entice urban redevelopment, was invented by the California legislature in 1952. Since then it has become popular as a method to raise funds for housing, commercial and industrial enterprises and public transportation projects.
For the duration of the TIF district — usually five to 30 years — additional tax revenue anticipated from the increase in property values in the district is used to pay for the project for which the district was created. Often the funds are dedicated to repaying bonds sold to get the project underway, but they can also be used to pay for studies and surveys, marketing, relocation and financing costs.
If everything goes as planned, several things happen:
- The project is completed and fully paid for.
- New businesses and residents are attracted to the area.
- The property value of the district increases.
- Other services continue with no cutbacks from the cap placed on their budgets.
The procedure is complex and fraught with pitfalls, but municipalities can maximize their chances of success by thoroughly analyzing several questions:
Would the expected development occur without TIF? (The “but-for” test)
- What is the long-term impact on the community?
- What is the likelihood that the redevelopment will take place as anticipated?
- Is the cost feasible, and can the municipality fund those costs before receiving the first increment dollars?
- How will the other departments and services be impacted by the increased population and traffic, and heightened demand for fire and police protection, EMS, water, sewer and the like?
- How many and what kind of jobs will the development create?
- What will the overall economy be like during the life of the district?
Not everyone is a fan of the procedure.
Count Randal O’Toole, a senior fellow with the Cato Institute, as one of its harshest critics. He cites several objections in his 2011 paper, “Crony Capitalism and Social Engineering: The Case Against Tax-Increment Financing.”
O’Toole contends that in light of the U.S. Supreme Court 2010 decision of Kelo v. City of New London, expanding a municipality’s power of eminent domain, many states loosened their definition of “blighted” property.
Further, he noted that only Georgia requires voter approval for TIF projects, and alleges that “elected officials use TIF to engage in crony capitalism” and “urban planners use TIF to practice social engineering.”
He noted several examples of TIF money going to less-than-suitable projects: helping a car dealer reinstate its General Motor franchise, developing a Walmart store, expanding a delicatessen, hiring mural artists and helping fund construction of a cinema, shopping malls and hotels.
O’Toole also argued that TIF sets a bad precedent by creating a moral hazard.
“Once one hotel, office building, or housing complex is built with TIF subsidies,” he wrote, “developers are not likely to want to build competing projects that are not supported by similar subsidies.”
For these and other reasons, O’Toole advocates the repeal of state TIF statutes, concluding that there is “little evidence that city governments are better than private developers at determining the type and location of new development that cities need, and plenty of evidence that they are not as good.”
Katie Kramer, vice president of the Columbus, Ohio-based Council of Development Finance Agencies, believes many of O’Toole’s arguments can be answered by local government officials following the advice she gives to all her clients: “Make sure you have done your due diligence, conduct a ‘but for’ test and be open and transparent with your constituents.”
Kramer cites the Atlanta Beltline Project in Georgia, Twin Falls, Idaho’s urban renewal and the downtown revitalization of Granville, Mich., as outstanding TIF successes.
Her advice to municipalities considering TIF: “There are great developers with creative ideas and great cities with creative ideas.” Cities must be flexible, she said, and have a premeditated game plan in place to snap up the opportunities that come along.