TIF For Tat: What is TIF and Why Should You Care

Most people don't know much about TIF, why they exist and who they are intended for, but the good people at New Rules (Hometown Advantage) do a really nice job of summarizing it below and the reason it needs reforming.

When used to off-set the high costs of redeveloping blighted sites in poor neighborhoods, Tax Increment Financing (TIF) can be an effective economic development tool. However, all too often, cities are using TIF to underwrite projects in affluent areas, to subsidize construction on undeveloped land, and to finance big-box retail.

TIF allows a municipality to issue bonds to pay for part of the costs of a new development. Property tax revenue (and sometimes sales tax revenue) generated by the development is then diverted from the public coffers and used to pay off the bonds. The diversion usually lasts for at least fifteen years and may last for as many as 30 or 40 years.

The original intent behind TIF—which has been established in 47 states—was to level the playing field between economically distressed and more vital areas by providing developers with an incentive to build in ailing urban neighborhoods. In order to use TIF, municipalities must declare the redevelopment site to be "blighted."

However, the definition of "blighted" and the rules governing TIF are so loose in many states that these subsidies are more often used to underwrite sprawling development in well-to-do suburbs—exactly the opposite of TIF's original purpose. TIF is commonly used to subsidize big-box stores and shopping malls.

Examples include:
The wealthy St. Louis, Missouri, suburb of Des Peres declared the West County Shopping Center "blighted" and provided $30 million in TIF incentives for the construction of a new mall.
West Des Moines, Iowa, created a $60 million TIF district to fund the development of the Jordan Creek Mall. Baraboo, Wisconsin, designated a cornfield and an apple orchard "blighted" and used TIF to help Wal-Mart build a supercenter on the site.

In addition to favoring development of greenfields in outlying suburbs over infill in low-income neighborhoods, these subsidies disadvantage independent businesses. Not only do local retailers rarely benefit from TIF, but they must shoulder a higher tax burden in areas where part of the city's property tax revenue is being diverted from city services and used instead to pay off bonds that financed competing shopping centers.
A growing number of states are considering legislation to reform TIF. We believe states should:
Establish stronger standards for defining blight. TIF should be limited to truly distressed areas marked by a high poverty rate and/or high unemployment rate.

Prohibit the use of TIF for retail development, except in areas where there is a demonstrable lack of basic goods and services, or for revitalizing historic Main Streets crippled by significant vacancy. Subsidizing retail produces no economic benefit for the community or the region, because the sales and jobs generated by the new store are invariably offset by declines in sales and jobs at existing businesses. This may leave the city worse off financially, because existing streams of revenue will decline, while new revenue is diverted to pay off development bonds.

Eliminate sales tax increment financing. Some states, including Missouri and Louisiana, allow tax increment financing through sales, rather than property, taxes. This is particularly poor public policy, because the basis for sales tax revenue is the community's disposable income, which is finite and cannot be increased by building new stores, only diverted from existing businesses.
Prohibit the use of TIF on undeveloped land. Subsidizing greenfield development contributes to sprawl and undermines downtowns and urban neighborhoods, exacerbating the very problem TIF was intended to address.