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.

T is For Taxes and TIF

As recently pointed out on this blog, TIF as a tool, needs tweaking, but so do property taxes. Iowa has a tax structure that is not seen as fair to either residential property owners or business interests, therefore neither group is happy. To this end, the Iowa legislature ran in circles trying to please commercial property owners wishes, but, at the same time, not biting the hand that votes for them--you and me. Hence, they did nothing--which, let me express, is good. Better to do nothing than come up with another "rob Peter to pay Paul" scenario.

This tug of war surrounding property tax creates some interesting problems for us like the issue I care most about, affordable housing. If I am a developer and I can build either apartments where I pay taxes at 100% of the property value or build "apartments" and call them condominiums, for which I will pay the rollback % of residential property value which in Johnson County is roughly 46% of value. Now granted, at the end of the day, it is either the renter or the condo owner who pays the taxes, but it does affect the cost of doing business for the period of time I have no tenants or owners--and, if I'm building apartments, it further impacts the amount of rent I will charge--which can end up affecting the rate of occupancy.

On the other hand, if I am a residential property owner, if my taxes were to more than double--to make everyone pay at the 100% level, many people would be forced to sell their homes. So you can see where politicians are not going to do that.

This is where the TIF (Tax incremental financing) comes in. Cities need their economic bases to grow, in part because they know that they have limited local control over their tax revenues (thanks to State government). However, the deal with the devil is that cities have to offer tax abatement to attract business, because the theory goes, if we don't, the next town will. So the cities create a local "rollback" for new or expanding businesses in the form of tax abatement for a period of time. Peter Fisher has a great article in the Press-Citizen today that addresses this. Also see this document that explains TIF from the organization I chair, FAIR.

On a local level, we expect a lot of our local governments in terms of public safety, but we also demand a lot of things that cost a lot to furnish, and we value as necessary. Things like parks and senior centers, neighborhood services, city planning, leaf pick-up--all have significant costs. But the thing that costs a ton of cash is infrastructure--roads, sewers, sidewalks, traffic lights--no one is offering a rollback to the city or county to provide these things.

The cost of doing business for communities is negatively elastic, that is to say, the price to buy and offer services increases over time and above the general inflation rate (due to personnel costs and material costs). This is why we are hearing the call for another penny sales tax, on top of what the school district recently had approved by voters. Cities like Iowa City are trying to keep up and not add a direct property tax. They are considering to do what the state is struggling no to--to get revenue any way they can that won't cause voters to hate 'em.

Unfortunately for local governments like ours, the politicians are paid as part-timers and not particularly gifted at making a sales tax pitch. Besides that, it is not non-controversial to hike the sales tax, as it affects certain people (the elderly, fixed and lower income people) more dramatically than others. Still, as Tip O'Neill loved to say, all politics are local politics.

What is needed is a set of priorities where taxation is concerned. No taxpayer should be unfairly burdened, nor should any taxpayer expect special dispensation at the expense of other sectors. This means reevaluating the way we do business as a state and as localities and developing coherent policy that allows localities more flexibility in structuring taxes and debt.