The Antiplanner

TIF & Crony Capitalism

6th July 2010

TIF & Crony Capitalism

posted in City planning |

Speaking of crony capitalism (as the Antiplanner was doing last week), one of the biggest sources of such urban corruption is tax-increment financing (TIF). TIF was invented in the 1950s to help cities revitalize neighborhoods that were supposedly so blighted that no one would gentrify them without government support. Today, such blight (which resulted when people left high-density inner cities for low-density suburbs) is mostly a thing of the past.

Urban planners use TIF to promote their social agendas, most recently favoring high-density, mixed-use developments (which is ironic since TIF was originally used to clear such developments that no one wanted). City managers see TIF as a way of boosting their budgets at the expense of schools and other entities that they see as competitors for the limited amount of tax dollars that property tax payers (and, in some states, sales tax payers) are willing to cough up. Mayors and city councilors see TIF as a way of rewarding developers who contributed to their political campaigns, which is where the crony capitalism comes in.

TIF can support all of these goals. In Portland, for example, TIF supports planners’ dreams by funding both rail transit and the transit-oriented developments along the rail lines. TIF adds roughly $100 million per year to the Portland Development Commission’s budget (see p. 31), to the detriment of the city’s schools and other tax-dependent services. At the same time, a few contractors and developers benefit from such developments, notably Bechtel, Homer Williams, and Walsh Construction, all of which were a part of Neil Goldschmidt’s light-rail mafia, and all of which continue to make significant contributions to political campaigns.

TIF is used for a wide variety of projects that really don’t deserve subsidies. Belleville, Illinois is giving $800,000 in TIF money to help a car dealer retain a GM dealership. Ann Arbor, Michigan agreed to classify a deli as a “brownfield,” even though it really isn’t one, in order for the deli to receive more than $800,000 in TIF support. Motivated by a court order requiring redevelopment agencies to give surplus TIF funds to schools, Redlands, California is spending millions to pay homeowners to paint or make other exterior improvements to their houses rather than give up any more of its funds than it has to (not an example of crony capitalism, but still pretty ridiculous). And those are just examples from news stories in the last week. (Thanks to my Cato colleague, Alison Meyer, for bringing these examples to my attention.)

Officials who rely on TIF like to say it is free money, but it is not. Part of the reason why is explained by this graph, which was drawn to persuade an Oregon community to stop using TIF. The graph shows that, due to inflation, the cost of urban services rises, but TIF skims off increased taxes so the fixed amount that is dedicated to existing services falls short.

But that is only part of the problem. What the graph fails to show is that the new developments that are supported by TIF impose their own burden on fire, police, schools, and other services, yet contribute nothing to those services for several decades. That means other taxpayers either have to pay more or accept a lower level of urban services. TIF supporters claim that, after the TIF bonds have been paid off — typically 15 to 30 years — the increase in tax revenues will make up for the short-term losses. The reality is that such an increase will only go to support the services consumed by the new development, which by that time will possibly have deteriorated into slums and so won’t contribute much taxes anyway.

At best, TIF is a zero-sum game: development supported by TIF would have taken place within the same region, though perhaps not the same neighborhood. At worst, it is a negative-sum game: the higher tax burden (or lower level of urban services) resulting from TIF discourages businesses from moving to or expanding in cities that use it.

Moreover, TIF creates a moral hazard: once some businesses have received TIF subsidies, other businesses will demand them as well. Companies such as WalMart, Cabelas, and Bass Pro sometimes seem to shop around for communities that will give them the biggest subsidies.

TIF is basically stealing candy from school children and giving it to developers. States should outlaw TIF as it is far more liable to be abused than it is to actually kick-start the development of a truly blighted area.

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  1. 1 On July 6th, 2010, JimKarlock said:

    I wonder if the best urban renewal program is crime control in blighted neighborhoods. After you clean out the street criminals, you are left with a safe, low cost neighborhood!

    More on UR at: http://www.portlandfacts.com/ur/priceofur.htm

    Here is where Portland’s TIF came from in one year (see link above):

    40% from City services
    27% from County services
    22% from Portland’s schools
    11% from other services

    Thanks
    JK

    posted on July 6th, 2010 at 3:08 am

  2. 2 On July 6th, 2010, Borealis said:

    It is interesting that when Walmart gets a subsidy, the unions drum up lots of opposition. But when it is a favored developer, it all goes over as a free lunch. Both TIFs and Walmart subsidies are the same thing — bribes from one jurisdiction to steal tax revenue from a neighbor.

    I can’t blame professional planners for TIFs. They generally hate them. But the availability of a mechanism to extract money from a government draws the attention of developers and they use their leverage with politicians to take the tax revenue.

    I can see how states with borders that share metro areas might want to take advantage of TIFs to steal tax revenue from the other state. But why do states without metro areas on borders allow it? It is just one city bribing development from a neighbor city.

    posted on July 6th, 2010 at 5:54 am

  3. 3 On July 6th, 2010, bbream said:

    Jim,

    I think you’re right on with your idea re: crime control. But what would that look like? Would a city “redistribute” its existing police force to focus on crime control within a blighted neighborhood with the goal of urban renewal? Or would you recommend that the city wait for a community-driven initiative?

    posted on July 6th, 2010 at 6:53 am

  4. 4 On July 6th, 2010, Dan said:

    Urban planners use TIF to promote their social agendas

    Ideologue bloggers state bullsh– to spread FUD.

    Spreading bullsh– notwithstanding, its been long known about the issues with TIF, esp on greenfields. The last large development I worked on I told the developer about the issues with TIF, but of course that is an advantage, so they went to the Council anyway.

    Ideologues who are ignorant of the profession continue to spout inanities because they either can’t speak to the issue, else purposely misspeak to try and force their small minority ideology down our civic discourse.

    DS

    posted on July 6th, 2010 at 7:27 am

  5. 5 On July 6th, 2010, Scott said:

    TIFs distort the market, as gov often does. Tax revenues are diverted from basic gov services to support new development, which actually increases property prices.

    Most TIFs are actually unconstitutional (eminent domain).
    Interpretation has changed “public use” to “public benefit”, even before Kelo. The “public benefit” is often not there, when measuring all factors, with a big advantage going to developers.

    The definition of “blight” is often distorted too.

    Competition between municipalities is good, but at the expense of their current residents, businesses & the future is bad. Similar problems occur in pursuit of sales tax dollars, rather than residential building.

    posted on July 6th, 2010 at 9:02 am

  6. 6 On July 7th, 2010, TexanOkie said:

    Scott:

    TIF =/= eminent domain (and neither are unconstitutional). Even though the City of New London was using both to pursue broader development goals, that is the only connection between the two practices, and the Kelo case was definitely an abuse of the power, in spirit if not in technicality. Your arguments about public use vs. public benefit are definitely needed in eminent domain debates. But, again, eminent domain and TIF are not the same, and their only relation is that they are tools that local governments have in certain states to pursue broader objectives.

    posted on July 7th, 2010 at 7:00 am

  7. 7 On July 7th, 2010, Scott said:

    No statement was made that TIF & eminent domain are the same.
    Not sure why you thought that.
    I typed Most TIFs are actually unconstitutional (eminent domain).
    Maybe, review what meaning of “are”, and within the context/sentence of how it’s used.

    posted on July 7th, 2010 at 5:08 pm

  8. 8 On July 9th, 2010, TexanOkie said:

    I don’t know, Scott… Maybe it was because you said TIFs are unconstitutional, then put eminent domain in parentheses immediately following it. You then proceeded to give a whole paragraph arguing about the proper definition of public benefit/use as it described in eminent domain cases. Public use/direct benefit are usually not required for TIF districts, unless you count attracting investment to certain areas, and with TIFs, local governments don’t actually seize anyone’s property rights or ownership.

    posted on July 9th, 2010 at 9:43 am

  9. 9 On July 10th, 2010, Scott said:

    TexOK,
    My statement did not mean that all TIFs violate eminent domain.
    I’m not sure why you thought “all” or in absolute terms.
    English lesson: in definitions, “are” does not mean the same or equal.

    Some TIFs also have other unconstitutional elements.
    That point was include in 1st sentence about that.
    Typing in () usually means an example, otherwise the sentence structure would be different, if that was the main/only point.

    Not sure why you are nitpicking about your lack of understanding. What’s your point? Do you have problems comprehending, like Dam & Hman?

    Do you think it’s fair for the gov to take private property (w/ compensation, could be BMR), for private use & then subsidize the new owner with money from taxpayers & then divert some tax revenue form ordinary gov services?

    posted on July 10th, 2010 at 9:24 pm

  10. 10 On July 12th, 2010, TexanOkie said:

    Scott, you’re an idiot. And I don’t mean this as a snide insult. I mean you’re a bumbling ignoramus. And I’m sure Dan and Hman can back me on this. At least Randal understands what it is we (meaning planners) do and how we do it.

    “Violate eminent domain”… hahaha!

    posted on July 12th, 2010 at 6:57 am

  11. 11 On July 12th, 2010, Scott said:

    Why resort to juvenile, baseless insults when you have proven wrong?
    It’s natural that you will side with others who miss points.
    What the specifics on your claim of idiocy & ignorance?
    Listen, it’s normal procedure to back points with evidence.
    You & your lefties cohorts omit that part (elaboration with valid reasons & facts) of trying to be persuasive or make points.

    What & how planners do, you say?
    Why did you switch topics, to the “purpose” of planning?
    The end justifies the means?
    So, it doesn’t matter if property rights are violated & tax money is diverted for private use, if there are good intentions?

    Why do you think eminent domain should be ignored?
    It’s to bad that planners & most politicians don’t understand the Constitution & economics.

    posted on July 12th, 2010 at 9:15 am

  12. 12 On July 12th, 2010, TexanOkie said:

    I resorted to the juvenile because that’s all that seems to get to you, on an intellectual and practical level. I will say, though, and I am not the first in this little soirée to take things off point and focus on personal. You spend a lot of time pointing out my lack of understanding without illustrating it with evidence, as you suggest I should do. I noticed this at our last confrontation, too.

    Eminent domain and TIFs can be abused, there’s no doubt about it, and people should keep a close, watchful eye on such practices to make sure such abuses are minimized. In the context of the political and development philosophy illustrated by the title of this entire blog, wanting to get rid of TIFs is perfectly understandable, and I don’t hold it against the A-P at all. In fact, I often sympathize with his intents.

    Which brings about the whole “you and your lefties” comment. I’m not a lefty. That’s something else Dan can back up. “I’ll go with ‘Premature Presumptive Assumptions’ for $700, please, Alex.”

    posted on July 12th, 2010 at 1:52 pm

  13. 13 On July 13th, 2010, Dan said:

    I mean you’re a bumbling ignoramus. And I’m sure Dan …can back me on this.

    110%.

    DS

    posted on July 13th, 2010 at 4:09 pm

  14. 14 On July 14th, 2010, Scott said:

    Nothing solid to comment on, just more blabbering, nonsensical, accusations, attempting to deflect from issues.

    TexOk, When You make comments that you don’t seem to care about the Constitution, that seems leftist.
    Juvenile is intellectual?

    posted on July 14th, 2010 at 7:04 am

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