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.