Tag Archives: tax-increment financing

The Wonderful World of TIF

City officials regard tax-increment financing as free money, when actually they are stealing it from other taxing entities. Nowhere is this more visible than with a special kind of tax-increment financing involving sales taxes. In Missouri, Colorado, and other states, private shopping malls and other retail districts can effectively assess their own sales tax, just like a government agency, and keep the money. Their patrons end up paying the tax but probably don’t realize it because taxes aren’t included in advertised prices.

Under Missouri law, a community improvement district can assess its own sales tax with the approval of all voters in the district. If there are no voters residing in the district, then a majority of property owners get to decide whether to assess the sales tax. Since other people will pay the sales tax while the property owners get the benefit, it’s an easy question.

The inequity of this system was made clear when a group of property owners in Columbia, Missouri defined their district in a way that, they thought, excluded all voters. As it turned out, there was one voter, and when she examined the proposal, she realized that it “just didn’t seem to be as good as they were saying to me at first.” As a result, the district may not hold the election, at least until it can figure out a way to gerrymander the sole voter out of the district (or perhaps bribe her into supporting their scheme).


Sustainable = Subsidies

Having abolished tax-increment financing (TIF) as a drain on the state treasury, California looks set to bring it back again in the name of “sustainable communities.” Senate Bill 1, the “Sustainable Communities Investment Authority,” would allow cities to use TIF in order to make neighborhoods more “sustainable,” meaning filled with more high-density, mixed-use housing.

SB 1 is a necessary follow-up to 2008’s SB 375, the “Sustainable Communities and Climate Protection Act,” which required cities to plan for high-density, mixed-use transit-oriented developments (TODs) in transit corridors. The author of that law, Darrell Steinberg, no doubt assumed that cities would use TIF to subsidize TODs. Legislative abolishment of TIF in 2011 left cities with few tools to carry out SB 375.

SB 1 not only allows TIF in blighted areas, but effectively defines “blight” as “inefficient land-use patterns,” means, in essence, neighborhoods of single-family homes. While the old law required cities to actually prove an area was blighted before they could use TIF, SB 1 specifically states that any agency that wants to redevelop an “inefficient land-use pattern” “shall not be required to make a separate finding of blight or conduct a survey of blight within the project area.” In addition, anywhere within one mile of a planned high-speed rail station is also considered suitable for “sustainable” redevelopment.

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What’s Wrong With TIF

Many people see the problems with tax-increment financing and think that TIF laws need reform. But in fact, no reforms will work; tax-increment financing should simply be abolished. The Antiplanner attempted to explain why in Boise last week, and here is a summary what I said. (Click any of the charts for a larger view.)

Suppose there is a school district, fire district, sewer district, or some other agency that gets its revenues from property taxes. Then suppose that a city proposes to establish a TIF zone within that taxing district.

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Reviving TIF in California

Last year, California Governor Jerry Brown persuaded the state legislature to shut down redevelopment districts whose use of tax-increment financing was eating into school and other local budgets and, by turn, into the state budget which was forced to make up for school losses to redevelopment. This year, the legislature has quietly been sneaking TIF back into the law.

Recall that TIF works by capturing all the growth in tax collections–whether that growth is due to new development or simply to inflation–and using that money to subsidize developers. Schools and other property-tax funded agencies lose because their costs increase, but their revenues within the TIF districts do not.

The legislature tried to make TIF more palatable to the governor by exempting schools. In other words, redevelopment districts would still be able to steal money from fire districts, water districts, sewer districts, and other property-tax dependent entities, but not from schools. Since schools are the only (or at least the main) ones that the state funds, the new “infrastructure development districts” can go back to their old ways of favoring certain developers (and certain kinds of development) without threatening the state budget.

Fortunately, at least a few writers are urging Brown to veto any bill that comes out of the legislature. I hope he does.


If They Only Had a Streetcar

Kansas City sold $295 million worth of TIF bonds to revitalize a part of the city known as the Power & Light District. The developer who benefitted from this money says “the development was successful as part of a broader effort to re-energize the city’s downtown.” Unfortunately, tax revenues are less than a third of what was projected, with the result that city taxpayers are having to make up the difference (as if city taxpayers wouldn’t be paying for it anyway).

The city naturally blames the problems on the recession. But recessions happen. Here’s the difference between private developments and government-subsidized developments: If the private developer guesses wrong, only the investors lose. If the government planners guess wrong, every taxpayer in the city or region loses.

The Wall Street Journal article about this boondoggle doesn’t mention it, but Kansas City wants to spend another $100 million on a two-mile-long streetcar line connecting Power & Light with other parts of downtown Kansas City. No doubt that will fix the problem. While they are at it, how about an aerial tramway, maybe a new sports stadium or two? Just what the city taxpayers need: more places to sink their money.


Crony Infrastructuralism

Last night, the Antiplanner dreamed that Apple, the company with the highest market capitalization in the world, was spending some of its $97 billion in cash on roads, bridges, and other local infrastructure. A crazy idea, I know, but then, in the dream, some politician says, “What a great idea! Let’s create some TIF and special assessment districts so other corporations can help our infrastructure too.”

Somewhere between dreamland and waking up, I tried to explain why this was a bad idea. Suppose a town has two business districts, I said, and one is doing poorly compared to the other, possibly because it is older. Shops, restaurants, and other tenants turn over frequently, vacancy rates are high, and the shops that do exist tend to be downscale, including thrift stores and antique malls. The other district, perhaps because it is newer, is doing much better.

Suppose the city creates a special-assessment district around the older area and uses the funds to update the infrastructure. Unfortunately, the assessments, i.e., taxes, paid by the property owners in the district force them to raise rents, which causes even more turnover. The other district will probably complain and demand its own infrastructure improvements, which the wealthier property owners will more easily afford and thus give that district an even greater advantage over its rival.

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Urban Renewal Dead in California

California cities do not have a constitutionally given right to steal money from schools and other tax districts to use for their crony capitalism and social engineering, says the California Supreme Court when it rejected a law suit brought by urban redevelopment agencies against a state law abolishing them. As a result, barring new legislation reinstating the practice, tax-increment financing (TIF) comes to an end in California, the state that pioneered the tax tool and, as recently as 2011, did more TIF than all the other states put together.

It is conceivable that, somewhere, sometime, a TIF project was truly worthwhile. In general, however, TIF was mainly a way for cities to build empires, elected officials to engage in crony capitalism, and urban planners to practice social engineering. Almost all of those “transit-oriented developments” that were supposedly stimulated by light rail and streetcars were really simulated by TIF. Nearly all of the cases of cities using eminent domain to take private property and give it to developers involved TIF.

Jerry Brown and Democrats in the California legislature killed TIF to free up tax dollars that should have been going for schools and other programs, not to protect property rights. But the fact that the Democrats saw through the claims that TIF is “free money” should inspire TIF critics elsewhere. In particular, in places where state money is used to help pay for schools, tax guardians can argue that abolishing TIF will help reduce that burden.

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Department of Irony

Officials from Aurora, Colorado are in a tizzy because someone conducted some focus groups to see what taxpayers thought of a $300 million subsidy to a proposed hotel. Such focus groups “violate the ethics code for economic development organizations in the region,” said Tom Clark, the executive vice-president of Denver’s Economic Development Corporation (EDC).

Apparently, it is perfectly ethical to steal money that taxpayers had allocated to schools, fire, and police and give it to a private developer, but it is unethical to ask those taxpayers how they fell about such theft. Colorado’s “taxpayer bill of rights” prevents governments from raising taxes by more than a certain percentage each year–but tax-increment financing, the main source of subsidies for the proposed hotel, is exempt from this law.

“You can’t work against your neighbor, and you can’t run around them,” Clark said. “If you do, you’re subject to permanent expulsion from the Metro Denver EDC.” Of course, it is always possible that some people don’t want to be a part of Clark’s cozy little club of thieves.

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A Different Kind of TIF

The Antiplanner’s visit to Lafayette, Louisiana was highly educational. Among other sights, I saw River Ranch, a very successful New Urban development that (according to local tax activists) was built without any tax subsidies. Although I personally would not want to live there, the development commands high prices even in the recession.

River Ranch Rowhouses start at $375,000 for 2,000 square feet, but owners are asking nearly $600,000 for the 2,800-square-foot corner model shown here. Single-family detached homes for sale include a 2,500-square-foot house for $550,000 and a 4,300-square-foot house for $725,000. Most single-family homes appear to be on fairly small lots. Given Lafayette’s median family incomes of less than $50,000, these homes are hardly affordable, but the development proved to be very successful.

I also learned that Louisiana tax-increment financing (TIF) is quite different than in most other parts of the country. In 1988, the state authorized cities to use property taxes, sales taxes, or hotel occupancy taxes for TIF. But property tax TIFs are limited to that portion of property taxes that are not already obligated to some specific purpose–and most property taxes are so obligated, so most if not all Louisiana TIFs rely on sales and hotel taxes instead.

Also, most, though not all, sales-tax TIFs are in the form of an additional sales tax on top of the existing tax (which is 4 percent for the state and a variable amount, generally around 4 percent, for local governments). TIFs that are on top of, rather than out of, the existing tax do not take money from schools, fire, and other urban services, which eliminates many of the objections to TIFs. (At least some other states that use sales tax TIFs, such as Colorado, also add the tax on top of, rather than out of, the existing tax.)

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California Almost Eliminates TIF Agencies

As a part of the annual budget package, the California legislature approved a bill that would have required city and county redevelopment agencies to either shut down or start making large payments to local school districts. However, Governor Jerry Brown vetoed the budget package, saying it doesn’t go far enough in closing the state’s budget gap.

Brown called for completely eliminating redevelopment agencies as soon as he took office in January. The agencies are primarily funded by tax-increment financing (TIF), which uses property taxes on new development to subsidize that development. California redevelopment agencies currently collect $5.5 billion in property taxes a year. Because some of that money is dedicated to repaying bonds, eliminating the agencies would immediately save the state $2.5 billion, later increasing to $5.5 billion as the bonds are paid off.

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