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.
- An Assessment of the Effectiveness and Fiscal Impacts of the Use of Local Development Incentives in the St. Louis Region— East-West Gateway Council of Governments; January 2011 (see our summary here)
- TIF, Greenfields, and Sprawl — by Greg LeRoy, Planning & Environmental Law, February 2008.
- Uneven Patchwork: Tax Increment Financing in Kansas City – This study was authored by Dr. Michael Kelsay, a professor of economics at the University of Missouri, and published in 2007. Among the major findings is a pattern of awarding TIF projects to the city’s most economically advantaged areas and bypassing those most in need of economic development.
- Straying from Good Intentions: How States are Weakening Enterprise Zone and Tax Increment Financing Programs – Published by Good Jobs First, this report reveals that many states have weakened the criteria for establishing tax increment financing (TIF) districts. TIF was originally intended to spur development in poor neighborhoods, but many states have broadened the criteria, allowing subsidies to flow to more affluent, suburban locations. The number of TIF districts has since mushroomed. Many include big box retail. The report also highlights a handful of states that have instead tightened their TIF laws and channeled subsidies to impoverished areas.
- Tax Increment Financing in New Orleans – Published by the Bureau of Government Research, a New Orleans-based nonpartisan organization, this report offers a detailed critique of tax increment financing (TIF), particularly with regard to how it has been used in New Orleans. It argues that “subsidizing a retail operation with TIF revenues gives it an unfair advantage over its competitors.” The report recommends that the state prohibit the use of TIF for retail development, except for “main street” revitalization efforts.
- What Do TIF Subsidies Cost Denver? – published by the Front Range Economic Strategy Center in 2005, this report finds that TIF has grown dramatically and now costs Denver taxpayers almost $30 million annually in foregone revenue; that many TIF projects fail to meet their revenue projections; and that they generate new public services costs that other taxpayers must shoulder.
- Bill to reform TIF in Missouri — Introduced in 2002, SB 172 would:
- limit the use of TIF to areas characterized by moderate income (less than 80 percent of the surrounding area’s median income), high unemployment (one-and-a-half times the rate of the surrounding area), or low fiscal capacity (assessed value per capita is at least 40 percent lower than the surrounding area).
- require that municipalities conduct economic feasibility studies to determine that the development would not occur without the subsidy.
- prohibit the use of TIF on sites that are more than 25 percent undeveloped land or farmland, and limit the use of TIF for projects that are primarily retail unless the development occurs in a federal enterprise or empowerment zone, or a “distressed community” as defined elsewhere in state law.
- reduce the impact of TIF on schools, libraries, and fire departments by stipulating that 25 percent of the tax revenue used to pay off the bonds be diverted to these other taxing districts. Currently, these districts have no say over the creation of TIF districts, but lose revenue every time a municipality establishes one. Some cities have threatened the provision of essential public services by converting much of their tax base to TIF districts.