Tax Increment Financing: A Useful Tool or a Misused Tool?Posted:Oct 9th, 2012 5:23 pm
By Doug Hunt, SVP-Development (South Bend, IN)
The election season is always a good time to talk about public policy. Of course most of the talk is really just about the politics of winning and losing elections, but the role of government is a subject always in order. In the case I’m discussing here, the focus is not on defense spending, Medicare and the like; it’s something closer to home – that long-used local government economic development program called Tax Increment Financing, or “TIF.”
Many of you may be quickly shifting to a more entertaining website about now, but any who are involved in real estate development know how important TIF – when it’s available – can be to a project and how, when it’s not available, projects become much more difficult and often impossible. Fortunately, in Indiana tax increment financing has been a useful development tool for many years. The first TIF laws in Indiana, which allowed local government to use TIF, were enacted in the mid-1970s. Over the years, changes in the law to make it more workable were passed by the Indiana General Assembly and, in more recent years, new changes have been enacted to add restrictions in the TIF laws – but more about that later.
What is “TIF” you may ask and why does it matter? Well, TIF is pretty simple: The idea is that the new “TIF’d” project is going to generate new property taxes, but to get that new project, some form of public investment – most often infrastructure – is required. The taxes generated by the project are held in the TIF district and used to pay for that public investment. The idea here is the “but for” argument, which goes like this: Without that public investment, that private investment would not have been made and – so goes the theory – those new taxes would never have been generated anyway.
How does this affect the local governments which depend on property taxes for all the necessities of a strong community like fire, police, schools, libraries, and so on? When a TIF district is set up, it is allowed to capture “new” property taxes. So all the property taxes paid by all the taxpayers who lived or had businesses in the TIF district before the district was created will still go to the same bundle of public service agencies as before. However, those agencies will not receive the new property taxes coming from the new project for which the TIF was created. Not so bad you say, because when that TIF infrastructure is paid for, those new property taxes will be freed up to go into the “pool,” out of which the police, schools, etc. (known in the parlance as the “taxing units”) are paid. However, this raises two issues.
First, these TIF costs can be quite high and may require the local government to go out and borrow by selling a bond; the issue: that bond could take 20 to 30 years to pay off. So, while it’s true that some time in the future the taxes from the new project will go to the taxing units, it could take as many as 30 years, quite a long time. At same time, the new business in the TIF district likely generates a need for those same basic services that all taxpayers receive, but the taxes it pays don’t yet go to those services and may not for a very long time. So that capped pre-TIF tax base has to pay for even more services because of the new project.
Secondly, the other major problem is that the concept of TIF expanded literally to encompass pretty large areas of a City. And don’t forget, one can have multiple TIFS in a community, so pretty large swaths of the tax base can be included and all the new taxes generated by whatever and whoever in those boundaries are captured for the TIF district. For example, take two cities I know pretty well: South Bend and Indianapolis. In South Bend, TIF areas make up almost 40% of the total acreage within the city limits. Not only that, those areas make up over 26% of the assessed value – that’s the property tax base – of the whole city. This isn’t peanuts when you translate it into tax dollars: $28 million plus per year.
Indianapolis has a similar story: Indy has the same boundaries as Marion County, so it’s a much bigger geographic area than South Bend – about 400 square miles. Even so, the TIF areas there represent about 35 square miles and capture 11% of the City of Indianapolis’ boundary assessed valuation. The biggest TIF District as a percent of total assessed value is in downtown Indianapolis. That TIF covers a third of Center Township, which is the “downtown” township. The biggest Indianapolis school system “loses” about nine million dollars a year to TIF.
I present these facts not to indict the TIF program, because I think it is a great tool in the economic development toolbox. It’s just that there always needs to be a “big picture” evaluation of any TIF district on an ongoing basis. TIF ain’t free, and the fundamental strength of a city or town is the quality of its basic public services, such as police, fire and especially the local school system.
Still, this TIF idea had merit and still does. Sometimes, especially with downtowns and neighborhoods, the planned improvements benefit a larger area, including taxpayers already there before the TIF was formed. So a couple of cross cutting trends are at work. Cities need development and the new tax base and employment it brings, but those new businesses and families that depend on them all have the normal needs for public service. So the need for such goes up with growth, but none of the new taxes in the TIF district goes toward that need, at least not for many years.
Well, have the elected folks who control TIF been asleep at the wheel, as these potential excesses have crept in over the years? No one has been asleep, but different officials have different views and usually it depends on who is controlling the TIF. TIF has been subject to regular amendments of late to restrict it, most notably a limit of twenty-five years on the life of a TIF district. If it has to be renewed down the road, at least it will have to be justified at that time.
In the meantime, many TIF districts have a long time to run and some that were set up in the early years have no limit to their lifespan. For those, and really all TIF districts, there needs to be the discipline of a plan on how to use the TIF money. In fact, given that some cities have a number of TIF districts, those funds should be part of an overall strategic plan for development of those communities. But be careful with that too, because one of the advantages of TIF is flexibility, so local officials can react to support a project opportunity that comes up on short notice. Most economic development projects do come up on pretty short notice.
Another area that calls for some reform is the practice of not letting the TIF’d property taxes just accumulate in a fund that the city can just dip in year by year, with no apparent long range plan for the funds. Some communities have shifted some TIF funds back to the “base” on an annual basis, so those other taxing units get some relief from the caps on their share of taxes. That’s not a for sure source of funds for more than a year at a time because next year’s TIF taxes may be different. But it does demonstrate that the government that controls the TIF recognizes the needs of the other taxing units.
All in all, TIF laws and the use of TIF funds should always be up for review. Those who control TIF funds should acknowledge a special responsibility, not just for how the funds can induce development but responsibility for the fair treatment of other services dependent on property tax dollars. After all, without confidence in basic public services, few businesses will choose to locate in a community, TIF or no TIF.
As with almost everything in the public arena, the middle ground is where the best balance of interests lies. And, as also the case, the people do get the government they “want,” whether they choose it by voting or by not voting. It’s still a choice. Not to be a scold to the busy, stretched and stressed citizen; I know you can’t get into the weeds on every public policy issue, but first and foremost, taking time to vote wisely – looking as best you can through the grubby swirl of TV ads and such – is the simple, one true duty of the citizen.