Tax Increment Financing (TIF): Good Intentions Subverted
October 5, 2021
By Greg LeRoy, director, Good Jobs First, a nonprofit watchdog group focusing on economic development incentives.
Tax Increment Financing (TIF), which began as a targeted tool has, over time, become a fiscal termite, an engine of sprawl, and a subsidy for monopoly retail. In an era of rising government transparency, it remains poorly disclosed. In my decades working on economic development incentives, TIF has been the most common problem I’ve encountered.
TIFS are a geographically targeted economic development tool. They capture the increase in property taxes, and sometimes other taxes, resulting from new development, and divert that revenue to subsidize that development. That diversion means local public services do not get the new revenue they would normally get from new re/development.
Like their cousins, enterprise zones, TIFs in some states began with good intentions but have strayed so far and become so costly they are having lots of unintended consequences. Here are seven that have emerged from the work we’ve done at Good Jobs First:
#1: The Intergovernmental Free Lunch: States give cities the power to create TIF districts even though the taxes that are diverted will typically also come at the expense of school districts, county governments, and other local taxing bodies — which usually lack any power to avoid such losses.
#2: The “Ravenous Increment” Problem: As a Chicago community group documented about 20 years ago, the property values in many of the city’s neighborhoods that use tax increment financing TIF districts had been rising before the TIF district was designated. But when the TIF districts were created, the pre-existing growth that would otherwise have kept going to support schools and other public services became part of the “increment.” In Illinois, that diversion of naturally occurring revenue growth lasts 23 to 35 years.
#3: “Blight” Defined by Local Option: States often require that a TIF district be declared as “blighted.” Over time, this goal has been subverted, either by deregulation or litigation. Virginia allows a TIF anywhere it will “promote commerce and prosperity.” Missouri’s highest court allowed an affluent St. Louis suburb to “blight” a shopping mall so that it could attract a Nordstrom store with a $41 million TIF.
#4: “But For” that Blocks Public Accountability: Some states require a developer to certify that “but for” the TIF, the project would not occur. But this supposed anti-windfall safeguard is really no protection at all: States don’t give cities the right to investigate a company’s internal records about such decisions. The developer says, “trust me” and the public never really knows what factors drove the company’s decision.
Based on research at Good Jobs First, I think the real purpose of this rule can be to disable criticism of public officials. If they get criticized, they can point to the “but for” certification as “proof” the project wouldn’t otherwise have gotten built. No one can credibly question that claim, so the criticism dissipates.
#5: Fueling Suburban Sprawl: Vacant or agricultural land, with its low base value, is attractive to developers and TIF-bond transactors because all the new improvements will count towards the increment. In Wisconsin, anti-sprawl advocates decried a TIF district in Baraboo that paved an apple orchard for a Walmart store. But the low assessed value of farmland meant a low base value and a resulting big increment. It was not unusual: a study co-authored by David Merriman at the University of Illinois Chicago found that over a 14-year period, 54% of the newly annexed land in the Badger State was TIFed: i.e., sprawling TIF districts on the fringes of city limits.
#6: Building Excess Retail Space: The use of TIF for retail can undermine local jobs and tax revenues. In the St. Louis metro area, the East-West Gateway Council issued a scathing study documenting $2 billion in TIF for malls and big-box stores given by St. Louis suburbs. Meanwhile, in the central city and inner-ring suburbs, retail establishments closed, tens of thousands of workers were laid off and the suburbs got the transferred buying power. Feeble retail job growth meant a per-job subsidy of more than $370,000.
When a TIF creates duplicate capacity like excessive retail space, it merely transfers jobs and revenue; it does not create net new growth. Consumers do not have more money with which to shop just because they have more places to shop. Yet TIFs have figured prominently in the aggressive subsidy strategies of a number of major retailers subsidizing the monopolization of U.S. retailing and all the problems associated with declining entrepreneurship and Main Street life.
#7: Poorly Disclosed Costs: Only a handful of states maintain rudimentary statewide databases on TIF districts, and a new government accounting rule is failing to capture many TIF revenue diversions. Since 2017, under GASB Statement No. 77 on Tax Abatement Disclosures, most local government bodies have been required to report (in their Annual Comprehensive Financial Reports) how much revenue they lose to economic development “tax abatements.”
Because a TIF usually diverts taxes rather than exempting them, GASB has struggled in its rulings on how Statement 77 applies to the three variations of TIF. We at Good Jobs First have a strong recommendation for GASB: The board should issue a TIF-specific Statement that clearly defines them all as abatements.