Tax Increment Financing – The Boon for Bums and Bureaucrats

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A History of TIF

Because of the expansion of federalism and the increased use of unfunded mandates by the state and federal government, local governments have been forced to provide more services with smaller budgets. In order to balance the budget, some local governments have made better spending decisions while others have done research to eliminate waste and cut unproductive or unnecessary services. These are examples of good fiscal management.

Yet other governments have chosen to go down a different road, preferring to have their cake and eat it too. Instead of cutting expenses programs or eliminating waste, these governments have decided to provide same high level of services and simply used other methods to acquire the revenue. TIF is one of these methods, and while proponents of big spending call it “creative”, those who still believe in sound fiscal management call it out as “deceptive”.

It has gained attention recently due to budget crisis’s faced by local governments but it has been around for some time. In fact, TIF first appeared California in 1952 as a means to provide local funds to meet the matching levels required to receive federal grants. It has been used heavily by local governments since the 1980s after a decrease in federal funds. TIF occurs when assessed valuation of property is “frozen” in a certain district, called a TIF district for a set amount of years. Joyce Y. Man describes the sometimes awkward process in simple terms; “Property taxes levied on this frozen tax base continue to accrue to local taxing bodies, but taxes derived from increases in assessed values (the tax increment) resulting from new development are used to pay for infrastructure needs and development expenditures in the TIF district.”

When a city uses TIF, they are more or less using “excess” or extra taxes for pet projects, sometimes to build infrastructure and sometimes to cleanup blight Really these are not extra taxes at all but rather an increment created by making a bigger tax bill, it’s stealing but it’s just cleaver stealing. All politics on the size of government and the right to taxation aside however, there are three major problems to consider with TIF and it’s applications. First, the citizens who pay for the ‘increment” are not usually the ones benefiting from the spending. For example, often persons in a middle class area of a city end up paying to subsidize residential development for the lower class, thus they pay a burden but receive no benefit for it. This fails all logic tests.

Second, taxpayers often have no say in how it is spent! Usually, a sort of “TIF agenda” is formed between a city and a county and the voters are left in the cold. Often, it is not for things they want or need but policies that will make a city bureaucrat look good or a county commissioner get the state off their back about an eyesore community. All of this waste occurs at the expense of the taxpayer.

A third problem stems from the TIF the calculus itself as it relies on an unstable mathematical model:

For TIF districts, the tax rate and assessed value are known before the levy or tax revenue is calculated. This process of calculating TIF revenue adds an element of risk to the TIF  financing  process.

What more or less occurs is a hedging of bets on what revenue might be and then spending that money on projects that a city is unsure if it can  finance . The argument could be made that many public budgeting mechanisms are not absolutely reliable. However, since TIF occurs over such a long period of time, if revenue projections are misguided or missed entirely, then the taxpayer should not be punished for that error.

With TIF you pay in but you don’t get anything out, it’s hard to hold accountable the projects that your money is spent on, and it is not based on stable mathematical formulas.

For these reasons alone it should be removed from the law boos, but since it is all too tasty and easy a cookie to reach from the jar, it will not be. Instead of pining for its abolition, it makes more sense to analyze the legal framework it operates in and then restrict it so that TIF can be used on a more limited basis, in less ways, and in a more accountable fashion.

A Legal Framework for TIF

Every state in the union currently has TIF laws, with the exception of North Carolina and Delaware. While the North Carolina enacted TIF legislation in 1982, it was rendered useless by an amendment to the state constitution. Yet even though so many states allow the usage of TIF, they vary greatly in what they allow to be used and when. The legal process takes part in five distinct places, each of them allowing or disallowing wiggle room for local politicians on what they might use TIF for. In the beginning, there is project initiation. As with any cleanup or re-development project, a problem must first be spotted for it to be dealt with; it is the same with TIF. The law comes in regarding how much authority a given government has to decide what a problem is indeed.

In some states, this rests solely with the municipality to decide. This is a good thing generally speaking because frequently TIF is misused and government is easier to hold accountable at the local level. Other states like California use a mixture of municipality and county governments.This is dangerous because it might cause backroom deals to get a TIF initiative passed, resulting in a pork barrel politics. In fact, only seven states, of which Minnesota is one, require some sort of quantified blight determination or in other words, logic, behind their use of TIF. This is not only sad but also terrifying, if the state is unwilling to demand a firm number on what must be done, then counties, cities, and re-development agencies have free reign over public money, which amounts to socialism, making the trail harder to follow for those interested in spotting misuse of public dollars. There is some security to be had in knowing that Minnesota is leading the way but there is cause for alarm in that now when TIF is more popular then ever, Minnesota is the best example for restraint in use.

The second stage, called formulation, involves creating a plan of action to cleanup the blight or create industrial development. We are a fairly poor example on restraint in this stage of TIF Minnesota’s own body of TIF law gives a fairly large amount of freedom to the municipality in determining what the problem is and how it should be solved:

That in the opinion of the Municipality; (i) the proposed development or redevelopment would not reasonably be expected to occursolely through private investment within the reasonably foreseeable future; and

(ii) the increased market value of the site that could reasonably be expected to occur without the use of tax increment  financing  would be less than the increase in the market value estimated to result from the proposed development after subtracting the present value of the projected tax.

This means that so long as the municipality is of the opinion that redevelopment will be a positive thing and it might yield a profit, then it is alright to proceed with the plan. Not exactly language that makes one feel safe with their wallet as it appears city administrators can spend taxpayers’ money with relative ease. The next phase is plan adoption, and it is sandwiched in between formulation and implementation because they define it, for this reason it is not necessary to discuss it. Implementation is quite important as it involves the manner in which a government can execute the plan and who takes part in that execution. Project  finances  are a hot topic at this point in the TIF continuum. Craig L. Johnson, the cartographer of this legal framework, points out the importance of law at this stage.

By setting  financing  restrictions at the outset of a TIF project, local governments can develop financial plans under less uncertainty. A vivid example is provided in the set of laws that authorizes and constrains the ability of a redevelopment agency to leverage their  finances  through the issuance of long-term debt securities. Of the 48 states that have authorized TIF, 46 allow the authority to issue bonds and other indebtedness…

States range in their views on how TIF should be implemented, some authorize a number of development types, such as Minnesota, where residential, industrial, and commercial developments are all allowed. The enabling statutes in Colorado on the other hand do not allow residential development, likely out of a fear of municipalities using eminent domain as a club.

The last stage of evaluating and terminating a tax increment district, is probably the most important and one of the most overlooked. This invites danger to the party and allows counties and municipalities to use TIF as a crutch. Herein lays a major problem as it causes governments to spend money they don’t have and rely on income they might not receive. This increases debt and furthers reliance on credit and deceptive budgetary practices.

In Minnesota, the standard TIF district lasts for 15 years however; a delinquent district may be decertified by the County Auditor under four categories.A county may decertify a district if the time expires (i.e. 15 years runs up), if the municipality is smart enough to set a time limit (i.e. a 7 year project instead of a 15), if the project is complete, or if the municipality makes a written request for decertification.

If county auditors became more aggressive, they could stop TIF abuse under project completion or work with city officials to create a mutual interest in decertification. Both are good strategies for a county or city to use if they wish to remove TIF abuses. If a TIF district has shown no activity, Minnesota law gives a good deal of power to counties to “knock out” and “knock down” these districts. The Three-Year “Knockout Rule” forces the county auditor to decertify a district, forcing them to re-apply for certification. The “Four-Year Knock Down” Rule applies to each parcel individually and makes sure that if TIF activity is not occurring, than “the original net tax capacity of the parcel must be excluded from the TIF district.” This is a was of protecting individual homeowners who might be pay more than their share in TIF dollars.

Impact of TIF on Suburbs and Rural Areas

In 2006, The Citizens League of Minnesota issued the 2006 TIF report, proving that cities are becoming over-reliant on TIF. For example, Minneapolis ranks number one with a TIF capacity of $56,836,388, which is some 14.7 percent of the total tax capacity.[16] There has been a constant complaint that urban areas are to blame as they are the big TIF spenders, yet suburbs and rural areas rely on TIF to a much larger extent.

For example, Rogers is a city with a population of 6,000 and has a TIF capacity of $2,944,844, which might seem small compared to Minneapolis, however, their actual use of TIF is much greater. In fact, TIF accounts for 25.8% of their total tax capacity. That is more than a quarter! Marshall also ranked in the top 50 with a TIF capacity of $1,157,109, and here TIF accounts for more than 13.5% of the total tax capacity, which is almost the same as Minneapolis.

The Marshall Independent recently published an article titled Defending The Use of TIF Incentives where mayor Bob Brynes gave a rebuttal as to why Marshall should use TIF, “We really tried to use it as appropriate-for job creation and for increased investments to support those jobs. That would not have happened without tax increment  financing .”[19] Brynes claims that Marshall is a textbook example of how to use TIF citing that industrial development is good, as opposed to a retail investment such as Rogers’s $5 dollar investment in the floundering Cabella’s store, which turned out pretty bad.

Brynes says, “When a city, like Marshall, properly invests TIF in industrial growth it’s usually not pitting competitors against one another. There was no other corn plant in existence.” While the logic makes sense, it seems like an advanced form of monopolistic socialism whereby government is taking over enterprise and impeding the right to compete.

But what if Ethanol doesn’t take off as the Mayor Bob Byrnes says? Right now there are numerous benefits to using ethanol such as tax breaks and less expensive gas (due to large tax breaks for owners of ethanol friendly gas stations). Even though Ethanol has only 20% the energy content of gasoline and creates more pollution than gasoline, it is still being viewed as a viable replacement. It makes one consider, what will happen when the subsidies stop and people don’t wish to pay extreme prices for this alternative fuel. It is easy to speculate that Marshall’s industrial investment in ethanol might go down the drain rather than in citizens gas tanks, yet the administrators who insisted on making the bad investment will evade angry taxpayers by hiding behind TIF statutes.

Summary

Whether it is a good investment or not makes no difference. Any taxes left over should go back to the taxpayers who can then invest in what they see fit, anything else is theft. TIF is not unlike social security where the taxpayer throws a good deal of money into the pot and has little say in how it gets used.

TIF is like a cookie jar that administrators like to dip their fingers in during a bad budget year. The legal framework of TIF must be analyzed more comprehensively by Congress. Statutes are what give TIF abusers their power and so long as their language is broad and enabling, it will be a constant source of refuge for TIF abusers. In recent years, TIF usage has been curbed somewhat by revising the legal process and demanding more documentation for usage; however, it is still widely used and abused.

It would be wise for Congress to limit TIF usage by creating shorter time windows and if possible, eliminate TIF from the palette of options available for government  finance . County governments can also take a cue from Pat Andersons report on TIF and aggressively decertify inactive or failing districts in an attempt to protect against abuse.

Source by Nicholas Prieve

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