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What the consultants won’t tell you about TIF financing |
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As we explained previously, TIF financing is a means of funding an urban renewal authority, such as the Louisville Revitalization Commission. Urban renewal authorities have no power to tax. To fund its activities, a URA has limited options: asking the municipality that created it for money, and TIF financing combined with issuance of bonds (i.e., borrowing money).
To hear the LRC’s consultant Ann Ricker tell it, TIF financing has no downside, only “benefits”; it’s “win-win-win.” As citizens with common sense, all of us know intuitively that there’s no such thing.
TIF financing can have a significant, harmful impact on our community and our larger community—that is, Boulder County and Boulder Valley School District. To understand how, you have to remember that TIF freezes at a “baseline” level the urban renewal district’s tax revenue that goes to fund operations and services at the municipal, county and school district levels. As an example, if King Soopers were in an urban renewal area, the sales and property tax revenue generated by King Soopers would be frozen. Without TIF financing, sales and property tax revenue pay for services like operating the library and city hall, paying for salaries in county offices, and janitorial services in schools. After TIF implementation, new tax revenues generated above the baseline level—that is, the “increment”—are held, invested, used or otherwise disposed of by the URA, here, the Louisville Revitalization Commission. The principal mission of a URA, and of the LRC, is to use public dollars to “incentivize” developers to build in an urban renewal district.
The pros of TIF financing. Since URAs can’t carry out their function—implementing plans to prevent and remedy “blight”—without money and since they can’t tax, they’ll need to get money somehow, and TIF financing is a common option. In a true blight situation, where property values and residential incomes are depressed in an area, it’s quite possible that private developers will have no incentive to develop, and the blighted area continues its downward economic spiral. In that situation, a URA could offer attractive incentives to developers, such as agreeing to pay for infrastructure (e.g., roads, sewers and utilities) that the developers ordinarily would be required to pay for, or agreeing to pay developers to develop. In that situation, many might agree that TIF financing (that is, the use of tax dollars) serves a compelling purpose—stopping an area’s downward spiral and rejuvenating it.
The cons of TIF financing. There are a number of problems with TIFs. 1. Where’s the blight? To start with, the urban renewal laws originally were all intended to prevent and remedy blight. Many such laws outside Colorado have been amended to permit URAs and TIF financing even when there is no blight, only a desire for economic development. When TIFs are not used to prevent and remedy blight, however, the compelling reasons for TIFs described in the previous paragraph cease to exist.
The question then becomes whether economic development/redevelopment is a good enough reason to justify TIF financing. For starters, it’s not really a proper question, since an urban renewal district under Colorado law cannot be created for the sole purpose of economic development/redevelopment and therefore a URA’s power to use TIF financing would never come into play.
2. Is it wise to use tax dollars to subsidize developers? But even if it were lawful to use TIF financing solely for economic development where there is no blight, some problems are apparent right away. Remember that TIF financing is not “free” money. It’s taxpayer money that’s being diverted from providing services to taxpayers to “incentivizing” developers to build in an area that is not blighted. One problem is this: It is well established that retail and housing development occurs in “boom and bust” cycles. When it’s in a “bust” cycle, does it make sense for a municipality to take up battle against regional or national economic cycles and incentivize developers with scarce tax dollars? If land during a “bust” cycle is not developed immediately, does it mean that it won’t be developed when the “boom” comes?
3. Should the rest of the city subsidize the urban renewal area? Perhaps the most pernicious element of TIF financing is its effect on the citizens and businesses outside the urban renewal area. Take the LRC’s proposed urban renewal district as an example. If it were approved, most of the city of Louisville would fall outside the area; if things went as planned, over the next 10+ years, the Hwy 42 corridor would be developed and redeveloped—there’d be a commuter rail station, hundreds of new housing units, new roads and underpasses, new sewers, widened streets, more streetlights and so on; as the property values increased and as retail stores were built, property and sales tax revenue would increase significantly—and virtually all of this increase would be absorbed by the Louisville Revitalization Commission to fund its “incentivizing” goals. The result would be that the residents and businesses outside the Hwy 42 urban renewal district not only would be subsidizing services being provided into the urban renewal district, but also subsidizing more and more of the development inside the district. This is because although the district would be generating in 2016 much greater tax revenues than it did in 2006, under TIF financing the area would be contributing the same revenue it was contributing in 2006, the rest going to the LRC.
4. Research shows that TIF financing doesn’t pay its way. The City’s consultant would argue that under that example the new revenue would not have been generated but for the existence of the LRC and its incentivizing ways. But that argument assumes, probably wrongly, that the development in the area would not have taken place but for the LRC and its incentivization of developers. The argument’s probably wrong because there is justifiable doubt about whether the LRC’s proposed urban renewal area contains the problems, quantity of blight and grim future that would justify any incentivization. That is to say, there is good reason to believe—among other things, because of the planned commuter rail station and its effect on land and incentives to build—that the Hwy 42 corridor will be developed and redeveloped irrespective of any incentivization using tax dollars.
A study by researchers from Iowa State University’s Economics Department concluded that:
Ÿ The ease with which TIF districts can be designated in Iowa, along with the multiplicity of uses for TIF districts, amounts to an entitlement for new industry and housing development.
The researchers concluded: “We found virtually no statistically meaningful economic, fiscal, and social correlates with [TIF financing] in our assessment; consequently, the evidence that we analyzed suggests that net positions are not being enhanced—that the overall expected benefits do not exceed the public’s costs.”
5. TIF financing worsens the city’s budget woes. Louisville’s operating budget problems have been attributed to the loss of sales tax revenue, which makes up the vast majority of the operating budget. The deficit for the 2007 budget was nearly $750,000. By contrast, the city’s capital budget—allocated for expenses associated with improvements to the city’s infrastructure—is adequately funded. TIF financing takes away “incremental” sales tax revenue generated in the urban renewal area and spends it on infrastructure improvements—e.g., incentivizing developers to build, and building roads, sewers, etc. that the developers otherwise would be required to pay for. The result? The city—i.e., the Louisville Revitalization Commission—is spending sales tax revenue that otherwise would go to the operating budget (which is in the red) to pay for infrastructure improvements that, without TIF financing, would be paid for by the city’s capital budget (which is in the black). |
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