TheAgitator.com
You Can’t Understand TIF without Eminent Domain
Thursday, August 21st, 2008Matt Yglesias suggests that Tax-Increment Financing (TIF) is a good mechanism for encouraging the development of abandoned property. I disagree. TIF is mostly a mechanism for transferring taxpayer dollars to politically-connected private developers, and it is intimately connected to the problems of eminent domain abuse.
TIF is one of those ideas that looks reasonable when you first encounter it (and, indeed, seemed reasonable when California invented it in the 1950s) but gets worse and worse the more you learn about it. The theory behind TIF is that local governments take out bonds that are paid back out of the increased tax revenue generated by a new development financed by those bonds. So, for example, if Wal-Mart wants to build a new store on land that was previously a low-revenue residential neighborhood, the city government might issue bonds worth several million dollars, give them to Wal-Mart to help build its store, and then repay the bonds out of the increased revenue generated by the Wal-Mart.
There are two problems with this approach. One is that the concept of “new tax revenue” isn’t as simple as it seems. It’s true in a trivial sense that the city government is now getting tax revenue from that particular site that it wasn’t getting before. But the reality is that Wal-Mart almost certainly would have built its store somewhere, and so some tax jurisdiction in the general area is losing revenue it would received but for the TIF.
Second, the way the TIF process is set up in Missouri (and Missouri is far from unique) creates a kind of revenue death spiral, where municipalities compete to give large companies ever-larger TIF packages (and eminent domain) to lure them to the state. The result is that large, politically connected developers wind up paying much less in taxes than they would in a world without the ability for such favoritism. Indeed, a lot of large retailers have become expert at playing this kind of game, staying only as long as required by their TIF agreement before picking up stakes and moving to another municipality, where they can get another round of taxpayer handouts.
Presumably, TIF proponents would say that this is an abuse of the TIF concept, and it is. But I’ve seen no plausible proposals to fix the process. The reality is that when you give local governments broad discretion to play favorites, they’re going to adopt policies that favor those with the most political influence. Those tend not to be struggling entrepreneurs that are trying to put down roots in a marginal neighborhood. Rather, they tend to be big companies that bulldoze marginal neighborhoods, kick out the poor people that live in them, and replace their homes with overpriced condos the previous residents can’t afford.
Which brings me to my final point: it’s also important to understand that in most states, TIF is inextricably intertwined with eminent domain. Here in Missouri, the preliminary steps for approving a TIF district—commissioning a study to determine that the area is “blighted” (and the firms that do these studies always conclude that the area is blighted)—are identical to the steps for approving the use of eminent domain. TIF and eminent domain are frequently offered as a package to potential developers.
Indeed, I don’t know about the U Street neighborhood specifically, but I do know that in many areas, the threat of eminent domain is one of the major impediments to organic growth of urban neighborhoods. Entrepreneurs who are foolish enough to try to start a new business in a marginal neighborhood without the city’s explicit blessing are sitting ducks for future confiscation of their businesses after the neighborhood begins to prosper. This creates a huge disincentive to develop abandoned property, and creates the illusion that only active city “redevelopment” can revitalize neighborhoods. In reality, the threat of “redevelopment” is one of the major drags on organic urban revitalization.
I’m loving these entries. If you are taking requests, I’d love to see your take on Enterprise Zones in California.
Tim,
While i am a libertarian, I still think that TIF’s do have the capacity to be a useful development tool. Most TIF’s are set up to finance infrastructure improvements such as roadways and streetscapes that are for public use and not given as a cash contribution. (not knowing Missouri’s laws, i’m not sure if this is the case there..)
However, I have two issues with your analysis:
1) Development is not a zero sum game. Yes, that Wal-Mart could go anywhere. But perhaps the location of THAT Walmart would be so good that it wouldn’t impact the business decision of placement of another store in the area. Maybe that Walmart entices a Target to come and set up a competing store nearby. also benefit the tax rolls of some level of govt, if not that municipality.
2) If businesses are being given tax breaks or eminent domain as a package in combination with TIF, than its not the actual TIF thats causing lost revenue. Theoretically, (and depending on state laws) TIFs should be set up to draw away only revenues that are to go to the general fund of the municipality and redirect them towards paying debt service on the issued bonds.
In some municipalities all revenues (including school and county) go towards the TIF, but thats is more a problem of the language in the legislation than the concept. The actual taxes paid by the landowner/developer should be the same as they ordinarily would be if only TIF is considered.
If businesses are only willing to develop where there are (temporary) tax breaks, then those businesses will only remain as long as the tax break remains.
Remember, the difference between socialist ideals and libertarian ideals are not the goals, but the means and outcomes. in theory, TIFs work great. However, when applied, they reek of corruption and political pandering.
Don’t let your goals cloud your judgement.
No one talks about the push down-pop up problem, in regards to eminent domain. If you make a neighborhood better and the previous tenants can’t afford to live there, they move to a new neighborhood and create crime there. You may have reduced crime in one area, but it has just moved elsewhere.
“There are two problems with this approach.”
Bullshit.
There is one problem with “this approach”, and it’s that you’re talking about stolen money.
Get your head on straight.
TIF’s have nothing to do with ‘stolen’ money. All they are there for is reallocating taxes that owners would already pay to a different stream. In essence, instead of going to a general fund, they go towards paying debt service on infrastructure improvements.
Now you could consider any taxes paid at all ‘stolen’ and certainly thats a different argument but not one that has anything to do with TIFs.
Eric,
Again a TIF in and of itself is not a tax break of any kind. It redirects the tax revenues that the owner would be paying anyways towards debt service instead of general fund purposes.
[...] at The Agitator, Tim Lee explains how one policy used by city and local governments to spur small-business [...]
Where to begin?
TIFs are a nightmare! My city has several – each is a scam that benefits politically influential special interests. I live in Virginia Beach VA.
The problem with TIFs is that they ear mark future taxes for special interests, leaving the general fund to flat line and thus, forcing more tax increases.
In my city TIFs are used for funding wealthy developers that were going to invest anyway – the TIF just made the deal sweeter for them. Often these TIFs are marketed to the public as some sort of “investment’ – however, the “investment” doesn’t return any increased funding to the general Fund; rather the increased costs of public services and new “public” infrastructure far out weighs the new increase in taxes collected.
The other problem with TIFs is that they often set a baseline year and take ALL increases in property value since the baseline year. The propoerty would have increased in value without the TIF, but that non-develop increases in taxes is now redirected to benefit the developer’s project, now to benefit the residents of the city outside of the TIF development.
Of course the TIF also eats up any of the city’s available credit (bond potential) for non-essential so-called “economic development” boondoggles; thus maxing out the city’s “credit card” when it comes time to borrow money for real needs, such as new schools or replacing worn out transportation infrastructure.
If new “infrastructure” is desired by developers then I prefer a “Special Taxing District” instead; this way, those property owners that benefit most from the new “public” infrastructure (like the $1.6M Italian marble fountain in our new TIF funded “Town Center”, or the $100M addition to the Lynnhaven Mall) are the ones that pay – and the increased property taxes go directly into the General Fund – thus REALLY offering residents a benefit – now.
Not 37 years “later” when the bonds are actually paid off.