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.
TheAgitator.com

