More Thoughts (and History) on Tax Increment Financing

My last go at the Tax Increment Financing (TIF) topic took a look at the major challenge to implementing TIF in Washington: severe constitutional limitations on implementing robust TIF legislation. (If you don’t know what TIF is, I suggest you start here and check out this article which I reference later.) Those limitations could be overcome with a constitutional amendment that would allow the increased property tax collections from a TIF district to be used for debt service rather than the state’s general fund. But once the constitutional problem is fixed there is still the matter of how the legislation could be most effective in promoting economic development and compact communities. Lessons from other states are helpful in outlining what might work best here.

How did TIF get started?

The origins of TIF are in 1952 California where local governments turned to this unique mechanism to generate matching dollars in order to qualify for federal urban renewal funding. Local governments in California raised the match money by selling bonds; then they paid back the loans by using the increased tax collections that resulted from the renewal projects they had just paid for. The technique worked. Then in the 1970s, federal renewal money went away, new voter-imposed restrictions drastically limited property tax rates (Proposition 13)—and the practice exploded because it was one of the few ways that localities could raise money for renewal development. In 1970, there were only 76 TIF areas in California, but by 1990 there were 658. The practice soon spread to other states: 28 states had TIF by 1984, 33 states by 1987, and 44 states by 1990. Today every state with the exception of Arizona has some form of TIF.

North Carolina changed its constitution for TIF

North Carolina’s voters approved constitutional changes to allow TIF—like Washington voters would have to—and we can learn from the shortcomings of their TIF measure. With the collapse of the tobacco industry and other economic challenges, in 2004 local leaders successfully pushed for TIF to be used by local government as an economic development tool. Two different reviews of the implementation of Amendment 1 completed by the University of North Carolina and another review by a graduate researcher found that most local governments were slow on the uptake. The four main problems with North Carolina’s new TIF program are:

• Other lower-cost options exist—general obligation bonds are more affordable for local governments than engaging in TIF. If money costs are too high, participation will suffer;
• More restrictive than other states—the rules that North Carolina applies to TIF are too stringent. The studies found that “a well intentioned safeguard can easily become a deterrent for using TIF;”
• First project got bad publicity—the first project out of the gate—the Roanoke Rapids Theater—got bad publicity as the project lost money; and 
• It’s too complex—the process to use the authority under the new law is a challenge to understand for local government and complicated to administer.

The lesson from North Carolina is pretty clear: keep it simple. If TIF becomes too costly for cities and developers in hard and soft costs then local governments just won’t be interested in using the tool. And the history of TIF shows that as federal and state dollars for local development projects dry up, TIF can be an important tool for local governments to use local resources to make those projects happen. Getting the constitutional aspects of TIF sorted out is only the first step. Being sure that TIF gets used and used well is just as important.

So doesn’t Washington already have TIF?

It is true that Washington is one of the 49 states with some form of TIF—it’s called “TIF lite” and I wrote about it in my last post. That solution hasn’t worked because it requires agreement from junior taxing districts, and the amount of money available is tiny—only $5 million. That amount is not nearly enough to put together big projects. And TIF lite is pretty complicated to use, making it a compromise that keeps it constitutional but doesn’t allow projects at a scale that would create large-scale shifts in land use or big public benefits. To get full TIF Washington would have to fix it’s constitution like North Carolina did.

Next: What should a full TIF look like in Washington?

In a follow up post I will share some ideas about ways a proposal for TIF in Washington might avoid some of the traps other states like North Carolina have faced.

Photo credit: jasonwebber01 from morguefile.com.