Tax Increment Financing is an important tool for accommodating new growth in Washington, but it certainly won’t address all of Washington State’s growth challenges. Let’s consider some of the arguments against TIF (if you need to get more basics on TIF start here). The central criticism of TIF—the one that is most likely to give fodder to opponents—is that what began as an effort to rescue cities from blight, TIF has become a program rife with inequities and abuse that is actually contributing to sprawl. It’s an important argument to prepare for when putting together a TIF proposal.
One of the best TIF critics I have read is Greg LeRoy who is well versed in how the tool works and where it has gone wrong. The title of his article on TIF, “Greenfields, and Sprawl: How an Incentive Created to Alleviate Slums Has Come to Subsidize Upscale Malls and New Urbanist Developments” kind of says it all. LeRoy’s arguments and examples are compelling.
From Blight to Economic Development
As I wrote earlier, TIF was originally conceived as a way to produce a local match for federal housing dollars. The original idea was that TIF could use debt to upgrade an area identified as “blighted,” increase the value of the underlying property, and then use the increased tax collections to pay back the debt that was taken on to make the improvements in the first place. Areas that were rundown, with low property values were ideal for this. Developers wouldn’t build there because the infrastructure costs were too high. But if a city could take care of those up-front investments—sidewalks, roads, or district energy for example—developers would be more likely to build. Because property values were low there was a lot of room for improvement for the underlying tax base, making that incremental increase in tax collections enough to cover the debt service.
Soon local governments figured out that blighted areas with low tax bases weren’t the only areas that could generate incremental increases that would arise out of publicly-subsidized infrastructure improvements. Gradually the definition of “blight” began to expand to the point it became almost meaningless in some states, while in some other states the term was abandoned altogether. States like Virginia and North Carolina simply substituted “economic development opportunity” for “blight” in their definition of what would constitute an area worth establishing as a TIF area. The problem, according to LeRoy, is that the more expansive definition caused a proliferation of TIF areas with a dangerous lack of focus. In fact, LeRoy argues that TIF has often aided and abetted sprawl rather than urban renewal, and it has subverted the intended public-private partnership.
Proliferation, Fiscalization, and Sprawl
The problem as LeRoy sees it is that politicians behave the way politicians often do, falling all over themselves trying to attract new business into their city or county. The TIF tool essentially became a giveaway to business. Cabela’s—a large outdoor sports big box retailer—won’t locate in an area unless they get generous subsidies, often using TIF. This use ends up creating land-uses that eat up open space, farmland, or habitat to set up a giant retail boxes surrounded by seas of parking and roads paid for using TIF. Not exactly the most sustainable outcome.
In LeRoy’s estimation, such wide authority is far too tempting for local government to abuse, resulting in huge windfalls for private developers and bad planning. As I mentioned before, TIF is essentially fiscal policy at the local level, allowing local governments to use their debt capacity to generate economic activity. It’s not exactly printing money, but TIF can provide the local economy a huge shot of economic activity and dollars. Faced with competition with other counties, states, or cities, local elected officials can use TIF far too often. And when multiple jurisdictions have access to TIF, there can be a race to the bottom as they extend themselves further and further trying to entice businesses to locate in a proposed TIF area. Tax dollars get diverted away from other important things like schools, and projects can end up being auto-oriented single uses rather than compact mixed-use development.
How to Respond to the Criticism
Washington State doesn’t yet have full TIF. But as state policymakers consider it, it’s useful to consider some ways to respond to the legitimate criticisms leveled by LeRoy and others. A couple of these points have been raised in earlier posts, but they are worth mentioning again.
- No density, no TIF—limiting the use of TIF to areas of potential density and within the state’s proscribed urban growth boundaries will prevent sellouts to big box sprawl. Local governments need to be told “no density, no TIF.” Only cities that are willing to support density and mixing of uses—housing, retail, transit, commercial—should be granted TIF authority.
- Fiscalization is OK—there is nothing wrong with using debt to make smart investments that will create economic activity now and in the future. If economic development is the purpose of TIF, it needs to be clearly defined and openly stated with measurable outcomes. Private developers need to make a profit, but use of the tool needs to be attached to some public benefit—even if that benefit is simply the increase in sales or property tax.
- Blow up the code—traditional zoning—the land use code—in Washington’s larger cities has become an obstacle. The code has become an accretion of things various city councils, over time, wanted to avoid rather than what they aspired to. Tying TIF authority to good innovative urban planning would create an incentive to race to the top rather than to the bottom when cities compete for new development.
Supporters of TIF ought to use LeRoy’s criticisms and examples to support the argument that TIF can lead to more sustainable outcomes—if used wisely. That means limiting the use of TIF to supporting the kind of sustainable development we need in cities. LeRoy points out (as I did in a post over the summer) that dense, urban areas provide a much better vein of property and sales tax to tap than sprawl—cities are where the greatest value can be found. And tyin
g TIF to innovative urban planning strategies will ensure the best outcomes.
Photo credit: clarita from morguefile.com
John Gear
You forgot the most important part, building in an accountability mechanism so that TIF doesn’t continue to plunder the budgets for schools, county services (mental health, jails, energy conservation programs, police, fire, soil and water conservation, etc.):There must be a measure established so that, in any metro area where there is a TIF-based development, the other taxing jurisdictions don’t get screwed out of the taxes that result from general appreciation. In other words, if the values in the whole metro area increase by 2% last year, then the other taxing jurisdictions that tax property within the TIF development area should see a 2% increase in revenue from within the TIF area—the TIF can have everything above that, as it’s at least plausibly related to the TIF investment.What has turned me from a former TIF backer to a TIF opponent is not just the stupidity of many of the investments but the way that TIF financing robs many Peters to make a couple Pauls rich, no matter how badly what they build flops. If investors buying the bonds had to pay closer attention to make sure that what got built with TIF money was actually likely to increase values above the general rate (to produce a revenue stream), then we’d all be much better off. Without something like that accountability built in, TIF is a disaster and only contributes to the third-worlding of America’s cities, where gleaming megaprojects siphon money up and away from basic services.
Brian Kelcey
I have to agree with Mr. Gear. TIF is still in its infancy in Canada, and when I worked in a Mayor’s Office in one middle Canadian city, we studied it as an option to help attack blight.Now that the necessary enabling legislation is in place years later, TIFs are in place or announced for two projects – once to subsidize projects that were already announced before the TIFs appeared in an already gentrifying neighborhood, and in another much larger case to pay to move a football stadium from a retail park to the suburbs – in what was initially a plan to subsidize a new defunct private buyout of a community CFL team. The idea of using TIFs hasn’t even been floated for any other purpose, even though the same city has Canada’s poorest and most blighted inner city neighborhoods spread over a wide area. The more I look south, and north, the more I find TIF is an invitation to corruption, corporate welfare and political abuse. I can’t see a scenario that gets past that problem, and am increasingly opposed to anything that resembles the model accordingly. Cash subsidies, at least, have the dubious value of having to be approved by someone in a lump sum in the cold light of trackable, auditable daylight.
John Gear
Yes, in the main, TIF is promoted by people with the best intentions and used (and abused) by those with the worst.
David Sucher
Totally agree with those dubious about TIF and am 100% against them. We have enough cronyism and bad decision-making—can you spell the work “tunnel?”—so I am against such governmental speculation.