Policy Documents

TIF at a Turning Point: Defining Debt Down

Joan M. Youngman –
May 2, 2011

The proposal by California Gov. Jerry Brown (D) to end tax increment financing (TIF) initiatives in that state signals a dramatic change in the fiscal landscape of a region with a long history of tax innovations, often with national repercussions. That was certainly true in the case of Proposition 13, and it was also true when California introduced TIF in 1952. That new instrument spread across the country, adopted in some form in almost every state, and is now ‘‘the most widely used local government program for financing economic development in the United States.’’ Whatever the outcome of Brown’s proposal, the suggestion that TIF initiatives are no longer sustainable in California marks a turning point worth careful consideration. Moreover, municipal experience with TIF may shed light on larger issues of debt finance now facing many state and local governments.

In theory, TIF creates a perfect closed system of self-sustaining finance, a textbook example of ‘‘value capture.’’ There are important differences among state approaches, but some common elements form the basic pattern. Generally, a municipality identifies a specific geographic area for redevelopment. The redevelopment initiatives may be directed by the municipality or by an economic development agency that is typically under municipal control. They may be funded on a cash basis or, more commonly, by issuance of bonds. The crucial feature is the earmarking of taxes on future increases in property values in the TIF district to pay for redevelopment costs.

TIFs can be invisible to taxpayers, because the assessor continues to value property as before and the taxpayer continues to pay taxes in the same way. But tax collections are now divided between the portion attributable to values in place at the time the TIF district was established and the portion that represents value increases since then. For the life of the TIF district, which may be 20 to 30 years, or even longer, taxes on value increases are earmarked for TIF spending or repayment of TIF debt.

In theory, the TIF project requires no new taxes, and it pays for itself by increasing the tax base. Because a finding of blight in the redevelopment area is often required to establish a TIF district, the government investment is considered targeted to a region that would not otherwise attract private capital. From that perspective, TIF is, as Prof. George Lefcoe of the University of Southern California has written, a ‘‘win-win-win for the city, the private developer and the taxpayers.’’ It is no wonder that Sacramento Mayor Kevin Johnson, in opposing Brown’s plan to end TIFs, called these projects ‘‘magical things.’’

In appropriate situations a TIF can produce exactly those results. A formerly blighted area may blossom, tax valuations may increase as a result, and a strengthened tax base may permit expanded future public services. In other cases, government investment could fail to improve local conditions, while the freeze in future tax base growth could restrict services during the period for repayment, further diminishing the jurisdiction’s economic prospects.

The promise and popularity of TIF have placed it in a position of enormous fiscal importance. Brown’s proposal signals the need to consider both its risks and potential drawbacks.