Tax Increment Financing Raises Costs, Hides Giveaways to Politically Connected

Published February 1, 2008

A decision by city officials in Kannapolis, North Carolina to borrow $168 million through tax increment financing exposes key problems with that type of funding scheme, according to a new report by the John Locke Foundation.

“Tax increment-financed bonds, or TIFs, are more expensive for local taxpayers than other options, such as general obligation bonds or certificates of participation,” said report author Joseph Coletti, a fiscal policy analyst at the North Carolina think tank. “A TIF scheme will also allow local governments to hide the targeted tax incentive they’re providing to a private developer.”

The Kannapolis City Council approved its TIF plans November 26, about the time the foundation released Coletti’s report, “Debt Is Debt: Taxpayers on hook for TIFs despite rhetoric.”

Three Disadvantages

“Tax increment-financed bonds have three disadvantages for taxpayers, and it’s no surprise that these disadvantages make TIFs extremely valuable to some government officials,” Coletti said.

“First, TIFs do not require voter approval. Second, TIFs divert tax revenue before it reaches the general fund. That means the fiscal effect is hidden, along with the TIF’s role as a taxpayer subsidy to private developers. Third, the lack of voter approval and transparency help make TIFs far more expensive than other forms of debt,” Coletti continued.

Most of the borrowing in the Kannapolis case is tied to a private developer’s plans for the North Carolina Research Campus, which covers the grounds of the former Cannon Mills Co. textile plant in downtown Kannapolis in Cabarrus County, about 20 miles northeast of Charlotte. Project supporters say the 350-acre campus eventually will be home to more than 100 biotech companies.

Billionaire Benefits

Billionaire businessman David Murdock, who owns a house overlooking the campus property, announced plans for the project in 2005 and pledged $100 million of his own money. Murdock owns Dole Foods Co. and the lead development firm, Castle & Cooke, Inc.

At the time of the announcement, Murdock said the campus eventually could cost up to $700 million to build. Area colleges and universities, local and state governments, and private investors are participating.

North Carolina’s local governments gained the right to pursue TIFs when voters approved Amendment One in 2004. Voters had repeatedly rejected tax increment financing in the past, but advocates secured passage of a statewide referendum on the issue after they started calling TIFs ‘self-financing’ bonds, according to Coletti.

Tax increment financing allows local governments to build capital projects with debt that’s repaid from new tax revenues collected in special districts tied to the projects. Nearly every state uses TIFs, and they bring mixed results, Coletti said.

Expensive Option

Tax increment financing costs taxpayers more money than other borrowing options, according to Coletti’s analysis. As an example, Coletti studied the costs of different borrowing options to secure $67 million, the amount of Cabarrus County’s portion of the debt for the North Carolina Research Campus.

“In present-value terms, a general obligation bond could save local taxpayers $6.8 million compared to the TIF,” Coletti said. “Over the life of the debt, the interest savings could be $38.5 million.”

TIF advocates contend the bonds impose no burdens on taxpayers. “This is simply not true, and those who say it have confused costs with budget items,” Coletti wrote in the report. “It is true the government does not use general tax dollars to pay the debt tied to a TIF. That’s because the revenue never makes it to the general fund in the first place.”

Coletti continued, “This has no cost in the same way that having taxes deducted from your paycheck has no cost. The money used to pay off the TIF debt is not available for other needed services, even in the special TIF district itself. A private development without tax increment financing would pay the same amount of taxes, with all of the tax revenue available to pay for city services instead of new debt.”

Hidden Subsidy

“If this [research park development] is a legitimate purpose for local government, the city and county governments could have chosen less-expensive options for meeting that goal,” Coletti said. “Instead, Kannapolis has chosen the most expensive form of borrowing to hide both the fact that it is borrowing money and that the borrowing leads to a taxpayer subsidy for a private developer.”

“Tax breaks for individual developers and similarly targeted economic development incentives are never a good idea,” Coletti notes in his report. “Hiding the incentives behind the veil of a TIF that also can lull people into not recognizing the risks of a project is even worse.

“Local governments need to be honest with taxpayers about the costs and risks involved in TIFs,” Coletti wrote, “and also about their use as targeted economic incentives.”

Mitch Kokai ([email protected]) is director of communications at the John Locke Foundation in Raleigh, North Carolina.

For more information …

“Debt Is Debt: Taxpayers on hook for TIFs despite rhetoric,” by Joseph Coletti: