TIF Epidemic Infects Local Governments

Published March 1, 2006

In 2004, the city of Fort Worth approved an economic development initiative that seemed to have all the numbers on its side. A billion-dollar company would come to town, bringing more than 500 jobs and luring an estimated 2.5 million visitors to the city each year.

And the cost to the city didn’t seem that much: $30 million to $40 million in total tax breaks to be parceled out over the next 20 to 30 years. The company receiving the tax breaks would be Cabela’s, a hunting/fishing megastore headquartered in Nebraska and now expanding across the country.

But when the numbers are peeled back, and the real costs of giving the tax breaks to Cabela’s are studied, Fort Worth’s economic development initiative isn’t all it appears. The economic development tool–tax increment financing, or TIF–is being used by cities big and small, and critics claim it is the latest form of corporate welfare, with hidden costs.

Overestimate Benefits

The facts are simple, according to the experts. Stores such as Cabela’s are already profitable, and incentives like TIF just make them extremely profitable.

Moreover, no one believes the original estimates of the number of visitors to the Cabela’s store were realistic. Cabela’s no longer offers firm visitor estimates, and Fort Worth officials admit the original estimates of tourist interest were overly optimistic.

“There is always this expectation with TIFs that the economic growth is a way to create jobs and grow the economy,” says Greg Le Roy, author of The Great American Jobs Scam: Corporate Tax Dodging and the Myth of Job Creation. “But what is missing here is that the cost of developing private business has some public costs. Roads and sewers and schools are public costs that come from growth. But private businesses need to pay their fair share, and then maybe the tax rate for the general public would not grow, or could be reduced.”

Use of TIF Explodes

Tax increment financing has been around for 50 years, but in the past 10 years it has become a development aid most cities and states use … and many corporations expect. Here’s how TIF works:

After a local government has designated a TIF district–most states say the area must be blighted–property taxes (and sometimes sales taxes) from the area are divided into two streams. The first tax stream is based on the original assessed value of the property before any redevelopment. The city, county, school district, and other taxing bodies still get that money. The second stream is the additional tax money generated after development takes place and the property values are higher. Typically that revenue is used to pay off municipal bonds that raise money for infrastructure improvements in the TIF district, for land acquisition through eminent domain, or for direct payments to a private developer for site preparation and construction.

The length of time the taxes are diverted to pay for the bonds can be anywhere from seven to 30 years.

Local governments sell the TIF concept to the public by claiming they are using funds that would not have been generated without the TIF district. If the land was valued at $10 million before TIF-associated development and is worth $50 million afterward, the argument goes, the $40 million increase in tax value can be used to retire the bonds. Local government officials also like to argue the TIF district may increase nearby economic activity, which will be taxed at full value.

Given the competition between cities eager to attract new businesses, tax increment financing is not likely to disappear anytime soon. “Has it gone overboard?” asks University of North Texas economist Terry Clower. “Sure … but the problem is that if a city doesn’t offer some tax incentives, the company will just move down the road.” According to Clower, “In a utopian world, there would be no government handouts, and every business would pay the same tax rate. But if a city stands up and says they aren’t doing [TIFs] anymore, they will lose out.”

Business Competitors Lose

Instead, it’s the competitors of TIF-favored businesses that lose. Academy Sports & Outdoors, which employs 6,500 people, has about 80 sporting goods stores in eight Southern states, including a store in Fort Worth. When the Fort Worth City Council was considering the TIF for Cabela’s, Academy Sports Chairman David Gochman spoke out against the tax incentives.

“This is not a nonprofit, not a library, not a school,” Gochman said. “They are a for-profit business, a competitor of ours, along with Oshman’s and Wal-Mart and others.”

But for now, Fort Worth has the Cabela’s store, down the road from the Texas Motor Speedway, which also has its own TIF. Housing and retail are growing in the area, but they were growing before the Cabela’s store came to town. A half-dozen shopping centers nearby were on the drawing board well before the Cabela’s TIF was considered. Within a five-mile radius of the hunting/fishing megastore, 10,000 new homes have been built since 2000. The area is expected to grow by 20,000 people in the next two years.

Big Corporations Are Big Winners

Some of the country’s largest corporations have been TIF’s major beneficiaries in Fort Worth: RadioShack, Dell Computer, Pier 1, NASCAR, and Cabela’s. In each case, city hall records show, the company made TIF a condition of its coming to or staying in Fort Worth.

“The plan has veered so far from its origins that it has become little more than welfare for the rich,” said Fort Worth businessman Louis McBee, who has fought TIFs. “Find the blight around the Texas Motor Speedway. Find it around Cabela’s. Find it in many TIFs around the country. What this is is a corporate giveaway, and the common tax-paying citizens are left paying for it.”

Daniel McGraw ([email protected]) is a Forth Worth-based freelance writer and author of First and Last Seasons: A Father, a Son and Sunday Afternoon Football (Random House).

For more information …

In March 2003, the Developing Neighborhood Alternatives project, a research effort in which The Heartland Institute participated, published The Right Tool for the Job? An Analysis of Tax Increment Financing. The executive summary and two-volume report are available online at http://www.heartland.org/Article.cfm?artId=11868.

Additional information on tax increment financing is available through PolicyBot™, The Heartland Institute’s free online research database. Point your Web browser to http://www.heartland.org, click on the PolicyBot™ button, and select the topic/subtopic combination Taxes/Tax Increment Finance.