Tax increment financing has become a popular tool for funding economic development projects in municipalities across the country. Originally designed to help blighted areas attract businesses, tax increment financing, or “TIF,” has quickly become the subsidy of choice for towns seeking to spur development.
TIF allows municipalities to use taxes (property, sales, etc.) collected from a new development – taxes traditionally used for public services such as schools, libraries, and fire departments – to subsidize development instead.
Several counties in Missouri have become reliant on TIFs to promote new development, often in areas the average person would not consider blighted. Several proposals considered in the past few years would limit the ability of municipalities to create TIFs single-handedly without county approval and would limit how TIF dollars are used.
One proposal, SB 774, would change the composition of TIF commissions. Currently, a TIF commission gives cities undue influence by allowing mayors to appoint six of the 11 total commissioners; the proposal would move these appointments back to the presiding commissioner. The bill also would prevent St. Louis, St. Charles, and Jefferson counties and their various municipalities from approving a TIF unless the county-wide TIF commission approves the plan, according to the Columbia Tribune. Currently, a town can override the commission’s vote and establish a TIF district; under the reform plans, if an override occurs in those counties, the funds could be used only on land clearance, land grading, and demolition costs.
A proposal by state Rep. Kurt Bahr would limit construction in high-risk areas by prohibiting creation of a TIF in any floodplain in the state. Currently, this restriction applies only to St. Charles County.
On the surface, tax increment financing appears to be a good deal for cities looking to encourage growth. TIFs look like free money because the bonds are paid by future tax revenue increases in the improved district, revenue that presumably would not materialize without the subsidized development. But research shows TIFs are a gamble on expected economic growth and increased property tax revenues.
A 2003 study by The Heartland Institute and three other organizations examining five Chicago-area TIF districts found tax increment financing does not tend to produce a net increase in economic activity. It favors large businesses over small businesses; often excludes local businesses and residents from the planning process; and operates in a manner that contradicts conventional notions of justice and fairness.
The study made four recommendations to communities seeking to spur economic growth:
- Consider alternative strategies before choosing TIF.
- Provide better information to the public about the effects of TIF.
- Make TIF decision-making procedures more inclusive and fair.
- Distribute the benefits of TIF more fairly.
The evidence shows tax increment financing is unwise for several reasons. TIF districts lack transparency, both in how they are implemented and how they utilize taxpayer dollars. Taxpayers have little say in how TIF districts are established. TIF districts lack accountability because residents cannot see on their tax bill how the redirected taxes are used.
Instead of shifting tax revenues away from public services, Missouri lawmakers should focus on attracting development through sound, competitive tax policy.
The following articles examine tax increment financing from multiple perspectives.
Bills Pending in Legislature Would Curtail TIF in Boone County
Andrew Denney of the Columbia Tribune examines proposed legislation that would increase county governments’ influence over the use of tax increment financing and limit incentives for projects approved without the blessing of a local Tax Increment Financing Commission.
Senate Bill 774: Reforming Tax Increment Financing Districts
This document presents the testimony of David Stokes of the Show Me Institute before the Missouri Senate Jobs, Economic Development, and Local Government Committee in April 2014 in favor of SB 774, a bill to reform TIF districts in Missouri. “Originally intended as a treatment for ‘blight,’ TIF has been aggressively used throughout Missouri’s wealthier areas. SB 774 addresses this concern, in part, by limiting the use of TIF in projects where a city goes forward without county TIF commission approval to factors that directly address the condition of the property: demolition, clearing, and grading,” Stokes states.
The Right Tool for the Job? An Analysis of Tax Increment Financing
The Developing Neighborhood Alternatives project, a joint project of The Heartland Institute with the Center for Economic Policy Analysis, the Jewish Council on Urban Affairs, and the Statewide Housing Action Coalition, conducted a case study of five Chicago-area TIF districts. The study examined how these districts were formed and their effects on economic development, concluding tax increment financing often fails to produce a net increase in economic activity, which is generally among the primary goals claimed by TIF planners. TIF also tends to favor large businesses over small ones, often excludes local businesses and residents from the planning process, and operates contrary to conventional notions of justice and fairness, the study found.
Competing for the Next Hundred Million Americans: The Uses and Abuses of Tax Increment Financing
George Lefcoe of the University of Southern California Law School examines the beneficial uses of tax increment financing and the major criticisms leveled against TIF.
Crony Capitalism and Social Engineering: The Case Against Tax-Increment Financing
Randal O’Toole of the Cato Institute identifies the many problems with tax increment financing and recommends municipalities decrease use of TIF to finance new development.
Tax Increment Financing and Columbia, Missouri
David Stokes of the Show Me Institute examines the problems with TIF districts and their misuse. “Missouri should dramatically tighten its TIF laws. At a minimum, TIF should be decided at the county level, and the ability of cities to override rejections from TIF commissions should be eliminated,” Stokes writes.
Debt Is Debt: Taxpayers on Hook for TIFs Despite Rhetoric
The John Locke Foundation compares TIFs with certificates of participation (COPs) and general obligation bonds, illustrates the premium local governments pay to use TIFs, and provides an example of how the city of Kannapolis and Cabarrus County, North Carolina, could have accomplished the same result as a TIF through other methods.
Tax-Increment Financing: The Need for Increased Transparency and Accountability in Local Economic Development Subsidies
In this paper from U.S. PIRG, the authors argue TIF can promote enduring growth and stronger communities, when used properly and sparingly. Used improperly, however, TIF wastes taxpayer resources and channels money to politically favored special interests, the authors conclude.
Time to Throw a TIF: Invisible, Unaccountable Taxes You’ve Never Heard of
The Illinois Policy Institute examines uses of TIF in Illinois and argues for increased transparency and oversight of TIF districts.
TIF at a Turning Point: Defining Debt Down
Writing in State Tax Notes, Joan M. Youngman of the Lincoln Institute of Land Policy documents the especially problematic structural elements of TIF: the dubious definition of blight, the assumption any future property value increases are caused by TIF, and above all the ability of a TIF district to appropriate the future tax base growth of other, overlapping jurisdictions, most notably school districts.
TIF for Tat: The Folly of Tax Increment Financing
Samuel Staley of the Reason Foundation identifies many faults of TIF, arguing TIF “should only be considered to fund a long-term public investment, such as roads or other transportation infrastructure that improves access in a local area” and that these investments must have tangible, measurable, and localized benefits.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartlander’s Budget and Tax News Web site at https://heartland.org/publications-resources/newsletters/budget-tax-news, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.
If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or [email protected].
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