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March 2012 Policy Study, Number 12-4

   

Tax Increment Financing: Magical Tool or Moral Hazard?

    Introduction
   

 

“Reforming” government programs and operations is an important topic in the current political environment. Well-documented abuses of power and wasting of taxpayer dollars over the last few years at both the national and state level, coupled with the personal economic stresses of the recession, have put policy and management reform at the top of many lists.

 

Specific TIF actions by some cities, perceived as evidence of “crony capitalism” and unfair treatment, have brought the local issues into focus. Accordingly, TIF reform has become a hot topic in Iowa, with public forums drawing standing-room-only crowds of taxpayers and local officials.

 

These concerns are not new. In 2008 Public Interest Institute (PII) issued a Policy Study titled, “Tax Increment Financing: Getting it Right.” This study questioned the proper and improper use of tax increment financing by cities for infrastructure development in economically “blighted” areas and for general economic and residential development.[10]

 

It was thought that by allowing the city to first develop infrastructure such as roads, water, and sewer systems in “blighted” areas, then private-sector businesses would be more willing to build and develop the property. The TIF funds were to be used to pay the bonds taken out to build the infrastructure, as the local match required to receive other state or federal tax money, or could simply be returned to the property owners as tax rebates, direct grants, or business loans.[11] All of these actions and use of tax money were viewed as acceptable because of the anticipated income and jobs as a result of the new developments.

 

TIF law and the use of TIF districts can be very complex. When a city approves the use of a TIF zone, the property taxes collected from that designated area are not divided between the city, county, and school districts.

 

Instead, the increased (increment) revenue is all diverted to only the city establishing the TIF. Taxes collected for the other authorities are frozen at the pre-TIF level. This can be done for a variety of time periods, including 20 years or more. For example, Wisconsin now allows TIF districts for as long as 40 years.

 

Chicago has made extensive use of TIF, with limited real benefit. The Central Loop TIF district in Chicago ran from 1984 to 2008, with over $1 billion total in new taxes diverted, $365 million during the final year alone.[12]

 

A 2002 study by the Neighborhood Capital Budget Group (NCBG) reviewed the development and tax history of 36 Chicago TIF districts. In all districts they found that property taxes were already rising in the five years before they were TIF’ed. If the growth had simply continued at the same rate, the city would still have gained $1.3 billion in new tax revenues during the TIF period.[13]

 

In effect the study found that over the entire TIF period of 23 years only $300 million in new taxes were actually generated – though the city of Chicago spent $1.6 billion. In the meantime, the Chicago schools, some of the worst in the nation, lost $632 million in diverted funds.[14] Magical tool or moral hazard?

 

In Los Angeles, the Hoover Redevelopment area, near the Memorial Coliseum, was first established in 1966. Recently it was renewed through 2051, for a total of 85 years.[15] One must question the benefit of a TIF at reviving a “blighted” area or generating economic development if it takes 85 years to see results.

 

   

 

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