Money in, money out? Madison Johnson

Behind the dry-as-dust name is a powerful (and controversial) tool for financing urban redevelopment. Here’s a quick guide to understanding TIF.

It’s time again for CityLab University, a resource for understanding some of the most important concepts related to cities and urban policy. If you have constructive feedback or would like to see a similar explainer on other topics, drop us a line at editors@citylab.com.

Urban development professionals, neighborhood activists, and diligent readers of local newspapers have very likely come across the term “Tax Increment Financing” (TIF). Whether all of these groups understand what it means is another matter.

This mechanism for financing redevelopment is a powerful and controversial force in American urbanism. Every state except Arizona currently allows it, as does the District of Columbia, and it has become the most popular incentive tool for economic development in the United States as the federal government has decreased its urban development spending. TIF plays a role in megaprojects such as Chicago’s Lincoln Yards and Amazon’s HQ2 in Arlington, Virginia, as well as in smaller-scale neighborhood improvements, affordable housing, and transit projects.

Depending on the specific project, and whom you ask about it, TIF is an essential mechanism for cities to stimulate much-needed economic development and revitalize neighborhoods at no cost to taxpayers, or it’s an opaque developer giveaway that puts a strain on city services without providing much public benefit.

KEY POINTS

  • Tax Increment Financing (TIF) creates special tax districts around targeted redevelopment areas from which future tax revenues are diverted to finance infrastructure improvements and/or development.
  • At the beginning of the TIF period, tax revenues in the TIF district going to general city services are frozen at a certain rate. All additional tax revenues go toward directly funding new development or servicing debts related to new development until the end of the TIF period, which usually lasts 20 to 30 years.
  • In most states, TIF can only be used in neighborhoods officially designated as “blighted” or “distressed,” and can fund developments ranging from stadiums and convention centers to affordable housing and parks.
  • Critics say TIF diverts city tax revenues from schools and other essential community services to the private sector or the pet projects of city officials.
  • Supporters say the new tax revenues generated by TIFs would not have taken place “but for” the investment that the TIF enabled, and that they are a valuable tool for neighborhood revitalization.  

HOW IT WORKS

State legislatures authorize and set conditions for the use of TIF by local governments. Cities and counties then create TIF districts and specify the terms of operation. Most TIF periods last between 20 and 30 years and are used to service bonds taken out at the beginning of the period. The revenue for TIF usually comes from property taxes, but it can also come from sales or business taxes.

Every TIF initiative has an associated TIF district. In theory, this is the area that will see economic growth (new development, infrastructure, and rising property values) due to the investment produced by the TIF. Most states require that TIF districts be officially designated as “blighted” or “distressed,” with high rates of vacancy, declining property values, and other indications that an area is incapable of attracting development. This designation comes as part of the “but for” analysis, which is meant to determine if the proposed development would happen without the proposed subsidies.

However, these findings are easily fudged by specialized consultants, a Lincoln Institute of Land Policy report found, meaning that TIF districts can often be created just about anywhere.

Once a district is designated, the taxable value of properties (called equalized assessed value or EAV) within the district is frozen. This tax rate, referred to as the base property value or frozen EAV, represents the funds that tax-collecting jurisdictions will continue to draw over the duration of the TIF period. For example, if a TIF district contributed $10 million in taxes when it was created in 2000, it would still contribute $10 million in 2019.

If TIF is working as intended, property values would have increased over that period due to infrastructure upgrades and other investments, meaning property owners are contributing more money in taxes. All growth in tax revenue during the TIF period, known as increment EAV or tax increment, is sequestered and used to finance these projects. Once the TIF period ends, all tax revenues will once again flow to tax-collecting jurisdictions. Tax rates do not change throughout this process.

Conceptual diagram of a TIF plan

(From Tax Increment Financing: A Primer, courtesy of the Citizens Budget Commission.)

What is Tax Increment Financing used for?

With its application in vastly different contexts across nearly every state, TIF is used to fund a broad range of projects. Currently, the method is most popular in post-industrial, Rust Belt cities and towns.

TIF is often used to lure major private-sector developments as an ingredient in “incentive packages,” like those that cities offered Amazon during its HQ2 competition. In fact, the winning bid from Arlington, Virginia, offered $28 million in TIF revenues from an already existing TIF district to pay for infrastructure upgrades. Another controversial megaproject that used TIF (albeit in a convoluted form) is New York City’s Hudson Yards. And then there’s Dan Gilbert’s $2.2 billion downtown Detroit development, which is set to include Michigan’s tallest building. That project will get $250 million in debt financing backed by a 30-year TIF.

Stadiums are another popular TIF category. Louisville and St. Paul are among the most recent cities to go this route, both for professional soccer teams. Louisville’s stadium TIF district covers only the development area of the stadium itself, and will last 20 years or until it generates $21.7 million. St. Paul’s TIF contribution totals less than $1 million for environmental cleanup of a former bus storage facility.

A new stadium for Louisville City FC, opening in 2020, is being built in a TIF district. (Louisville City FC)

In addition to directly funding numerous convention centers, TIF revenues are commonly sought by hotel developers seeking to build nearby. Developers of a luxury hotel adjacent to Kansas City’s convention center are seeking TIF revenues to subsidize 40 percent of the construction cost. The hotel’s developers say the project would not be financially feasible without the subsidy, while local business boosters say the city needs a luxury hotel to host top-tier conventions. Two hotels near the Waco, Texas, convention center have recently been authorized to receive TIF funds totaling more than $4 million.

But in other cases, TIF revenues have been used to fund public transit, affordable housing, and other, more self-evidently public-serving projects.

Transit TIF has been used to fund projects in Chicago, San Francisco, and Denver as part of a broader menu of “value capture” strategies that help cities fund large-scale infrastructure improvements.

Portland, Oregon, currently dedicates about 40 percent of its TIF revenues to affordable housing. Over nine years, the program generated nearly a quarter of a billion dollars for affordable housing, according to City Observatory. In the city’s largest TIF district, which includes the fast-gentrifying Pearl District, TIF has generated $83 million and helped produce 2,200 units of affordable housing in combination with other funding sources.

TIF revenues can be divvied up like grants for specific projects. Spokane is using TIF dollars to repair a pedestrian bridge and upgrade sewer and water connections at a local park. Deciding whether these types of projects should be eligible for TIF funds is not always clear-cut: In Spokane, local residents and policymakers debated whether the bridge and park renovation fulfilled the TIF district’s goals of helping a historically disinvested neighborhood.

Why have so many states and cities embraced TIF?

TIF emerged in the 1950s in California as a way for the state to take advantage of matching federal redevelopment funds. Unlike unpopular bond initiatives or tax hikes, TIF could be implemented without input at the ballot box. As a “self-financing” tool, TIF is often an easy sell to the public—that is, if it the public even knows it’s being used. City leaders also gain the ability to hand-pick developments, and in some cases companies, that move into their city.

The number of states permitting TIF increased from eight in 1970 to 49 in 2010. This period corresponds to the end of the federal government’s urban renewal programs and successful efforts to lower taxes in many states. In 2011, California eliminated its redevelopment agencies, leaving jurisdictions in the state without a way to utilize TIF. New TIF vehicles emerged a few years later. Even so, the move might signal the beginning of a more critical discussion of TIF in policy circles.

What are the drawbacks?

The most obvious problem with TIFs is inflation. With tax revenues frozen for 20-30 years, the real value of that money steadily decreases over time, by an average about 2 percent per year. (Some TIF policies do account for inflation.) To balance out this decrease in the real value of taxes being collected, jurisdictions might have to raise taxes, find revenue in other forms, or cut back on services.

Then there’s the question of the extra costs incurred by the new development. If the TIF is used to finance housing, for example, the school district does not necessarily gain new revenue to account for rising student populations. Similar claims could be made for police, fire, and other services needed for all forms of development. Again, some TIF policies have provisions to mitigate these effects.

While TIF districts are usually created by city governments, they affect a wide range of tax-collecting bodies, including school districts, regional transportation districts, and county governments. In addition to bureaucratic confusion, this can create the impression of a power grab by the TIF sponsor agency. Once TIF revenues are set aside, they tend to receive far less scrutiny than general fund budgets, and are therefore susceptible to abuse.

The “but for” problem looms over nearly every TIF program that is intended to spur economic development. How can a city predict whether new investments or developments will take place if they do not create a TIF district? The existence of TIF might create a self-fulfilling cycle, where developers will only invest in certain places if they can access TIF subsidies. Competition—between major cities, within a region, or even within a city—can be a major impetus behind TIF, creating the possibility of a “race to the bottom” on incentives.

Some critics argue that TIF just spreads economic development around, rather than stimulating new growth. In 2017, real-estate investment firm JLL estimated that 90 percent of Hudson Yards’ office tenants relocated from midtown Manhattan. But supporters of the project argue that some of those companies would have left the city if not for the premier office space offered at Hudson Yards. There is evidence that TIFs in the Chicago and St. Louis metros have shifted economic activity around, rather than generating new growth.

In some places, TIF has been criticized for spurring gentrification and displacement. Elsewhere, critics have said that TIF is disproportionately used in wealthy, white neighborhoods that don’t need help attracting dollars. In Chicago, an academic study found that white neighborhoods were much more likely to be part of TIF districts, although the same study found income not to be a significant predictor of TIF districts.

CASE STUDY: CHICAGO

A rendering of the $6 billion Lincoln Yards development in Chicago. The project stands to receive $1.3 billion in TIF funding. Critics contend that the site is not blighted, but a judge dismissed a lawsuit by community activists in September. (Sterling Bay/SOM)

Few places have embraced TIF with the enthusiasm of Chicago and its suburbs. Approximately $1 billion out of the $14.4 billion in property taxes billed in Cook County, Illinois, in 2017 went to TIF districts. Chicago’s 143 TIF districts generated $660 million, equivalent to more than 10 percent of tax revenues in the city. One-quarter of all properties in Chicago are in TIF districts.

Chicago’s highest-revenue TIFs, 2018

TIF First year

2018 revenue

Total revenue

Transit RPM1

2016

$115,735,214.75

$174,105,069.79

LaSalle Central

2006

$100,926,569.59

$361,771,088.82

Kinzie Conservation (Industrial Area)

1998

$49,229,212.64

$367,926,939.81

Near North

1997

$35,716,959.86

$330,800,054.76

River South

1998

$34,448,113.13

$273,240,094.76

Chicago / Kingsbury

2000

$33,177,660.74

$270,644,567.14

Canal / Congress

1998

$31,399,421.84

$335,286,098.90

One of Chicago’s fastest-growing TIF revenue sources is the so-called Transit TIF for CTA’s Red and Purple Lines, the first TIF in the state dedicated to transit improvements. The project will include track and station modernization on the Red and Purple Lines as well as a new bypass track for the Brown Line, which will allow the three lines to double capacity by 2040. The TIF will cover $622 million of the $2.2 billion project, with the rest covered by state and federal grants.

The Transit TIF was made possible by a custom state law that allows TIF durations of 35 years, rather than the 23 under the previous law, and does not require a “blight” designation. The Transit TIF law also stipulates that Chicago Public Schools receive the same proportion of TIF revenue as they would if there were no TIF. Eighty percent of the remainder goes to the transit project, and the final 20 percent is distributed among other taxing bodies.

These additional provisions make the Transit TIF less susceptible to criticisms that have dogged many of the city’s other TIF districts, such as the claim that they take money away from schools. A lack of accountability is another major line of critique. This problem was vividly illustrated by former Mayor Rahm Emanuel’s shady machinations that transferred $55 million from a TIF to pay for renovations at Navy Pier, a popular tourist attraction 3 miles away and well outside of that TIF’s jurisdiction. Granted, the money’s original destination was a Marriott hotel project.

This wasn’t the first time the city’s vast TIF system has sparked accusations of abuse. Emanuel’s predecessor, Richard M. Daley, was accused by local media of advocating austerity in the city’s general fund while lavishing TIF monies on major corporations and neighborhood pet projects. Daley also spearheaded numerous TIF districts in the city’s downtown Loop, an area that can hardly be called “blighted.”

Most recently, debate has raged over the question of whether to grant TIF status to infrastructure related to two Chicago mega-developments: Lincoln Yards and The 78. The two projects could benefit from $2.4 billion in TIF incentives, some of which has already been approved.  

Opponents say that’s too much of a giveaway to for-profit developers who are not providing enough community benefit in return. The two development sites are also both located in fairly well-off neighborhoods that don’t need the investment as badly as many other Chicago neighborhoods, activists say. Supporters say these megaprojects will provide a long-term tax boost, and provide valuable infrastructure improvements, including $293 million worth at Lincoln Yards.

Newly sworn-in Mayor Lori Lightfoot campaigned as a TIF critic, but so far she has gone along with the TIF plans at Lincoln Yards and The 78. When the Chicago Teachers Union went on strike in October 2019, it criticized the Lincoln Yards TIF as a handout for the wealthy and said that this money alone could cover its contract demands. Lightfoot responded that it was an “illusion” that the funds could be redirected that way.

Still, it seems the city is moving toward TIF reform. In a report last year, former Cook County Clerk David Orr called for TIF revenues connected to completed projects to be returned to the general fund. He also called for greater transparency about how TIF funds are spent—especially when general-fund dollars undergo such a rigorous and highly public allocation process.

The Chicago Tribune editorial board has also called for greater TIF transparency, and ensuring that only economically depressed areas are eligible for TIFs, echoing a report from the city’s inspector general, Joseph Ferguson.

FURTHER READING

Tax Increment Financing: A Primer,” New York State Citizens Budget Commission

Something for Nothing: Understanding Tax Increment Financing,” The Journal of Government Financial Management, by Richard Brooks, Catherine Plante, and Denise White Hayes

The Tiff over TIF: A Review of the Literature Examining the Effectiveness of the Tax Increment Financing,” National Tax Journal, by Robert T. Greenbaum and Jim Landers

Tax Increment Financing: A Tool for Local Economic Development,” Lincoln Institute of Land Policy, by Richard Dye and David Merriman

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