Tanvi Misra is a staff writer for CityLab covering immigrant communities, housing, economic inequality, and culture. She also authors Navigator, a weekly newsletter for urban explorers (subscribe here). Her work also appears in The Atlantic, NPR, and BBC.
Cities love to use Tax Increment Financing to boost development. Should they?
Local governments often hail this tool as a way to revitalize investment-deprived neighborhoods, fix dilapidated roads, clean up polluted waters, revamp blighted property, and foster commercial activity and job creation. It’s often poorly understood by city taxpayers, but it affects them in very real ways.
I’m talking about Tax Increment Financing (TIF), a popular mechanism meant to boost economic development. Its usage is widespread: Every state but one employs it, and it’s a go-to move for many cities trying to revive struggling neighborhoods, especially in the Midwest. But how effective is it, really?
The answer, like life itself, is complicated. But David Merriman, a professor at the University of Illinois at Chicago, takes a stab at it in a new report for the Lincoln Institute of Land Policy. After reviewing available research on the implementation and impacts of TIF, Merriman concludes that the mechanism, while helpful in some ways, leaves a lot to be desired.
“In the end, it can be a valuable mechanism,” he said. “It’s not something I’d like to get rid of—but it deserves a lot of scrutiny because public sector dollars are being re-routed into a different task, away from general purpose funds.”
To understand what he means, let’s first explain how TIF works: When a city designates an area as a TIF district, the property value of all the real estate within its boundaries at that time is designated as the “base value.” This is the amount that, for a set amount of years after the fact, generates revenue through the city’s property tax process. Everything over and above that, through an increase in value of existing real estate and new development in that time frame, goes into a separate fund earmarked for economic development.
The city can then use this second pot of money to lure private investors with loans and subsidies for commercial projects, or to make public projects more attractive. Sometimes, private entities put money on a TIF district even before the revenue comes in, because they’re anticipating revenue from economic development. The overall idea behind TIF is: By creating these districts, cities can spark new private-public partnerships and new economic activity in a region that may not otherwise see it, and by doing that, widen its tax base. It’s economic development that, in a sense, pays for itself.
But in practice, TIF doesn’t always play out that way. Critics often charge that it funnels money out of the taxpayers’ pockets into a special fund that, by and large, works in a pretty opaque manner. While some of that money funds essential public works, much has also gone towards erecting new Whole Foods, renovating glitzy hotels, and building stadiums—the type of projects, one might argue, should not require such incentives. And the evidence Merriman analyzes suggest they may have a point. He shows that, in most cases around the country, the tool did not fulfill its main goal of boosting economic development.
“On average, [TIF] may be moving development from one part of the city to another, and changing the timing of the development, but there’s not more development than would have otherwise been made,” Merriman said.
In addition, this is a tool with several drawbacks. According to Merriman, TIFs might “capture” some tax revenue above the capped “base value” that may have been generated anyway through natural appreciation in property values if the TIF hadn’t been created. This is money that taxpayers might have otherwise paid directly towards an overlapping school district, or for public services. And while TIF is not a direct tax increase, it may lead to higher rates or service cuts elsewhere, if the city plans on bringing in the same general property tax revenue as before TIF.
“If property taxes are higher—if the rates are higher—then the TIF money has come of the taxpayer’s pocket,” Merriman said. “It’s a diversion in that way.”
In other words, TIF doesn’t exist in a vacuum. Like other tax incentive programs, it may have the adverse affect of creating competition between neighboring jurisdictions in a way that is not always beneficial—all for outcomes that are mixed, at best.
Perhaps the biggest concern with TIF, though, is that of transparency, because of the way this mechanism effectively bypasses the public municipal budget process.
“Once a TIF is created, the operation of a TIF receives less scrutiny than other spending,” Merriman said.
Take Chicago, where a whopping $660 million—a third of the city’s property taxes—go into its many TIF districts. Back in 2009, Chicago Reader’s Ben Javorsky and Mick Dumke called TIF spending a “shadow budget.” They uncovered documents revealing how the administration of then-Mayor Richard M. Daley used TIF money to revamp skyscrapers and dole out subsidies to large corporations in deals made behind closed doors. Not a lot appears to have changed since then: In 2017, an investigation by Crain’s Chicago Business and the Better Government Association found that under Mayor Rahm Emanuel, $55 million in TIF dollars—ostensibly meant for fighting blight—were spent to renovate Navy Pier, a glitzy waterfront tourist attraction.
But TIF is good for sparking public-private partnerships that may help fund useful infrastructure that may not otherwise be appealing to investors, such as raising the height of a bridge tunnel so it can carry large trucks, for example. In the report, Merriman recommends several ways to use this tool more effectively, and make it easier for policymakers and researchers to evaluate. Most important: Cities needs to be more transparent about how they are using TIF. It’s not a magic free-money generator.
“It’s a concern about why those decisions are being made,” he said, “and why there’s a public subsidy for development that might have occurred even without the subsidy.”