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What are States’ Obligations to Monitor the Use of Tax Increment Financing?

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By David Merriman
November 12, 2018

States laws typically proscribe how local governments can use their tax bases. But are too many states neglecting their responsibility to monitor, document and evaluate local government use of tax incentives? Tax increment financing districts (TIFs) demonstrate the importance of this question.

TIFs are designed to promote economic development. Here’s how they work: Let’s say the assessed value of properties goes up. Typically, unless tax rates are reduced that results in an increase in tax revenues, which can be used for a variety of purposes. But when a TIF has been established by a municipality or county, the additional amount is mandatorily set aside to be used exclusively for economic development in that district.

Forty-nine states—all except Arizona—have legislation authorizing some form of TIF. This goes by different names in different states and the details vary. But local governments can establish TIF districts in which the excess dollars go to uses like on-site remediation, reimbursement of (private) developer costs, payment for new infrastructure and debt service on prior infrastructure investments.

Use of TIFs can be controversial for a variety of reasons. One of the most significant issues is that TIFs often affect overlapping governmental entities, which have little say about their formation. Consider school districts. If a TIF and a school district depend on the same property taxes, the school district no longer has the ability to use increased property tax revenues for its own needs.

Also, like other tax incentives, TIFs may heighten the competition between neighboring jurisdictions for economic development. When one area uses a TIF, the pressure can cascade for others to do the same.

Perhaps most important, rigorous academic studies have found that TIFs don’t necessarily create new economic activity but often shift development from one place to another. Yet, state governments often do little or nothing to even monitor TIF use, much less to document or evaluate its effects. Based on rigorous research, I conducted with my graduate students at the University of Illinois (Chicago), in Alabama and Pennsylvania, there is no single source, for the most basic piece of data: the actual number of TIFs.

The same research found that phone calls were necessary to locate basic information in some states, like Alaska, Hawaii and Wyoming. In New Hampshire, Tennessee and elsewhere only approximate numbers were available even after website searches and calls to government officials. In several states, including Georgia and Nebraska, researchers found no official source of information but relied on academic literature. In New York, at an extreme, this data only appeared available through presentations by real estate professionals.

In total, research identified about 10,000 TIF districts around the country ranging from over 3,600 in Iowa to zero in Delaware and Wyoming. A few states had informative official reports providing extensive information about the extent to which TIF was used including Illinois, Kentucky and Wisconsin but most states provide woefully inadequate information.

Some cities do better. After years of controversy, Chicago, which has over 140 TIF districts, more than any other big city in the country, now provides extensive information about each TIF district with information about TIF plans, financing, expenditures, etc. St. Louis, where use of TIFs has been very controversial, has a website that provides at least summary information about each TIF district. Milwaukee, where TIFs also have been used extensively provides information about each of its 50 or so TIF districts.

In a comprehensive review of what we know about TIFs, recently published by the Lincoln Institute of Land Policy, I argue that TIFs are an appropriate and potentially beneficial tool for economic development in a limited set of cases in which there is a need for joint action by the public and private sectors and in which an institutional arrangement is needed to create long term trust between these sectors. TIF’s basic design can protect the public interest by assuring that no public funds will go to private developers unless those developers take actions to enhance real estate values.

TIFs also protect the private sector by assuring that any real estate revenue created by appreciation in the area in which the investment was made will be plowed back to fund further economic development. This arrangement can be mutually beneficial if the preconditions for creating the TIF district (generally that the development would not have happened but for the TIF) are rigorously applied and the funds are used as agreed in the TIF plan.

Still, there is need for skepticism about whether these conditions are routinely met. Elected officials and private developers both have important incentives to over-use TIFs and experience suggests that they often do. The solution is to maintain a vigorous program of tracking, independent rigorous evaluation of TIFs and revision of TIF arrangements when they fall short of stated goals. Unfortunately, to this point, states generally fall very short of this ideal.

Author: David Merriman is the Stukel Presidential Professor in the Dept. of Pub. Admin. at the Univ. of Illinois at Chicago and is a faculty advisor of the Government Finance Research Center at the same University. He is also a Senior Scholar at the Inst. of Gov’t and Public Affairs at the Univ. of Illinois. He recently authored the Lincoln Institute of Land Policy report Improving Tax Increment Financing (TIF) for Economic Development from which the material in this essay is drawn. ([email protected])

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