Monday, February 15, 2010
Standard Article by Randal O'Toole
Originally created with good intentions, tax-increment financing (TIF) has become a way for city officials to enhance their power by taking money from schools and other essential urban services and giving it to politically connected developers. It is also often used to promote the social engineering goals of urban planners.
TIF is based on the idea that public improvements to a neighborhood or district will lead developers to invest in that district. To finance such public improvements, cities are allowed to keep the "increment" or increased property taxes collected from the area. Typically, planners estimate in advance how much new property tax the city can collect and then sell bonds that will be repaid out of those taxes. The revenues from the bonds are used to pay for the improvements.
TIF was invented in California in 1952 in response to a problem found in many cities after World War II. At the beginning of and during the war, most urban residents lived in apartments. After the war, huge numbers of people moved to single-family homes in the suburbs. This left inner-city neighborhoods with high vacancy rates. Since few wanted to rent the cramped housing in such neighborhoods, the landowners did not keep the housing in good condition, and the neighborhoods became "blighted."
So the California legislature allowed cities to create "redevelopment districts." Typically, the cities evicted the residents of the districts and tore down the housing, thus leaving bare land that developers could use to build whatever met market demand. It sometimes worked, but often did not, and to this day some neighborhoods of New York City, New Jersey, and other urban areas remain little more than gravel pits.
Eventually, every state but Arizona legalized TIFs -- North Dakota doing so in 1973. (Arizona and some other states use a similar scheme involving sales taxes.) Thousands of cities have established TIF districts. But experience has proven that they don't work as well as hoped.
TIF is not "free money." Studies have found that, at best, TIF is a zero-sum game, meaning for every winner in the TIF game others lose an equal amount. In other words, TIF does not increase the total amount of development that takes place in a city or region; it merely transfers development from one part of the region to another.
The new developments in the TIF districts consume fire, police, and other services, but since they don't pay for those services, people in the rest of the city either have to pay higher taxes or accept a lower level of services. This means people outside the district lose twice: first when developments that might have enhanced their property values are enticed into the TIF district and second when they pay more taxes or receive less services because of the TIF district.
Not only does TIF not stimulate urban growth, it may even slow it down. One study found that TIF is actually a negative-sum game because businesses that might have located or expanded in the cities decide to move to another place that has lower taxes or higher levels of urban services.
TIF puts city officials on the verge of corruption, favoring some developers and property owners over others. TIF creates what economists call a moral hazard for developers. If you are a developer and your competitors are getting subsidies, you may simply fold your hands and wait until someone offers you a subsidy before you make any investments in new development. In many cities, TIF is a major source of government corruption, as city leaders hand tax dollars over to developers who then make campaign contributions to re-elect those leaders.
TIF isn't even necessary to promote redevelopment of declining neighborhoods. Eventually, property values fall low enough that people start to buy and restore or replace buildings in those districts. Rather than use TIF and eminent domain to redevelop a warehouse district, Anaheim recently decided to merely get out of the way of developers of what became known as the Platinum Triangle. Since then, developers have invested billions of dollars in the district.
TIF is no longer about blight. Today, the inner-city slums that TIF was created to replace are long gone, yet TIF continues to grow. Bismarck wants to create a quiet rail zone. Fargo wants to revitalize its downtown. Whenever any kind of development "need" arises, city officials are happy to steal money from fire, police, schools and other services that rely on property taxes and use it to fund that need.
Some states require cities to find that a neighborhood is blighted before they can use TIF. San Jose planners once found that a third of their city was blighted, including one posh neighborhood that was supposedly a slum because the residents had failed to rake the leaves from the private tennis courts in their backyards. Some cities go so far as to declare prime farmland to be "blighted" so they can maximize their share of the revenues when that land is developed.
TIF today is often part of a social engineering agenda that Americans should reject. With no more slums to clear, urban planners see themselves as having a new mission: not to restore blighted neighborhoods but to re-engineer society to fit their fantasies of how people should live. Automobiles are evil, the planners think, and getting people to live in high-density housing will lead them to drive less because they won't have as far to go to get anywhere. So cities like Denver, Minneapolis, and Portland are using TIF to subsidize high-density developments.
Ironically, we seem to have come full circle. Once used to subsidize the removal of high-density developments that few wanted to live in, TIF is now used to subsidize the construction of high-density developments that few want to live in. After all, if there was truly a demand for such high-density housing, no subsidies would be needed.
While we like to think that government officials have our best interests at heart, TIF is just too much of a temptation for many cities to resist. Two Democratic legislators in Colorado want to reform TIF in that state so that cities can't declare farms to be blighted. A bill doing just that was proposed in, but not passed by, North Dakota's 2003 legislature.
But that doesn't go far enough. Legislators should recognize that TIF no longer has a reason to exist, and it didn't even work when it did. They should repeal the laws allowing cities to use TIF and encourage cities to instead rely on developers who build things that people want, not things that planners think they should have.
Randal O'Toole is a Cato Institute Senior Fellow working on urban growth, public land, and transportation issues. He is also a Land Use Policy Fellow at the NDPC.