The Problems with Tax Incremental Financing

30

Jun
2013

The Problems with Tax Incremental Financing (TIF)

by Legate Damar

The state of Kentucky’s sluggish economy has state lawmakers concerned about tax revenues for the next two years as they begin preparing the state budget.

Speaking to legislators Thursday, State Budget Director Jane Driskell painted a stark financial picture for Kentucky with revenue declining three out of the last four months.

"According to Driskell some of Kentucky’s major state indicators, don't reflect a robust economic recovery to date. Employment and income growth are lower than you would expect, and it's been a very flat recovery for Kentucky. There's still a lot of caution with businesses and consumers (Sluggish economy raises concerns among Kentucky lawmakers, 2013).”

As a result, the state has taken in about one percent less in sales tax revenue through May compared to last year while the surrounding states have seen an increase, said Greg Harkenrider, deputy executive director of financial analysis for Kentucky (Sluggish economy raises concerns among Kentucky lawmakers, 2013).

The slow economic growth in Kentucky may spur interest in the economic stimulus tool known as Tax Increment Financing (TIF). Tax increment financing, or TIF, uses anticipated future gains in taxes to support current improvements that are expected to generate increased revenue (TIF districts spark growth, projects throughout NKY, 2013).

According to the Enquirer, the use of TIF’s to spur new projects and redevelopment may become a catalyst for economic growth in Northern Kentucky. TIF has been used extensively in some parts of the country, but has been only sparingly utilized in Kentucky.

Jim Parsons, an attorney with Taft Stettinius and Hollister who has assisted on TIF projects throughout the state, said the development incentive is still fairly new in Kentucky.

“Kentucky didn’t really have a very active TIF statute until 2000 and that was created for some more specialized projects,” Parsons said. “In 2007, the current TIF statute was adopted and that is the one we are operating under today. It has opened up the possibility of using the incremental increase in taxes to support development projects within designated areas (TIF districts spark growth, projects throughout NKY, 2013).”

Some areas in Kentucky that have implemented TIF’s are:

• Boone County has designated three TIF districts, most recently for a small area near Mount Zion Road where a public market is nearing completion.
• Covington recently designated a large portion of the city as a TIF district.
• A significant project in Bowling Green that involves about a four-or-five-hundred-acre redevelopment of downtown.
• Dayton with the Manhattan Harbour mixed-use development in front of the city’s flood wall.
• Newport with the Ovation project where Corporex, has proposed a $1 billion residential and commercial development on the site
• In Louisville the Marriott Hotel, KFC Yum Arena, Churchill Downs expansion, and the University of Louisville is also using TIF to build parts of its research campus, as direct state appropriations for that type of project becomes less likely because of budget constraints.
• There are also several projects in downtown Lexington (TIF districts spark growth, projects throughout NKY, 2013).

Problems with TIF’s

TIF began in the state of California in 1952, but the state has currently discontinued the use of them due to a couple of lawsuits. As of 2008, California had over four hundred TIF districts with an aggregate of over $10 billion per year in revenues, over $28 billion of long-term debt, and over $674 billion of assessed land valuation. Thousands of TIF districts still currently operate nationwide in the US in small and mid-sized cities. According to Boone County Administrator Jeff Earlywine, when properly utilized, TIF districts can effectively promote growth.

“It is absolutely an economic development tool that can be used to enhance or make a project come to fruition that otherwise might not happen,” Earlywine said. “It’s also a policy issue for the elected officials in Northern Kentucky who are going to have to help determine when, where and how often it is effective and appropriate to utilize (TIF districts spark growth, projects throughout NKY, 2013).”

Earlywine’s advice for evaluating the appropriateness of TIF’s may be an understatement given the fact that in California where TIF districts originated, they have become monstrous, unaccountable bureaucracies and have attracted much criticism. Some question whether TIF districts actually serve their resident populations. An organization called Municipal Officials for Redevelopment Reform (MORR) holds regular conferences on redevelopment abuse and as far back as 2002 published “Redevelopment: The unknown government“ in response to TIF abuses.

Another Unaccountable Government Agency?

According to the report, California state law allows a city council to create a redevelopment agency to administer one or more "project areas" within its boundaries. An area may be small, or it can encompass the entire city. This is similar to Kentucky’s law whereby the statute was enacted at the state level, but only city and county officials have the authority to designate a TIF district (TIF districts spark growth, projects throughout NKY, 2013).

Similar to the problems with Kentucky’s special districts, these project areas are governed by a redevelopment agency with its own staff and governing board, appointed by a city council. Legally a redevelopment agency is an entirely separate government authority, with its own revenue, budget, staff and expanded powers to issue debt and condemn private property. Out of California's 475 cities, 356 have active redevelopment agencies. No vote of the residents affected was required. NO review by the Local Agency Formation Commission (LAFCO) was done. (Only 20 of 58 counties have also created redevelopment agencies, and with unincorporated areas shrinking, counties constitute barely 4% of all redevelopment expenditures.) (Redevelopment: The unknown government, 2002).

Broad Powers

In California all a city needs to do to create or expand a redevelopment area is declare it "blighted, which is easily done. State law is so vague that almost anything has been designated as "blight." Parkland, new residential areas, professional baseball stadiums, oil fields, shopping centers, orange groves, open desert and dry riverbeds have all been designated as "blight" for redevelopment purposes (Redevelopment: The unknown government, 2002).

"Cities adopted very loose and very creative definitions of blight," writes syndicated Sacramento Bee columnist Dan Walters, author and long-time state policy analyst. "Often, vacant, never-developed land is branded as blighted to allow its inclusion in a redevelopment zone."

A city park in Lancaster has been declared blighted to justify paving over 19 acres of parkland and axing 100 trees for a new Costco. ("Landcaster Ready to Pave Parkland and Put Up a Costco," Los Angeles Times, June 24, 2001.) (Redevelopment: The unknown government, 2002).

To eliminate alleged blight, a redevelopment agency, once created, has four extraordinary powers held by no other government authority in California: 

1) Tax Increment: A redevelopment agency has the exclusive use of all increases in property tax revenues ("tax increment") generated in its designated project areas.

2) Bonded Debt: An agency has the power to sell bonds secured against future tax increment, and may do so without voter approval.

3) Business Subsidies: An agency has the power to give public money directly to developers and other private businesses in the form of cash grants, tax rebates, free land or public improvements.

4) Eminent Domain: An agency has the expanded powers to condemn private property, not just for public use, but to transfer to other private owners.

These four powers represent an enormous expansion of government intrusion into our traditional system of private property and free enterprise. Let us carefully consider the costs of this power and if it has done anything to eliminate real blight (Redevelopment: The unknown government, 2002).

Vacuum for our Tax Dollars

There are a couple of different models that can be used to generate revenue in a TIF district. One is use of the increments, which is based on the increased value of the property before and after the improvements, Earlywine said. Another is the wage assessment up to 2 percent above and beyond the locality’s normal payroll tax rate.

“The wage assessment will probably be the source of revenue that we look at more than any other in Boone County because our real estate tax rate is low, so it doesn’t generate as much additional tax revenue,” he said (TIF districts spark growth, projects throughout NKY, 2013).

If the increments model is used, once a redevelopment project area is created, all property tax increment within it goes directly to the agency. This means all increases in property tax revenues are diverted to the redevelopment agency or to pay down the bond debt and away from the cities, counties and school districts that would normally receive them (Redevelopment: The unknown government, 2002).

The bi-partisan Commission on Local Governance for the 21st Century, chaired by San Diego Mayor Susan Golding, released its report, Growth Within Bounds (State of California, Sacramento, 2000). The commission specifically cited the negative impact of tax increment financing, noting that "this financing tool has steadily eaten into local property tax allocations that could otherwise be used for general governmental services, such as police, fire protection and parks" (page 111).

In 2001, this revenue diversion was just over $2.1 billion statewide in California. This means over 10% of all property taxes was diverted from public services to redevelopment schemes. Even with modest inflation, the percent taken has roughly doubled every 15 years (Redevelopment: The unknown government, 2002).

Corporate Welfare

The process arguably leads to favoritism for politically connected developers, implementing lawyers, economic development officials and others involved in the process. Redevelopment subsidies are often not distributed evenly: Favored developers, NFL team owners, giant discount stores, hotels, and auto dealers receive the most money. Small business owners must face giant new competitors funded by their own taxes. Redevelopment in California has become a massive wealth-transfer machine and corporate welfare. Cash and land go to powerful developers and corporate retailers, while small business owners and taxpayers must foot the bill.

Redevelopment's extreme bias in favor of retail and against industry has created low wage jobs at the expense of skilled workers. It subsidizes big box stores selling largely imported goods at the expense of American manufacturing jobs (Redevelopment: The unknown government, 2002). A recent example of this bias was the request by the Kenton County Fiscal Court to rezone 28 acres near the intersection of Ky. 17 and Taylor Mill Road from single-family residential to NSC, or Neighborhood Shopping Center zone for a Walmart. Fortunately for the city of Independence it was later withdrawn due to opposition by hundreds of residents (Kenton County drops disputed rezoning, 2013).

This costly distortion of the free enterprise system is justified as the only way to boost local sales taxes. Yet, if new developments are justified by market demand, they will be built anyway. If not, they will fail, regardless of the subsidies. The catalyst for TIF’s is motivated by a belief that tax subsidies to selected private businesses can stimulate the local economy. It assumes that the free enterprise alone is inadequate. It presumes that government planners can allocate resources more efficiently than can the free market, which history has demonstrated as patently absurd (Redevelopment: The unknown government, 2002).

Evidence in Support of TIF’s?

Is there any evidence that redevelopment has promoted economic development in blighted areas? The first systematic statewide analysis of redevelopment agencies was published by the prestigious Public Policy Institute of California in 1998, titled “Subsidizing redevelopment in California.” Veteran researcher Michael Dardia compared 114 different redevelopment project areas to similar neighborhoods outside of redevelopment areas, from 1983 to 1996.

The report concluded that redevelopment activities were not responsible for any net economic growth or increase in property taxes, and that they were a net drain on public resources. As the report's title suggests, Dardia concluded that redevelopment was being subsidized by taxes being drained from schools, the state, and special districts (Redevelopment: The unknown government, 2002). As greedy as our special districts have been for our tax dollars, wouldn’t it be amusing to see them compete with a Redevelopment Agency (Nickel and Dimed by our Special Districts, 2013)?

Similarly, the Los Angeles Times (January 30, 2000) published a detailed study showing the North Hollywood Project Area's 20-year, $117 million effort had produced no net benefits for the community. The Times compared North Hollywood to ten other socio-economic comparable areas in Los Angeles that had no other redevelopment, including Van Nuys, mar Vista and Venice. "Although they received no redevelopment money, most of the comparison areas registered improvements in income and poverty rates equal to or better than the heavily funded North Hollywood Project area," the report concluded (Redevelopment: The unknown government, 2002).

Census data confirm the conclusions of the Public Policy Institute and Los Angeles Times. A 10-year comparison (1979-1989) of redevelopment and non-redevelopment cities shows no net per-capita income gains due to redevelopment activity. Pairing similar cities by area, size, and income, shows those without redevelopment posted greater gains in living standard than those with redevelopment (Redevelopment: The unknown government, 2002).

Redevelopment apologists and lobbyists counter with pretty pictures of new stadiums and shopping malls. Surely, with all the money spent, some nice new buildings have been completed. But their evidence of success is purely anecdotal. The evidence of failure is in the numbers. All objective comparison studies have shown that aggregate statewide redevelopment activity does NOT generate economic development and does NOT eliminate blight (Redevelopment: The unknown government, 2002).

Eminent Domain Abuses

"Nor shall private property be taken for public use without just compensation." Thus the Bill of Rights specifies the only purpose for eminent domain: "public use."

Since then, government has used eminent domain to acquire land for public use. Roads, schools, parks, military bases, and police stations were essential public facilities that took priority over individual property rights. Private real estate transactions, on the other hand, were always voluntary agreements between individuals. Redevelopment has changed all that. Under redevelopment, "public use" now includes privately owned shopping centers, auto malls, and movie theaters. "Public use" is now anything a favored developer wants to do with another individual's land. Eminent domain is used to effect what once were purely private transactions (Redevelopment: The unknown government, 2002). The designation as blighted, essential to most TIF implementation, can allow governmental condemnation of property through eminent domain laws. The famous Kelo v. City of New London United States Supreme Court case, where homes were condemned for a private development, was about actions within a TIF district.

Covington Assistant City Manager Larisa Sims said the city of Covington completed a center city action plan that helped identify the areas that had redevelopment potential.

“We’ve been trying to promote more redevelopment in the core,” Sims said. “We have a lot of building stock that is in need of rehabilitation and renovation. As a way to help facilitate redevelopment, we thought a TIF district would be a good source of revenue.”

The Covington TIF district will capture 80 percent of the local incremental increases in payroll taxes and property taxes and Kenton County has agreed to provide a 60 percent contribution of its increases. The district stretches from the Ohio River south to 13th Street, and from Interstate 75 to the Licking River, with the exception of MainStrasse and the Licking Riverside neighborhoods, which already have significant development. Projects that could benefit from the establishment of the TIF district include the $25 million Hotel Covington, the $81 million development of Gateway Community College Urban Campus, and the $35 million Northern Kentucky Convention Center expansion (TIF districts spark growth, projects throughout NKY, 2013).

“We also have some larger structures that will be undergoing renovation for mixed use... and there is some interest to use TIF as part of their funding stack,” Sims said. “So it is already spurring some interest.”

This may explain why Covington Mayor Sherry Carran is such an ardent opponent of language safeguarding private property rights and the removal of regulatory barriers included in the Goals & Objectives of the Areawide Comprehensive Plan for Kenton County (Stand up for your Private Property Rights!, 2013). It would serve as a major impediment for the city of Covington to impose eminent domain on the property owners in their city if that language were included in the Comprehensive Plan. It would be a real shame if it precluded city officials from violating anyone’s private property rights.

The lack of evidence supporting TIF’s, private property violations, corporate welfare, and the eminent domain abuses should come as no surprise to libertarians or Tea Party members. Everywhere in the world, those countries that respect property rights and free consumer choice outperform those that put economic decisions in the hands of bureaucrats. It is ironic that even as we encourage former Soviet bloc governments to free their economies, we increasingly entangle our local and state governments in economic policies that have repeatedly failed elsewhere (Redevelopment: The unknown government, 2002). If you think this can only happen in a liberal state like California you are sadly mistaken. I’m sure TIF legislation started out innocently in California with a very noble purpose but evolved into a government money-making scam, rife with corporate influence, greed, and violations of private property rights. Given the nature of government to grow and the greed inherent in corporations I’m confident it will ultimately happen in Kentucky. This is why we need to stand and fight.