Tax Increment Financing and Economic Development, Second Edition

Uses, Structures, and Impact

Craig L. Johnson, Kenneth A. Kriz, Craig L. Johnson, Kenneth A. Kriz

• Publisher: SUNY Press
• Year: 2019
• ISBN:
  9781438474991
• Topic: Economics
• Subtopic: Economic Policy
• Index: Economics

This book brings together leading experts to examine the evolving nature of tax increment financing (TIF), the most widely used tool of local economic and community development. Originally designed as an innovative approach to the redevelopment of blighted areas, it has become a more general-purpose tool of economic and community development. Contributors offer case studies of the uses, structures, and impacts of TIF projects alongside more general discussions on the theoretical, financial, and legal bases for the use of TIF. They also explore its effect on overlapping jurisdictions such as cities, counties, and school districts. Some of the case studies capture TIF at its best—redeveloping areas that would likely never develop without substantial incentives. Other cases highlight questionable uses, especially where it has been used in new ways that those who developed the tool never envisioned. Originally published in 2001, the book was called "…a major contribution to the debate on the efficacy of such economic development financing tools as TIF…" by the journal Public Budgeting & Finance. Clear, comprehensive, and timely, this new edition features the latest research and thinking on TIF, including the political, legal, and even ethical issues surrounding its use.

PART I

BACKGROUND

1

Introduction

CRAIG L. JOHNSON AND KENNETH A. KRIZ

Introduction

Since the first edition of Tax Increment Financing and Economic Development: Uses, Structures, and Impact was published in 2001, tax increment financing (TIF) in the United States has grown, matured, evolved. TIF is now one of the most widely used and recognized state and local government economic development and redevelopment techniques in the United States of America. This volume, the second edition of Tax Increment Financing and Economic Development: Uses, Structures, and Impact (2019) underscores the enduring and evolving nature of TIF.

TIF has changed in many ways in eighteen years, but the essence of the TIF policy imperative has remained the same—finance local government economic (re)development, with local resources, and under local political control. In this volume, we describe how TIF is currently understood and practiced across the nation. We also analyze the changes to TIF, which have been substantial. In some states the changes have been incremental, in others they have been of earthquake proportion. We document the full gambit of these changes and describe how TIF operates now, which is often very different than in 2001. The TIF model has evolved by many means, perhaps most importantly by the collaboration of stakeholders in the arena—government officials, private developers, researchers, community development organizations—learning from each other, advancing the knowledge in the field, and turning that new knowledge into new policies, laws, and practices.

Over the past eighteen years the TIF practitioner and academic research literature has grown in quality and volume. The literature is clear on how to use TIF in an effective, efficient, and equitable manner. The basic principles that can facilitate the appropriate use of TIF were laid out in the first edition of this book. In the second edition, we update the principles, expand them where necessary, and apply them to current TIF policies, practices, and cases. To get the most out of TIF, state and local officials merely need to apply the academic and practitioner knowledge, most of which is synthesized, explained, and illustrated in this second edition.

TIF has endured because it works. TIF is resilient, as demonstrated by its ability to weather the storms of the Great Recession. Wielded expertly, with care and forethought, TIF can enhance productivity and improve the quality of life in communities throughout the ups and downs of the economic cycle. But TIF is not perfect. It is a tool. Like other tools, it must be carefully and appropriately used, or it can be misused. There are potential spatial spillovers and direct effects on overlapping taxing districts and taxpayers (Yadavalli and Delgado, this volume; Nguyen-Hoang, this volume). In this edition we also discuss the problems and limitations of TIF, and how the TIF model has evolved to overcome some of these challenges. We also suggest solutions.

Since the citizens of the state of California passed the first TIF law in 1952 (Horiuchi and Chapman, this volume), tax increment financing has spread across local communities with laws authorizing TIF in forty-nine states and the District of Columbia. The spread of TIF was incentivized by two important trends, one emanating from the federal government and the other the result of a nationwide movement against the local government property tax. While supporting local development during the New Deal era and after World War II, in the 1970s the federal government began divesting many of its state and local government development responsibilities and reduced intergovernmental fiscal support for local capital projects in the era of federal devolution. At the same time, property taxpayers were voting down on-budget tax increases and demanding more stringent controls on property taxes, as in the case of Proposition 13 in California, for example. State and local government officials found themselves in the difficult position of having to develop new and creative own-source financing techniques to fund development-related projects in order to improve their physical infrastructure and stimulate economic redevelopment.

TIF stepped up to fill this funding void and now has become one of the first financing techniques local communities in the United States look to in order to finance a significant economic development or redevelopment project. TIF has proven over the years to be a useful and effective vehicle for local government officials for several reasons. One, it is effective at raising funds to finance projects of all sizes. For many projects, TIF funds can cover all construction costs—land acquisition, site development, property rehabilitation and construction, water and sewer expansion and roadway improvements, etc.

For larger projects, TIF is often used as part of a broader financing package. TIF has been used in multiuse projects to help build and rebuild entire communities (Martell, this volume; Meyers, this volume). In large financing packages, it is frequently, and effectively, used as leverage with private developer funds and equity, intergovernmental grants, and other sources of funds and types of financial incentives (Paull, chapters 10 and 11, this volume). By providing a large, long-term stream of reliable, and relatively inelastic, sources of revenue dedicated to pay specific capital expenditures, TIF often provides the glue that can seal a major public-private partnership deal between local government officials, private developers, and other stakeholders.

Second, when done correctly TIF can be an effective planning and management tool. TIF does more than just raise money. It facilities local government capital and community facilities planning and management (Craft and Weber, this volume; Maher et al., this volume; Billingham and Sandefur, this volume; Burnett et al., this volume). Governments use TIF to organize people and resources around specific development and redevelopment opportunities, and then use the TIF administrative enterprise to implement and manage such projects. Though TIF is a financing tool, its added value is often in its use as a planning, land development, and improvement tool. TIF contains a process for creating or revising the redevelopment plan, providing a vehicle for local government officials, private developers, and citizen stakeholders to collaboratively plan and manage the development of their community.

Third, TIF’s template has been exported to local jurisdictions around the nation because its generic framework is flexible and easily adapts to different political environments and the financial and budgetary circumstances of local jurisdictions (Johnson and Kriz, chapter 2, this volume; Kriz and Johnson, chapter 3, this volume). Generic TIF principles are applied differently across the United States. The use of TIF is broadly enabled at the state level, but TIF is mostly practiced at the local level with detailed local statutes written and executed by local government officials. TIF is popular because it gives local government officials fiscal autonomy over their capital project improvements. TIF enhances their ability to finance their own projects, with their own resources, when and how they want and need to.

TIF has also become popular among the professional community, with both practitioners and academics, because in theory it is consistent with the benefit principle of public finance (Kriz, this volume; Klacik and Nunn 2001). The basic theory undergirding TIF is that only those expected to benefit from the project will pay for the project, and beneficiaries contribute in proportion to their benefits. Though in practice TIF sometimes falls short of this principle, TIF laws and practices can, and should, uphold this principle in practice as well as theory.

TIF demonstrates its flexibility as a financing tool by the wide variety of improvements it is able to support. It finances commercial, industrial, and residential economic development and redevelopment projects and the infrastructure—water, wastewater, power utilities, transportation facilities, etc.—necessary to support such projects. It is also not uncommon for TIF projects to support residential projects such as affordable housing, the revitalization of low-income and moderate-income communities, and brownfields remediation and redevelopment (Paull, chapter 10, this volume).

TIF can also be a controversial form of financing, and it is not free from abuse. TIF was originally designed and justified as a local method of self-financing the redevelopment of blighted urban areas. But TIF commonly finances projects in non-blighted, as well as blighted areas; in suburban, as well as urban areas; in greenfields, as well as brownfields (Maher et al., this volume; Billingham and Sandefur, this volume). Such applications in non-blighted, suburban, growing greenfields, for example, are potentially misuses of the generic TIF model, and are not consistent with the original intent and principles of TIF. Such practices should be addressed at the state level. State officials provide the TIF enabling legislation, and should craft laws that minimize the abuse of the TIF subsidy.

A recurring problem with TIF is its potential impact on overlapping governments. If not structured properly TIF districts can drain the future revenues of overlapping taxing districts. Indeed, the state of California recently eliminated its redevelopment agencies largely because of their effect on school district and state government budgets. If TIF authorities in other states do not heed the lessons of California redevelopment agencies and make appropriate reforms, they may face a similar fate.

TIF has also been used as a fiscal and budgetary tool to circumvent traditional local budgetary processes. TIF has been adopted by local communities facing several forms of fiscal stress, especially property tax limitations, infrastructure demands from population growth, and declines in intergovernmental aid. TIF has also been used as a method of participatory budgeting to increase citizen participation in the budgetary process (Craft and Weber, this volume). TIF can be used to lock in long-term, intrajurisdictional revenue and expenditure decisions. However, taxpayers should be protected from government officials using TIF to circumvent the annual budget processes of overlapping taxing districts. In addition, surplus TIF revenues should not be allowed to accumulate in TIF funds; rather, they should be returned to overlapping taxing districts promptly.

This chapter continues by describing the structure and contents of the book. The book is divided into three sections. The first section provides an overview of tax increment finance in the United States. Part I provides an up-to-date and comprehensive background discussion on the world of TIF. The introductory chapter provides a discussion on why TIF is important and an overview of the book. Chapter 2, “A Primer on Tax Increment Financing,” by Craig L. Johnson and Kenneth A. Kriz presents a descriptive discussion on the generic structure of most tax increment financing districts. They discuss what TIF is and how it works. Chapter 3, “A Review of State Tax Increment Financing Laws,” by Kenneth A. Kriz and Craig L. Johnson, reviews the diverse legal framework of tax increment finance across the states. The legal framework is important in that it sets forth the “rules of the road” for establishing, stimulating, regulating, maintaining, constraining, and terminating TIF districts. The chapter shows how TIF laws have changed since the first edition of the book was published in 2001. It reviews state TIF laws in 2018, current trends, and the areas where TIF has been subject to substantive reforms, as well as areas where reforms are still needed. The chapter notes that strong, comprehensive TIF laws are essential to ensuring that TIF is used in the most transparent, publicly accountable, equitable, efficient, and effective manner.

Debt is used to finance most TIF projects. Chapter 4, “The Use of Debt in Tax Increment Financing,” by Martin J. Luby, Tima T. Moldogaziev, Craig L. Johnson, and Ruth Winecoff describes the aggregate use of municipal debt securities from 2000 to 2016 in financing TIF. Chapter 4 describes the different types of TIF debt security structures, issue purposes, use of financial intermediaries, methods of sale, and bond structures associated with TIF debt. The chapter provides an analysis of the risks inherent in TIF debt from both taxpayer and bondholder perspectives, including a discussion of issues associated with the changes in California TIF debt.

Part II illustrates the diversity of TIF programs by covering the implementation, uses. and structu...