Tax Increment Financing is a Bad Deal for Taxpayers

When it comes to providing targeted incentives to developers and picking winners and losers with our tax dollars, it’s hard to beat tax increment financing (TIF.)  Currently the usage of tax increment financing is prohibited in Arizona, but if city officials, planners, developers and politically connected landowners get their way, it may soon become a reality in our state.

What is a TIF? A TIF allows local government to create special “economic development” zones where they are able to take the tax generated by future growth (the increment) in the zone to finance bonds for development.  Public services such as schools, fire, sewer and police are financed at the original assessed value of the property while the additional tax revenue generated in the zone is used for land acquisition, infrastructure and developer subsidies.

It’s easy to see why local governments and insiders would love to have TIFs in Arizona. In the zero-sum game of “economic development” cities are clamoring to offer handouts to subsidize light rail, shopping malls, hotels, car dealerships, high density housing and multiuse “green” facilities.  The lure of city planners to treat urban areas like their personal sim-city accounts make TIFs a go-to funding mechanism open to rampant use and abuse.  The justification is the same as for all economic cronyism – development would not have occurred without the giveaway.  This is neither supported by data or common sense.

A study done in the City of Chicago of multiple TIF districts actually showed a slower job growth and subsequent losses in jobs in other areas of the region.  These facts demonstrate the jobs “created” by TIFs would have occurred anyway, just elsewhere.   In Fort Worth, Texas the city gave $40 million in property TIF dollars to a Cabelas.  A Big Bass Pro Shop already existed 10 miles away, without handouts.

Making matters worse, the additional demand for public services without additional revenues, leads to one of two inevitable conclusions – a decrease in the quality of those services or an increase in the tax rates.  This hardly creates the fertile ground for other developers to set up shop.  Additionally, other developers are less likely to build if they do not receive an incentive like their neighbor.  This is seen as an unfair competitive advantage and a general assault on equity.  Subsidizing one development has an opportunity cost that is rarely factored.

Some have attempted to defend the use of TIF districts as a tool to revitalize blighted areas, not fund economic development.  Of course, governments now exaggerate what is considered a blighted area by designating them as having a “potential for revitalization”, a “conservation zone,” or being “at risk for blight.”  In some cases, entire neighborhoods have been deemed “blighted” despite high valuations in homes, forcing savvier citizens to band together to fight blight designations and protect themselves from the inevitable squeeze of higher taxes or subpar public services.

All too often TIF districts are highly gerrymandered to hand pick properties that benefit a few select developers, as demonstrated by this TIF district in Portland, Oregon:

gerrymandered TIF

The bottom line is that TIF districts always end up pitting special interests against the majority of property owners in the community.  And given the track record in other states, taxpayers lose.