In most urban areas in the nation, and many rural areas, local governments are relying on tax increment financing (TIFs) to finance infrastructure and jump-start redevelopment projects. In an era of declining budgets, this financing tool has become an attractive alternative to asking voters to approve tax hikes to pay for needed public improvements. But, is it being abused? Is it hurting schools?
To understand this, rewind to the 1960s. Many of our cities were in decline and large sections were nothing more than crime infested slums. The tax base was declining leaving no revenue to address decay. President Johnson’s Great Society provided money for urban renewal projects across the nation, but the program was expensive and was soon virtually eliminated. Yet the problems persisted.
Tax increment finance was born to address this problem without busting the federal budget. TIF districts sprang up around the nation, and played a major role in the re-development of urban areas, and poor rural areas that lacked economic opportunity. But, like with all good ideas, it did not take long for shrewd developers and politicians to find ways to game the system.
This is how tax increment financing works. A local government makes a determination that an area has become so blighted that private money is not available to finance the massive costs of re-development. The governmental body sets up a board that has the right to use eminent domain to condemn property, and to issue bonds to pay for improvements. This public investment will then attract private capital and banks loans to finance the typical development costs. The bonds are paid off by using the future tax money (property tax and sales tax) that the redeveloped area generates.
Yet, many areas are now being called blighted that do not begin to meet the definition of blight.
TIF is often being used to finance costs developers traditionally paid with their own capital. This means taxpayers are being stuck with the bill because property and sales taxes are siphoned off for use by the TIF so local governments have to raise taxes to finance schools, roads, water and sewer, police and fire and other needs. These costs are often made higher because the re-development usually brings in more residents to serve with declining revenue.
In 2011, California was faced with huge budget deficits and the effects of the recession. Governor Brown realized that over-use (or abuse) of TIFs was costing the state and local governments of California $3 billion dollars a year. The biggest loser was California’s school system. So, at the governor’s request, California ended TIFs. This contributed to California reversing its budget deficits and creating budget surpluses.
Other communities would be wise at least change the laws to stop abuse of TIFs. In an age where the federal government is shifting programs to state and local governments, funding for schools is in decline. When TIFs syphon huge amounts of revenue away from schools and local governments, either taxes must increase or schools do without.
An example of potential TIF abuse is occurring in the Denver suburb of Littleton, Colorado. The un-elected Urban Renewal Board (called LIFT) is proposing a massive redevelopment project to pay for yet-to-be identified improvements to benefit a yet-to-be-developed plan without details. The result could mean that for 25 years, all the incremental revenue from that 744 acre project would go to the LIFT, not the schools, the city or the county governments.
Although no details have been released, it is safe to assume the re-development would generate many new students that Littleton Schools would need to educate. The short fall will need to be made up by raising property taxes, or bigger classroom sizes.
In the Littleton situation, it seems that the yet undisclosed developers are getting a huge subsidy at the expense of school children.
To remedy this type scenario, the states must reform TIF. First, boards given the power of eminent domain and taxation should be elected, not appointed. Secondly, they should be restricted from using bond money for things the developers should finance. TIF was not intended to be a profit-boosting scheme for private developers. Lastly, a detailed plan with sound economic data and specificity must be provided and approved before a project moves forward.
These reforms would end much of the abuse. TIF can be a good thing, or a very bad thing especially for schools. We must not short change education.
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