A tiff about taxes
A picaresque detour in our occasional series on real estate taxation:
“Blogging is more or less bunk.”
“Any color you want so long as it’s green.”
– Henry Ford, developer, explaining what type of money he needs.
Because affordable housing always costs money, developers of all stripes rapidly cotton on to any financing source, so it will be no surprise that they make heavy use of Housing Set-Aside Funds (HSAF), a byproduct of Tax Increment Financing (TIF, rhymes with biff), where it eventually becomes soft debt to close the cost-value gap and enable affordable housing to be built (or bought and preserved) in communities that otherwise would never do so, especially those with booming economies.
The estimable quarterly Land Lines, a free publication of the Lincoln Institute of Land Policy, contains a great primer, by Richard F. Dye and David F. Merriman, explaining TIF’s mechanics:
The basic rules of the game are illustrated in Figure 1. The top panel shows a land area view of a hypothetical municipality. The area on the western border is designated a TIF district and its assessed value is measured. The lower panel of Figure 1 shows the base-year property values in the TIF (B) and the non-TIF (N) areas. At a later point in time, assessed property values have grown to include the increment (I) in the TIF district and growth (G) in the non-TIF area of the municipality.
Tax increment financing carves out the increment (I) and reserves it for the exclusive use of the economic development authority [Or affordable housing. — Ed.], while the base-year assessed value (B) stays in the local government tax base.
Incremental revenues (I) are ring-fenced for redeployment in economic development
Thus,
Before-TIF value = before TIF local government tax base = B + N;
After-TIF value = B + N + I + G;
After-TIF tax base available to local governments = B + N + G; and
TIF district authority’s tax base = I.
B-I-N-G and O the increase in taxes!
TIF designation thus divides the area’s revenue stream into general revenues and a special TIF stream:
Impacts on Overlapping Governments and Non-TIF Areas
The value increment (I) is the tax base of the TIF district. In most states (like
Remember, real estate taxes are the principal funding source for local public schools.
To understand the economics and politics of TIF, it is crucial to note that while the municipality makes the TIF adoption decision, the TIF area value is part of the tax base of the school district and other local governments as well. Moreover, the TIF district gets revenues from the increment times the combined tax rate for all local governments together.
The following hypothetical tax rates for a group of local governments overlapping a TIF district are close to the average proportions in
+ 0.15% = Municipal tax rate
+ 0.60% = School district tax rate
+ 0.25% = Other governments’ tax rate
= 1.00% = Combined tax rate
For each 15 cents of its own would-be tax revenues the municipality puts on the line, the school district and other local governments contribute another 85 cents. Thus, there may be an incentive for municipalities to “capture” revenue from growth that would have occurred in the absence of TIF (to collect taxes that would have gone to school districts). Or, municipal decision makers may favor inefficient economic development strategies that do not result in public benefits worth the full cost, since their own cost is only 15 cents on the dollar. TIF proponents would counter that nothing is captured, because the increment to the tax base would not exist “but for” the TIF authority expenditure. That argument, of course, turns on what would have happened to property values in the absence of TIF.
If, as municipalities are often required to assert when they adopt TIF, all of the increment is attributable to the activities of the TIF development authority, then TIF is fair, in that the school district is not giving up any would-be revenues.
If, as critics of TIF sometimes assert or assume, none of the increment is attributable to the TIF and all of the new property value growth would have occurred anyway, then the result is just a reallocation of tax revenues by which municipalities win and school districts lose.
The authors then gargle a bucketful of fizzy statistics to test whether TIF districts grow their equalized assessed value (EAV) — the proper level-playing-field measure of a locality’s tax base — faster than like districts without TIF. They find no boost to the tax base:
Must every housing bubble pop?
The second row shows that in the period after TIF adoptions took place, gross-of-TIF Equalized Assessed Value (EAV) grew less rapidly for TIF adopters. The last row shows that the net-of-TIF EAV growth rate for TIF adopters was even lower, suggesting that growth (I) in the TIF district may come at the expense of property values outside the development area (G). In summary, if we make no statistical adjustment for the effects of other determinants, TIF adopters grew more slowly than non-adopters.
More gargling, no more correlation:
When we run separate regressions for available EAV growth by type of land use for the all-county sample, we see more evidence of a zero or negative impact of TIF on property value growth.
In other words, no help or a possible drag.
Again, there is a significant “cannibalization” of commercial EAV outside the TIF district from commercial development within the TIF district.
Let’s consider everybody else’s tax revenues
Having searched in vain for a revenue-base boost, the authors conclude, opening with the faintest of praise:
Tax increment financing is an alluring tool.
“Hey, big spender, spend a little TIF with me.”
TIF districts grow much faster than other areas in their host municipalities. TIF boosters or naive analysts might point to this as evidence of the success of tax increment financing, but they would be wrong.
“We could do that … but it would be wrong.”
Observing high growth in an area targeted for development is unremarkable. The issues we have studied are (1) whether the targeting causes the growth or merely signals that growth is coming; and (2) whether the growth in the targeted area comes at the expense of other parts of the same municipality. We find evidence that the non-TIF areas of municipalities that use TIF grow no more rapidly, and perhaps more slowly, than similar municipalities that do not use TIF.
So, if TIF doesn’t boost the tax base, should everyone junk it?
Policy makers should use TIF with caution.
[TIF is] merely a way of financing economic development and does not change the opportunities for development or the skills of those doing the development planning. Moreover, policy makers should pay careful attention to land use when TIF is being considered. Our evidence shows that commercial TIF districts reduce commercial property value growth in the non-TIF part of the same municipality. This is not terribly surprising, given that much of commercial property is retailing and most retail trade needs to be located close to its customer base. That is, if you subsidize a store in one location there will be less demand to have a store in a nearby location. Industrial land use, in theory, is different. Industrial goods are mostly exported and sold outside the local area, so a local offset would not be expected. Our evidence is generally consistent with this prediction of no offset in industrial property growth in non-TIF areas of the same municipality.
After all that fine analysis, the authors may have missed the point. The value of TIF is not that it creates more revenue than the general coffers, but rather that it ring-fences expenditure.
Affordable housing is seldom a locality’s sexiest expenditure, and NIMBYism is often rampant.
Housing Set-Aside Funds outflank the NIMBYs —
and that, if nothing else, justifies their existence.
