TIF Controversies

Aerial of the Extension of the Westside Economic Development Area TIF District
Aerial of the Extension of the Westside Economic Development Area TIF District (photo by Geoff McKim)

In several other posts (such as this one), I have mentioned that there many who are skeptical of tax increment financing (TIF) as an economic development tool. In general, I would summarize the various criticisms as follows:

  1. TIF activities can cause a loss of revenue to other taxing units (cities and towns, counties, townships, school districts, etc.) through circuit breaker (“tax cap”) losses.
  2. Extensive development in a TIF district causes the tax rates in the taxing district containing the TIF district to be higher than they would otherwise (because the assessed value in the TIF district is captured by the TIF, not the surrounding taxing district).
  3. TIF districts encourage “green field” development, rather than redevelopment of blighted areas. This development can reduce greenspace, eliminate farmland, and encourage urban sprawl.
  4. Development in TIF districts may cause increases in costs for the units of government that serve the TIF districts (i.e., schools, libraries, fire and police protection, etc.) without providing these units of government with any additional revenue to provide that service.
  5. Areas that are already poised to develop may be hurriedly placed into a TIF district, which would increase the return on investment to the private investors in the TIF district, to the detriment of taxpayers and other local units of government.
  6. Assessed value is moved from the base of the TIF district (i.e. the pre-TIF assessed value) to the TIF, in order to ensure that bond payments can be made. This reduces the assessed value available to other units of government, and thereby increases tax rates for other taxpayers (and with the circuit breaker tax caps, could even reduce the revenue to other units of government).
  7. Development encouraged by TIF districts benefit may primarily the private investors in the properties in the TIF district, and do not benefit the existing residents of the town, city, or county.
  8. Decision-making about TIF districts and expenditures are made by appointed, rather than elected, officials, and generally are made with significantly less public scrutiny or transparency than other local government budgetary decisions.

These are the general criticisms I see about TIF districts. Of course, with any individual TIF district, there is always the question of sustainability — will the district generate the necessary tax increment to pay the bond for the infrastructure. And of course, while most of these criticisms are valid, there are also legitimate responses to each of them. If you think that I have missed a major criticism of tax increment finance in general, though, please let me know!

Here are a couple of recent news stories or blogs with criticism about TIF in Indiana:

  • The Indy Star on 2012-09-01 published this: “Behind Closed Doors: Top Democrats are mum on this tiff“, about a controversy in Indianapolis about whether to proceed on a couple of planned TIF district proposals immediately vs. waiting for a more systematic and structural change to the TIF decision-making processes.
  • A blogger, Pat Andrews, who goes by the name Had Enough Indy? is a frequent critic of TIF districts in Indianapolis, and lately has been calling attention to the drop in the TIF base (the amount of assessed value in the district that is allocated to other units of government, rather than the TIF district itself) in several Indy TIF districts. Although I don’t agree with all of the conclusions here, Andrews raises some important questions and puts out a number of original documents to support the claims.
  • I’ve posted before on the City of Carmel bailout of the Carmel Redevelopment Commission, where the Carmel City Center TIF district became overextended to the point where it could only barely make bond payments.

If you see any other stories on TIF controversies in Indiana, please send them to me!

City of Carmel Bails out Carmel Redevelopment Commission

The Indianapolis Star today has an interesting article summarizing a situation in Carmel that has been going on for several months now:

In short, primarily because of cost overruns on the construction of the Carmel City Center (think Palladium), which is funded by the tax increment in a TIF district, the Carmel Redevelopment Commission has gotten into a situation in which it doesn’t have any income left for further redevelopment after its debt service payments are made.  The City of Carmel is essentially agreeing to bail the Redevelopment Commission out by refinancing its debt. The savings through lower interest rates will either allow the debt to be paid down faster or will allow additional revenue to complete the development. In exchange for the bailout, the City Council will be asserting greater control over future debt of the Redevelopment Commission.

TIF Neutralization for Monroe County Approved for 2012

Aerial View of Printpack Factory in Westside Economic Development Area (TIF District)

Monroe County just received notification that its annual TIF Neutralization calculations were accepted by the Department of Local Government Finance, the final step before the certification of our county’s net assessed value (NAV) — the value of all real and personal property in the county, after all deductions, abatements, and exemptions. The forms and calculations are available here: 2012Pay2013 TIF Neutralization.

But what is TIF neutralization and why does it matter?

To answer this question, remember what Tax Increment Financing (TIF) is. TIF is a technique for spurring economic development in a particular defined area (the TIF district) by investing in infrastructure that serves that area, and then using the additional property taxes generated by the new development as a result of that infrastructural investment (called the “increment”) to pay for that investment. The infrastructural investment is frequently primarily in roads, trails, and sewers — but can also be in the form of parks or other amenities that serve the TIF district — and can even be  in the form of training assistance and other intangibles.

This increment — the additional property taxes owed on new assessed value in a TIF district as a result in the infrastructural investment — is revenue that does NOT go to the other units of local government that serve the TIF district (e.g. the county, the public library, the township, the city or town, the school corporation, etc.). This is the source of the greatest controversy associated with tax increment financing — the development that occurs in TIF districts may result in an additional burden on the units of government that serve the TIF district, yet the revenue from the TIF district is siphoned off to support new infrastructure and development in the TIF district.

A related concern with tax increment financing is that a TIF district will capture (and siphon off from other units of government) the increment from increased property values — even from property values that are and would be increasing anyway. Why would they be increasing anyway? Maybe the real estate market is hot in the area. Maybe the area has become much more desirable for any one of a number of reasons. In any case, the annual TIF neutralization process attempts to address this concern by identifying the total increase in assessed value in a TIF district in a given year and then determining whether or not it is:

  1. an increase that would have occurred anyway, due to increasing property values in the area; or
  2. an increase that is beyond that of the surrounding area, and therefore attributable to the investment in the TIF district.

The increased assessed value from (1) — the increase that would have happened regardless of the investment — belongs to the units of government that serve the TIF district. The increased assessed value from (2) — the increase that occurred due to the infrastructural investment, i.e.,the increment — belongs to the TIF district.

Although you can read the TIF neutralization forms in detail if you want, the following table summarizes the property taxes that each TIF district will receive in 2013 (actually, the maximum possible property taxes that each TIF district will receive). Again, in principle, this is the increment that is attributable to the investment in infrastructure in the TIF district (but is therefore not available to the other units of government that serve the TIF district).

2012 Pay 2013 Monroe County TIF Neutralization Summary

Jurisdiction TIF District Potential Tax Increment for the TIF District
City of Bloomington
Thompson Original  $897,051.00
Thompson Expanded  $210,286.00
Walnut-Winslow  $86,887.00
Original Downtown  $2,040,770.00
Expanded Downtown  $373,043.00
Adams Crossing  $596,531.00
Kinser-Prow  $91,094.00
Whitehall/Gates  $1,162,094.00
Tapp Road  $248,226.00
Monroe County
Westside  $1,634,763.00
State Road 46 (North Park)  $160,017.00
Fullerton Pike  $297,560.00