In November 1998, Metro – the regional government for my hometown of Portland, Oregon – asked voters to increase their property taxes so Metro could double the size of Portland’s convention center. The voters resoundingly rejected the idea. So Metro doubled the size of the convention center anyway. As Forbes magazine later noted, the result was that convention center occupancy fell from 71% to 43%.
But after voters rejected the tax increase, how did Metro pay for the expansion?
In the same election, Portland’s transit agency, Tri-Met, asked voters to increase property taxes to build more light-rail lines. The voters, resoundingly rejected the idea. So Tri-Met is building the rail lines anyway. Since the first segment opened, it has carried fewer riders than the buses it replaced.
But, given the fact that the voters rejected the property tax measure, how did Tri-Met pay for the rail construction?
Partly with TIP.
TIF, or tax-increment financing, is a government-financed tool that is much loved by planners and city councils across the country.
TIF is most commonly used by urban-renewal or redevelopment agencies. These agencies have been in the news recently because they frequently use eminent domain to take land from one set of private owners so they can give it or sell it to another set of private owners.
While many people find that outrageous, TIF is more insidious and ought to be more upsetting. It takes money from taxpayers without their knowledge or permission and spends it on things that they probably would not support. Moreover, TIF often provides the financing for eminent domain.
Here’s how TIF works. Your city has an urban-renewal
agency (or redevelopment agency, depending on the state). The board that runs the agency may be identical to your city council, or the council may appoint a separate board.
The board has the power to draw a line around a piece of vacant land, or perhaps a run-down business district or neighborhood of dilapidated homes, or even a not-so-run-down area, and declare the land inside that line an urban-renewal or redevelopment district. Most, but not all, states require that it declare the area blighted, but except as a legal matter, that is unimportant for TIF to work. The property in the district might have a collective value of, say, $1 million, and the property owners pay taxes on that value.
Planners now imagine that this district will be redeveloped and the new developments will have an assessed value of, say, $10 million. That will generate ten times more property taxes. Normally, those taxes would go to schools, police, fire, libraries, and other purposes. But for the next 15 years or more, depending on the state, all the incremental taxes in an urban-renewal district – that is, all the taxes paid over-and-above the taxes that are now being paid – go to the urban- renewal agency.
Most states allow urban-renewal agencies to collect those taxes for 10 to 20 years. After that, the taxes go back to the schools, police, and other agencies that normally are funded by them.
Having projected this huge stream of tax revenues, the urban-renewal district sells bonds that will be repaid by taxes. It uses the bonds to subsidize developers to redevelop the properties in the district. The agency will use eminent domain if it thinks the existing owners won’t be interested in redevelopment or do not have the resources to undertake it. But often the agency will just negotiate with the existing owners to do the redevelopment.
In effect, developers get to use the property taxes they pay on their developments to help pay for part of their work. Better still, they get the capital value of those taxes, at tax-free municipal bond rates, and they can often leverage that capital to raise more capital.
Imagine getting to use the capital value of 15 years’ worth of the property taxes to subsidize the construction of your new home. Depending on your tax rate, you might be able to build a home that is 25-50% larger than you could otherwise afford.
New developments, of course, consume fire, police, sewer, water, and other urban services that are normally paid for out of their property taxes. If they include housing, their residents probably use libraries. If the residents have children, they probably go to public schools. Since the taxes on these properties are not going to a fire, police, water, sewer, library, or school district, other people’s taxes must cover those costs. If enough taxes are diverted to TIF, the city schools or libraries will soon suffer a funding crisis, requiring voters to approve tax increases to support them. But the higher taxes are really supporting the TIF-financed developments.
Of course, planners’ projections of future tax revenues may be optimistic. In that case, the city urban-renewal agency defaults on its bonds. This may make it difficult for the city to do more urban-renewal projects for a time, but it has no effect on the developer’s credit rating or on the bond rating for other city projects. In fact, the city might be able to create a new urban-renewal district somewhere else and start the whole process over.
TIF is extremely popular in California. Former Fullerton city councilor Chris Norby says that the share of all property taxes collected in the state going to redevelopment agencies
The voters resoundingly rejected the idea. So Portland’s transit board did it anyway.
has increased from less than 1% in 1960 to more than 100% day. As of 2003, says Norby, redevelopment agencies issued $56 billion worth of bonds to finance urban-renewal projects. At least one state, Colorado, has a sales-tax analog to TIF, known as a public-improvement fee or PIF. Like TIF for property taxes, PIF means that sales taxes collected from retail shops in a redeveloped property go to payoff urban-renewal bonds that subsidized the development, rather than going wherever sales taxes usually go.
TIF was originally developed to fund urban-renewal projects in the 1950s. In those days, urban renewal usually meant downtown revitalization. As “Edge City” author Joel Garreau observes, America built downtowns for only about a century, from the advent of industrialization in the early 19th century until the early 20th century when the decentraliZing forces of the automobile, telephone, and electricity rendered downtown densities unnecessary. By the 1950s, many downtowns had declined. They were often populated only by the very poor, with retail stores increasingly threatened by suburban shopping malls, and offices mainly occupied by banks, insurance companies, and other financial firms.
TIF-financed urban renewal cleared the “tenement” housing of poor people, often replacing it with high-rise luxury apartments or civic centers. Planners often botched the job, leaving at best sterile urban monuments and at worst bombed-out districts cleared of low-cost housing but replaced only with parking lots and rubble.
Jane Jacobs discredited this sort of downtown renewal in her book “The Death and Life of Great American Cities” (1961). She argued that many of the so-called slums that planners wanted to clear were in fact living, vital neighborhoods. She claimed that downtown mixtures of housing and retail shops were not a sign of decay, as planners thought, but a usable neighborhood model enjoyed by many working-class families.
Jacobs may have demolished the case for slum clearances and urban planning in general, but she did not stop urban renewal for one simple reason: the money never stopped. No state legislature that had granted TIF authority to cities ever considered taking it away. As long as the money was there, it was too tempting for cities to ignore. So cities kept on doing urban renewals of one sort or another.
Of course, it is not necessary for planners to have any logical foundation for their proposals. Planners who suggested that downtowns be revitalized would get strong support from downtown property owners, who welcomed more business and did not mind getting subsidies to attract it. In 1989, MIT planner Bernard Frieden noted that TIF was “one of the leading downtown strategies” because it allows planners to “shield their own ventures from budget review and voter approval.” Frieden observed that such programs “are troublesome to people who value accountability based on the informed consent of the governed.”2
One big problem with TIF is that it creates a moral hazard for developers. Denver-area cities have used TIF to support so many shopping malls that it is doubtful anyone will build a new retail development in the region without TIF support.
While defenders would say that TIF-supported developments create jobs and new businesses, they are at best a zero-sum game. Those jobs and businesses were going to be somewhere in the urban area; all TIF did was transfer them from one location to another. At worst, and ordinaril~TIF is a negative-sum game: the TIF money is taken from schools and other public services, whose quality either declines or is held steady by increases in everyone else’s taxes.
Several studies have documented the unfavorable effect of TIF on the cities that use it. Two Illinois researchers found that”cities that adopt TIF grow more slowly than those that do not.3 A report issued by a left-wing group called the Developing Neighborhood Alternatives Project, in cooperation with the more libertarian Heartland Institute, found that “TIF does not tend to produce a net increase in economic activity; favors large businesses over small businesses; often excludes local businesses and residents from the planning process, and operates in a manner that contradicts conventional notions of justice and fairness.”4 TIF survives such challenges because it concentrates large benefits on a few, at a relatively small and largely hidden cost to the many.
By 1990, planners had gone beyond merely transferring funds to rent-seeking downtown property owners. Instead,
As long as the money was there, it was too tempting for cities to ignore. So cities kept on doing urban renewals of one sort or another.
they wanted to change suburban lifestyles. As the fastest-growing parts of America, suburbs do not need revitalization, but in planners’ eyes they do need redevelopment. The suburbs were too “auto-dependent,” planners said. Their solution was New Urbanism.
Ironically, the planners’ “New Urban” model for suburban redevelopment was the high-density, mixed-use downtown neighborhood that Jane Jacobs had defended from an earlier generation of planners. She made her case too well: in arguing that such neighborhoods harbored a valid lifestyle, she convinced a new generation of planners that these neighborhoods were the only valid lifestyle. The planners managed to ignore all the pages in the book that criticized both their profession and the very idea of government planning.
So planners set out to redevelop suburban neighborhoods into high-density, mixed-use neighborhoods. Denver used $93 million of TIF money to redevelop old Stapleton Airport into a New Urban neighborhood. Lakewood, a Denver suburb, used $57 million of TIF and PIF money to subsidize the redevelopment of Villa Italia, once the region’s largest shopping mall, into Belmar, a mixed-use retail and residential community.
Private developers would have gladly redeveloped both the airport and the shopping mall without any public support. But they would have turned the airport into a conventional low-density suburb and the mall into an updated but still auto-dependent shopping center. Planners used TIF not to spur redevelopment of blighted areas but to socially engineer the region’s population to higher densities, densities that they believed were morally superior to those in normal suburbs.
There were few local objections to these projects because neither Stapleton nor Villa Italia had been a residential area. But planners who proposed to redevelop residential areas to higher densities quickly encountered rabid opposition from the people who lived in them. And this is where rail transit comes in.
To get federal funding for rail transit, cities must show that rail lines will be cost-effective. To be cost-effective, they have to attract a lot of riders. So, wishing to boost ridership projections, planners assumed that low-density neighborhoods along the rails would be replaced by high-density developments whose residents would be less auto-dependent and more likely to ride a train. Then, when the rail lines were under construction, the planners told suburban residents that the federal government required that the neighborhoods near the lines be redeveloped into mixed-use, transit-oriented developments. It is one thing to oppose a local plan, quite another to challenge a federal mandate.
Today, Denver and its suburbs plan to use TIF to support the redevelopment of dozens of neighborhoods along exist- ing and proposed light-rail lines. Portland, Los Angeles, San Jose, and other cities with new rail transit lines have done the same.
TIF’s most insidious feature is that it is so well hidden that few people are aware of it. As a result, it escaped all the tax revolts that have swept the states in recent years.
• California’s Proposition 13, which greatly limited property taxes in 1978, did nothing to slow TIF and only increased the share of taxes that went into it.
• Oregon’s Measure 47, passed by voters in 1996, both limited property taxes and required that all increases in taxes and user fees be submitted to the voters. In a compromise approved by the legislature the following year, TIF was the only tax exempted from the requirement that tax increases receive voter approval.
• Colorado’s Taxpayer Bill of Rights, or TABOR, approved by voters in 1992, limited the growth of state and municipal spending to the rate of inflation plus the rate of population growth. Although TABOR does not mention TIF, cities in Colorado treat TIF as if were outside the purview of TABOR, and no one has successfully challenged this presumed exemption in the courts.
Tax activists in many states have proposed TABOR-like amendments to their own state constitutions. But if they want to curb municipal spending and social engineering, they had better specifically include TIF in those amendments. They should require that no TIF bonding be allowed without a vote of the people in the cities and districts that will be affected by TIF and PIF diversions of taxes into redevelopment.
Recent public attention to the Supreme Court’s Kelo decision on eminent domain has been a boon for property rights
Planners often botched urban renewal, leaving at best sterile urban monuments and at worst bombed-out districts of parking lots and rubble.
activists. But merely restricting local use of eminent domain will not solve the greater problem of abuse of government power. Without TIF, there would often be no funds for eminent domain for urban redevelopment. But without eminent domain, cities free to use TIF will still waste taxpayers’ money on futile social engineering programs. People campaigning to curb abuse of eminent domain should consider restricting TIF as well.
The big issue in Portland today is an aerial tramway that
is under construction between a group of hospitals and a planned residential-office complex on the South Waterfront. The initial estimate for the tramway’s cost was $15 million, but after construction began the estimate increased to $30, then $45, and now $55 million. It turned out that the people who made the initial $15 million estimate had no previous experience with a tram and sort of just made the number up.
Meanwhile, the anticipated cost of street improvements, parks, and other publicly funded parts of the South Waterfront District – known to its detractors as the So What district – have at least doubled, from $50 million to $100 million. The city has also promised to fund construction of low-income housing, but no one knows how much that will cost. Much of the money for these projects is supposed to come out of TIF. As long as TIF provides a nearly unlimited source of funds, there is no need for accuracy or accountability – which is exactly why TIF should be outlawed.