KENNEDY: TIFs have gone from good idea to bad

I’m on the mailing list of the libertarian Cato Institute (and the Republican and Democratic parties, among way too many others). I am fond of Cato—not because I necessarily agree with them, although I sometimes do—but because they are intellectually consistent and their reports are well-researched. So I was interested to read their report “Crony Capitalism and Social Engineering: The Case against Tax-Increment Financing.”

For those of you unfamiliar with TIFs, the concept is fairly simple. In order to induce development of projects that would not otherwise be economically viable (sometimes called the “but for” test, as in “but for the economic assistance, the project wouldn’t be built”), the municipality caps the parcel’s property taxes at the rate paid prior to the new development, and plows the added tax revenue into the development for a period of time, in order to bridge the gap.

The Cato report made several points:

1) By diverting the “extra” tax dollars generated to the project, those dollars are lost to schools, libraries, fire departments and other urban services. In a sense, those services are also subsidizing the development. (To which proponents of TIF financing would respond, yes, but if the project would not otherwise get built, and if the abatement ends after a reasonable period of time–after which those urban services do receive the extra income–everyone benefits.)

2) Studies have shown that cities are not really applying the “but for” test. Many of these projects would have been built without the extra help. (Whoops!)

3) The new developments impose added costs on police and fire departments, etc., so other taxpayers are either paying for the services rendered to the new development until the abatement ends, or they’re receiving reduced services during that time.

4) No matter how well-intended these programs, elected officials will often give in to the temptation to use TIFs as a vehicle for crony capitalism, providing subsidies to developers who in turn donate campaign funds to those same officials.

Cato has other problems with TIF financing, primarily because it is often used to drive development to denser in-city areas over suburban low-density ones. (In my opinion, that’s an argument for, rather than an argument against—as the techies might say, that’s a feature, not a bug.) But it is hard to argue with their other criticisms.

This is what makes policymaking so difficult. If TIFs are used as originally intended—and used selectively—they can be a useful tool. When I was in city hall, in the early days of TIF use, they were being employed by urban municipalities as a tool to level the playing field—to allow cities to compete with the lower costs of suburban development.

Over the years, however, TIFs have been adopted by smaller bedroom communities like Carmel and Greenwood—and developers have learned to play “Let’s make a deal,” in essence turning TIFs into bargaining chips. One result has been that the “but for” test is history. And when the “but for” test was gone, so was the original justification for the program.

Unfortunately, selective and limited use of TIFs has gone the way of the “but for” test. Here in Indianapolis, if news stories are to be believed, the Ballard administration is proposing to turn large swatches of the urban core into TIFs, robbing school districts and libraries of desperately needed revenue.

Ballard’s plans are further evidence that Cato is correct when it notes that TIFs have “become a way for city governments to capture taxes that would otherwise go to rival tax entities such as schools or library districts.”•

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Kennedy is a professor of law and public policy at the School of Public and Environmental Affairs at IUPUI. Her column appears monthly. She blogs regularly at www.sheilakennedy.net. She can be reached at skennedy@ibj.com.