Borrowing from the future without understanding the actual risks, and then spending the money carelessly? Sounds like Wall Street all over again. But this time, it's a little-known tax mechanism known as tax-increment financing, or TIF.
TIF is an ingenious local economic development tool that lets city governments borrow against future tax revenues for a given area of town in order to invest in new projects today. While TIFs can work as intended and spur development, they are also highly vulnerable to abuse because their details and implementation are shrouded in complexity: a convenient temptation for expedient politicians.
TIF lets politicians borrow money from the city's future tax base, and then spend it on development projects with minimal public or legislative oversight. The scheme is sustained by the the supposition that the TIF bond money, if well-spent today, will pay for itself with future tax revenues generated by new development.
Ah, but does that actually happen? And who exactly does it help most? The key is the implementation. Too bad that that the future generation of taxpayers or their proxies, the press and citizenry, cannot easily oversee TIF decisionmaking. Did I hear someone say favoritism and corruption?
It's welcome news that USPIRG (US Public Interest Research Group) has produced a major report documenting the abuses of tax-increment financing and calling for increased transparency and accountability. The report, "Tax-Increment Financing: The Need for Increased Transparency and Accountability in Local Economic Development Subsidies, argues that TIFs are often wasted on projects that “fail to achieve public goals, enrich special interests at the public's expense, and encourage development in areas where it's least needed.”
TIFs were initially used to help depressed neighborhoods by spurring much-needed investment; more recently, they have been used as a more general development tool. TIFs are an attractive financing tool because they access money that would not otherwise be available. “Taxpayers appear to lose nothing, and the local economy hopefully grows, and everyone seems like a winner,” as the report puts it.
The problem comes when such funds are used for ill-considered projects or sweetheart deals that don't really generate the anticipated tax revenue in the future. Or when they finance projects that end up producing additional, unanticipated costs for the city (e.g., new road infrastructure for stores, new students for local schools).
The town of Baraboo, Wisconsin, creatde a “TIF district” in a cornfield as a way to lure Walmart and other stores to build. In Chicago, USPIRG notes, "TIF revenue funded an entire 'shadow budget' of projects under mayoral control, hidden from the public and even the city council. In California, use of the tool became so widespread that school districts began to sue cities to recover the revenue they were losing to TIF-funded redevelopment schemes.”
If projects fail to bring hoped-for investment, then the city budgets that fund schools, parks and other public services suffer. Because TIF is not well-understood and publicly scrutinized, politicians have keen incentives to channel TIF revenues to their favorite, well-connected businesses, even if the public benefit is modest or nil. Because of the complexity and lack of transparency, it can be hard for the public and press to assess whether a particular TIF project makes sense. State laws governing TIF don't require much data, reporting or accountability.
USPIRG concludes: “The failure to restrict TIF to appropriate settings and to impose sufficient public oversight and budgeting rules over TIF funds have allowed what should be a mundane tax policy to instead become a temptation that too many municipal officials find themselves unable to resist – an immediate infusion of cash that often comes with little consideration of the long-term costs.” In short, TIF can be a shell game for siphoning away public monies without attracting much attention or oversight.
The USPIRG report is a wake-up call to the public and municipalities to get TIFs under control. The process needs to be “targeted, transparent, accountable and democratically governed” – not a secretive slush fund understood by a handful of political insiders and their corporate friends. Developers who receive TIF funds need to be held accountable for their promises, with specific goals and reporting requirements. The public should be able to monitor the process as it happens, not just years later when the bills come due.
The USPIRG report (44-page pdf file) can be downloaded here.