A Comprehensive Approach to the Assessment of Tax Increment Financing (Tif) Projects
Johnson, Thomas G., Scott, James K., Journal of Public Budgeting, Accounting & Financial Management
Competition between states and communities for jobs, investment and economic development continues to intensify. This competition has fueled (and is fueled by) a significant increase in the use of state and local incentive programs. One of the most popular incentive tools used today is commonly known as Tax Increment Financing (TIF). First used in California to foster redevelopment in "blighted" urban areas, TIF programs have been adopted by forty states, and they are being developed in rural and affluent suburban areas (Klemanski, 1989). The use of TIF programs has long been the subject of debate and controversy.1 Proponents of TIF argue that these incentive programs have fostered new investment and increased property tax revenues in areas that would otherwise have experienced negative growth. Opponents argue that TIF is now used in non-blighted areas-on projects that could have been completed with no special government subsidies. They also argue that TIF projects proposed by cities reduce badly needed future revenues for other government jurisdictions such as school districts. Despite the controversy, political pressure to support job creation suggests that TIF projects will continue to expand in the future.
In Missouri, recent legislation allows some TIF projects to "capture" additional State revenues generated by a new development to pay for certain public development investments. This provision, known informally as "Super TIF"2 requires an assessment of the fiscal impacts that proposed TIF projects will have on the State before each project is approved. This same statute also requires that all local TIF districts formally assess the fiscal impacts of proposed TIF projects for all government jurisdictions affected.
This paper proposes a comprehensive approach to the mandated TIF impact assessments. The paper is organized in four brief sections. First, it defines TIF programs, and describes the features that are unique in Missouri statutes. Second, it describes a number of perverse incentives that TIF programs create for their proponents and administrators. Third, it develops and recommends a comprehensive assessment framework with which program administrators can assess the impact of particular TIF programs. Fourth, it illustrates how the framework can lead to better economic development policy decisions at both the state and local levels.
HOW THE TIF PROGRAM WORKS IN MISSOURI
The objective of Tax Increment Financing is to harness the power of public investments to increase the future tax base of declining localities. Future increases in tax revenues are captured and earmarked for the repayment of investments in public infrastructure and economic development incentives. TIF allows municipal governments to sell bonds and to make public investments before the tax base comes on-line. TIF programs are typically applied to blighted or economically stagnant areas.
The TIF device is designed to distribute the costs of the public investments across the various taxing authorities in proportion to the benefits (tax base increases) they realize. Once a redevelopment area is identified, the existing property tax base is identified and the tax revenues generated by all taxing jurisdictions frozen within the area. The TIF area will typically be a part of several taxing authorities-a municipality, a county, a school district and, often, other special purpose taxing authorities such as water, sewer or community college districts.
Following the creation of the TIF district, the various taxing jurisdictions continue to collect tax revenues at the pre-TIF program level. Taxes on increases in the tax base following the establishment of the TIF district, the tax increment, go to the TIF authority. (The TIF authority may give a prescribed percentage of the tax increment back to the taxing authorities if it isn't needed). These revenues may be used for prescribed uses such as the repayment of bonds. …