TIFs: Crony Capitalism

On of the currently fashionable ways government has of subsidizing business is the TIF — tax increment financing district.

Is sounds reasonable. Government pays for development, and gets the money back in increased property taxes. As one source explains:

TIF uses the additional property taxes paid as a result of development in the district to pay for part of the development costs. When a new building is constructed, the market value of the property and its property taxes typically rise. Classic examples would be building a new store on an undeveloped parcel or replacing one or more old buildings with a new, larger building. In both of these instances, the market value of the property will rise because the improvements add value to the parcel.

Does that sound perfectly sensible?

If it does, you need to get used to thinking further about these issues.

All economic development tends to increase property taxes. Add a room to your house, guess what happens? The value of your property increases, and your taxes increase.

American business invests billions in the economic development of America’s cities without demanding TIF subsidies.

But sometimes politically well-connected business interests can convince local officials give them multi-million dollar subsidies from TIF districts. The officials explain to the taxpayers that “it’s not really costing you anything, since we’ll get it all back in property taxes.”

But the truth is that investors do have millions of their own money to spend. If government refuses to subsidize them, they have to invest the money somewhere. Of course, if other localities do agree to subsidize them, they may go there. But that’s an inefficient use of resources, and state governments should not allow localities to complete like this.

Who gets the short end of the stick when they do compete using TIF districts? Local businesses that can’t easily pick up and move, small businesses that don’t have the clout to demand TIF districts for themselves and taxpayers who are saddled with the debt for the money used to subsidize favored businesses. They have been promised that increased property taxes will cover it, but they have no guarantee of that, especially if the subsidized business goes belly up.

A recent study from the Heartland Institute studied five Chicago TIF districts in depth, and came to several conclusions:

• TIF did not consistently increase the number of businesses; of the three commercially oriented TIF districts studied, two experienced a net loss of businesses.
• TIF did not result in a net increase in the number of jobs. Job losses in the neighborhoods surrounding each TIF district more than offset any increase in the number of jobs inside the TIF district.
• TIF tended to increase residential property sales, but the impact on housing prices was mixed. In some TIF districts, median housing prices increased faster than the citywide median, in other cases more slowly.

In other words, a mixed picture, and one that hardly justifies millions in government subsidies.

One local critic of TIF has been former Mayor of Milwaukee John Norquist. In spite of having left office under a cloud, Norquist is in fact a policy wonk of some distinction. According to journalist Bruce Murphy:

Norquist, who served in the legislature when the TIF law was passed, notes the bill was promoted by business leaders to “hot wire development in the Inner City.” Instead, he notes, it’s become a standard offering in the suburbs, so that in the city, “there’s a certain amount of TIFs you have to do just for defensive purposes.”

Norquist argues that TIFs reward insiders at the expense of other developers. “It makes insider contacts more important than anything,” he argues. “So you get less variety of developers. When we stopped offering subsidies for Downtown development, then the little developers started showing up. Instead of two or three developers, the few like Gary Grunau, we had 30.”

Norquist argues that reliance on TIF subsidies can “suppress other buildings from being built that the market would do on its own.”

It is certainly good that local communities care about attracting business. The problem is that the honest tools for doing this — good education, good police protection, low taxes — are hard to achieve, and would require taking on powerful entrenched interests.

It’s easier to resort to crony capitalism, and then turn to the voters and say “look at the development I produced.” With some luck, they won’t have figured out the scam.