‘Crony Capitalism and Social Engineering: The Case Against Tax-Increment Financing’

Whitewater’s residents may have heard, as I have, ignorant and false boasting about the benefits of tax incremental financing. It’s variously described as increment or incremental financing, but either way, it’s a plan to entice developers with taxpayer funds by segregating from the general fund, if any, the revenue generated from a development to pay off the tens or hundreds of thousands extended to attract the developer. (It’s an if-we-entice-with-public-money-then-these-already-wealthy-outside-developers-will-come plan.)

In Whitewater, where one of her tax incremental districts (TID 4) is actually distressed (distressed being a term for broke and busted), the ignorance & arrogance of pushing more of this is astonishing. It’s as ignorant as a doctor telling a patient that leeches are a good cure, and as arrogant as someone who dispatches his own parents and then pleads mercy because he’s suddenly become an orphan.

Whitewater’s failed TID 4 is the anomaly – however bad they are, few tax incremental districts in Wisconsin ever fail. Even during the Great Recession, few TIDs failed:

By the assessment of the Wisconsin Department of Revenue, the number of distressed districts in the state is exceedingly small — in fact, as of April 2011, of over 1,050 tax incremental districts, only 13 were distressed (or severely distressed).

That’s only 1.2% of the statewide total. The overwhelming majority — the other 98.8% of districts — were not similarly ailing.

If the economy or changes in the state’s formula for property valuation simply made a district distressed, then more would have been equally ill. They weren’t.

The next time someone tries to tell you how common distressed districts are (“It should be noted that many other municipalities are seeking distressed designation for TIDs…”), you’ll know that’s an exaggeration– it’s very rare for a city to have a distressed district.

(So rare, that the WI Dept. of Revenue concluded that the state would have few additional distressed designations: “However, since the ability to declare a TIF district as “distressed” or “severely distressed” must be done before October 1, 2011, the bill [SB-55] is not expected to significantly affect the number of TIF districts that will be designated as “distressed” or “severely distressed.”)

See Distressed TID 4. Indeed, FREE WHITEWATER has a whole series of posts with the sad truth about TID 4, and about tax incremental financing.

The self-designated ‘development’ gurus associated with the failure of TID 4 should have left the Whitewater Community Development Authority. This was, and has been too often in other decisions, men simply using and wasting public money.

These few pricey projects here or there have not uplifted ordinary residents’ economic well-being.

For a fine assessment of tax incremental financing, I’d recommend Crony Capitalism and Social Engineering: The Case against Tax-Increment Financing:

Tax-increment financing (TIF) is an increasingly popular way for cities to promote economic development. TIF works by allowing cities to use the property, sales, and other taxes collected from new developments — taxes that would otherwise go to schools, libraries, fire departments, and other urban services — to subsidize those same developments.

While cities often claim that TIF is “free money” because it represents the taxes collected from developments that might not have taken place without the subsidy, there is plenty of evidence that this is not true. First, several studies have found that the developments subsidized by TIF would have happened anyway in the same urban area, though not necessarily the same location. Second, new developments impose costs on schools, fire departments, and other urban services, so other taxpayers must either pay more to cover those costs or accept a lower level of services as services are spread to developments that are not paying for them.

Moreover, rather than promoting economic development, many if not most TIF subsidies are used for entirely different purposes. First, many states give cities enormous discretion for how they use TIF funds, turning TIF into a way for cities to capture taxes that would otherwise go to rival tax entities such as school or library districts. Second, no matter how well-intentioned, city officials will always be tempted to use TIF as a vehicle for crony capitalism, providing subsidies to developers who in turn provide campaign funds to politicians.

Finally, many cities use TIF to persuade developers to build “new-urban” (high-density, mixed-use) developments that are supposedly greener than traditional designs but are less marketable than low-density suburbs. Albuquerque, Denver, Portland, and other cities have each spent hundreds of millions of dollars supporting such developments when developers would have been happy to build low-density developments without any subsidies.

TIF takes money from schools, fire departments, libraries, and other urban services funded by property taxes. By eliminating TIF, state legislatures can help close current budget gaps and prevent cities from taking even more money from these urban services in the future.

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