Last night, Whitewater’s Common Council recommended to a Joint Review Board five new Tax Incremental Districts for the city. There is common agreement that Whitewater faces significant economic challenges, and that an increase in private economic activity, and development, would be welcome. (There are, in our town, few if any ‘no growth’ advocates of the kind one would encounter in a prosperous suburb.)
One way to encourage additional private development is through the now-ubiquitous municipal financing arrangement known as Tax Incremental Financing. Virtually all states have statutes that allow municipalities to finance public works in this way. Tax Incremental Financing is a mechanism by which a municipality designates tax revenues from growth in property values within a specified area to finance public works development in that same area. The municipality may undertake any number of public expenditures for roads, sewers, etc., within the designated area, and repayment of financing for those public expenditures comes from the increased (incremental) tax receipts that the city receives from additional private investments within the district.
The mechanism is Tax Incremental Financing (TIF) and the area is a Tax Incremental District (TID).
It’s not, of course, the only way to raise money for new public works in a designated area. The other options, however, are often more painful, uncertain, or undesirable. A city could, after all, increase taxes wherever possible, to finance new roads and street lights in a blighted area. The cost, however, might be borne disproportionately by areas of the city that don’t need or want additional public works, and both affluent residents and prospering businesses might rethink staying in town.
A second alternative might be to issue bonds to raise the money for new streets, etc., in the designated area, even if new business prospects were not yet available. There are limits both legal and practical on this approach, the practical being – ultimately – the more decisive. Will you spend publicly with no clear private prospect in mind? Some might do so, in the hope that new roads, etc., in a blighted area would attract businesses looking for a new market. This sort of “if you build it, they will come approach” is, however, better left to novels about baseball than the public finances of our small town. There is only so much that we could bear, and risk, in any event. Without a clear private gain, spending merely to spend would be the riskiest of ideas for us.
That brings us to TIF – an authorization to commit up to a specific amount of municipal obligation, from which we would build public works in a specific area, and an obligation that we would satisfy through the additional tax revenues that increased private activity made possible.
(In the Common Council discussion, City Manager Brunner remarked that Wisconsin statutes afford only one development tool, while other states have several. It’s a narrow way of seeing the world; no one thinks that cities did not undertake development projects long before the first tax incremental scheme was instituted. TIF is a post-war development, yet cities undertook both urban planning and development without it. Spend too much time inside, and you no longer imagine the scenery outside, as it were.)
Some have written as though Tax Incremental Financing (TIF) and the designated Tax Incremental Districts (TIDs) where it takes place are identical. Our city has five proposed TIF districts, designated 5 through 9. Tax Incremental Financing is a municipal redevelopment mechanism that may be more or less reasonable as applied to a specific TID. The selection of the right area – the right TID – will render the entire TIF mechanism either sensible or foolish. It’s not wholly different from the distinction between the concept of a thirty-year fixed-rate mortgage and the suitability of a given property and borrower for that arrangement. For Tax Incremental Financing, all the real action is in the districts, so to speak. One may be a good idea, others foolish.
So, what’s a community to look for in a TID?
1. Limits on new retail space, to avoid cannibalization from existing locations. (It’s not that there should be no new retail, but merely that one needs to be mindful of merely cannibalizing existing retail locations. This is a problem apart from a TID, too.)
2. Limits on use for completely open agricultural land. Why? Because valuation for open ag land is different from valuation for other land, and the base value of the TID derives not on the potential for the farm land for development, but on the value as existing crop land.
3. Areas for a TID should ideally be blighted or struggling. Creating a TID in a place that doesn’t need one restricts otherwise useful tax gains only to a TID that doesn’t need it, away from general tax coffers where they would be more useful. Saying that statutes determine selection is unpersuasive, as there is flexibility in selection of TID boundaries.
4. Minimum amount of public works possible. A TID will have a legally defined amount of public spending possible, but less is more in public works expenditures.
5. A transparent, responsible community body to carry out TID administration. (A critical study of TIDs in Chicago found that many TIDs are poorly administered, of limited accountability, and that administrators voted ‘yes’ on proposals before them over 99% of the time.)