How TIF Works
To obtain TIF funds, a city (or, in most states, a county) must draw a line around an area it wants to redevelop. This may be called an urban renewal district, a redevelopment district, or simply a TIF district.
At the time the TIF district is created, the property taxes generated by that area become the base taxes, and those taxes will continue to fund schools and other services for the lifetime of the district. But from that day forward, any increases, or increment, in taxes—whether from new development or from the increased value of existing land and developments—are retained by the urban-renewal agency for redevelopment.
While 31 states require the municipality to find that the area within the district is "blighted," as anyone familiar with the eminent domain issue knows, the determination of what is "blighted" is often contentious. Not only do 18 states not require a blight determination, at least 16 others weakened their blight requirements in the decade before the Kelo decision.26
In Missouri, neighborhoods have been declared blighted simply because the homes were older than 35 years.27 When homeowners in a Michigan city argued that their neighborhood was not blighted, the city planner responded that "‘blighted’ does not mean shabby or marked for demolition. It simply means the area has revitalization potential."28 That definition effectively eliminates the blight requirement for any city whose only goal is to increase tax revenues.
Some states allow cities to create TIF districts for reasons other than blight. Idaho, for example, allows cities near state borders to create TIF districts if they are at a competitive disadvantage with cities in neighboring states. The city of Post Falls used this to justify putting 40 percent of the land area of the city in a TIF district. Yet according to the Idaho State Tax Commission, Idaho’s overall tax burden is significantly less than Washington’s.29 It seems likely that Post Falls’s TIF districts attracted more business away from nearby Idaho cities, such as Coeur d’Alene, than from Washington state. Significantly, Coeur d’Alene created two urban-renewal districts five years after Post Falls created its first district, and two other nearby towns also recently created TIF districts.
Some states require little more than a public hearing to create a TIF district; others may require a study to determine if redevelopment is feasible. Only one state, Georgia, requires cities to ask voter approval to create a TIF district. Georgia also requires cities to obtain the consent of other taxing entities that overlap with the district.30
Though 13 states have no limit, most states limit the life of the district to between 20 and 50 years. Planners typically estimate what the tax increment will be over that time period. The city then sells bonds that can be repaid by that increment and spends the revenue from the bonds to purchase properties and clear existing structures. All but eight states and the District of Columbia allow cities to use eminent domain to compel landowners to sell property within TIF districts.31
Once existing structures are cleared, most cities also use TIF funds to make improvements within the district. Cities often build infrastructure such as streets, sidewalks, parks, sewers, water, and parking garages— infrastructure that developers would normally pay for themselves. The city then sells the land to developers, typically for far less than the city has invested.
In lieu of providing infrastructure, cities sometimes give some of the bond proceeds directly to the developers. In other cases, particularly transit facilities, sports stadiums, and convention centers, the city builds the actual structures and then manages, leases, or sells them.
There are many variations. In addition to property taxes, 17 states allow municipalities to dedicate incremental sales taxes to redevelopment, and three states allow them to dedicate incremental income or payroll taxes to redevelopment.32 Most states allow cities to create pay-as-you-go TIF districts, spending the incremental taxes (or any surplus tax revenues after making bond payments) on district improvements each year. In many such cases, the developer pays for the infrastructure and then the city rebates the incremental property and/or sales taxes until the developer’s costs have been covered.
Some states limit the amount of land a municipality can put in a TIF district. Oregon, for example, allows cities to put no more than 25 percent of their land area in a TIF district. Other states have no limit, and cities such as Mission Viejo, California; Port Richey, Florida; and Wheaton, Illinois, have either placed or proposed to place all land within their city limits in a TIF district—effectively claiming (since those states all have blight requirements) that 100 percent of the city is blighted.33
In addition to providing funds for redevelopment, TIF districts generally insulate cities from failure. Although most redevelopment agencies are run by boards of directors whose members are identical to the city councils, they are considered separate entities. If a TIF district fails to collect enough incremental taxes to repay its bonds, it can default on the bonds without jeopardizing the city’s bond rating. This allows cities to take on high-risk projects that developers might avoid even if they were guaranteed no increases in property taxes.
In 1991, the Englewood, Colorado, Urban Renewal Authority defaulted on $27 million worth of bonds sold in 1985 to support a retail development that failed and was eventually bulldozed.34 Bondholders, not taxpayers, paid the price. But this does not mean that TIF is a good deal for taxpayers. In fact, such defaults are rare because cities have many ways of capturing taxpayer funds to pay for TIF.
First, in many states, TIF agencies get rewarded for inflation. As property values increase due to inflation, TIF revenues rise even if the district does nothing to improve the area. Normally, such increased revenues would be used by schools and other tax entities to offset increased costs, but since the TIF districts are capturing those revenues, other tax districts must either raise taxes or cut back on services.
In some states, property taxes are indexed to government budgets, not to inflation, so increased property values do not automatically boost TIF revenues. But TIF agencies have other ways of using fluctuating property values to capture revenues. For example, in Idaho, when property values decline (as they did in the recent recession), the base value of the property (the portion whose taxes go to schools and other traditional tax entities) also declines. When property values recover, the base value remains at its lowest level, so TIF districts capture "incremental" tax revenues that, prior to the recession, had gone to other tax districts.
Second, in most states, TIF districts gain when other tax entities persuade voters to increase taxes. Say a school or library district convinces voters to pass a bond levy that increases taxes by $1 for every $1,000 of property value. Taxes are increased both inside and outside of the TIF districts, but the increased revenues inside the TIF districts go to TIF, not to the school or library district.
For example, in 2006, voters in a fire district in Northglenn, Colorado, agreed to increase the local fire district’s tax rates, an increase that the fire district admitted was needed mainly because local TIF districts had taken so much money from the fire district. Yet the increase also increased TIF revenues, effectively rewarding the urban-renewal agency for taking money from the fire district.35
Third, TIF districts get credit for development that would have taken place in the district anyway. If a city creates a TIF district out of a neighborhood that is already being gentrified by private developers, all the taxes on new development in the neighborhood go to the TIF district even though that development would have taken place without the TIF district.
Fourth, TIF districts get credit for development that takes place within their boundaries that would have taken place somewhere nearby anyway. In a growing region, new homes, shops, offices, and other developments will be built somewhere. TIF subsidies may attract such development to the district at the expense of development somewhere else in the region. The result is no net increase to the region’s total tax base, but a net decrease to the tax revenues for schools and other entities that must compete with the TIF agencies for funds.
To obtain TIF funds, a city (or, in most states, a county) must draw a line around an area it wants to redevelop. This may be called an urban renewal district, a redevelopment district, or simply a TIF district.
At the time the TIF district is created, the property taxes generated by that area become the base taxes, and those taxes will continue to fund schools and other services for the lifetime of the district. But from that day forward, any increases, or increment, in taxes—whether from new development or from the increased value of existing land and developments—are retained by the urban-renewal agency for redevelopment.
While 31 states require the municipality to find that the area within the district is "blighted," as anyone familiar with the eminent domain issue knows, the determination of what is "blighted" is often contentious. Not only do 18 states not require a blight determination, at least 16 others weakened their blight requirements in the decade before the Kelo decision.26
In Missouri, neighborhoods have been declared blighted simply because the homes were older than 35 years.27 When homeowners in a Michigan city argued that their neighborhood was not blighted, the city planner responded that "‘blighted’ does not mean shabby or marked for demolition. It simply means the area has revitalization potential."28 That definition effectively eliminates the blight requirement for any city whose only goal is to increase tax revenues.
Some states allow cities to create TIF districts for reasons other than blight. Idaho, for example, allows cities near state borders to create TIF districts if they are at a competitive disadvantage with cities in neighboring states. The city of Post Falls used this to justify putting 40 percent of the land area of the city in a TIF district. Yet according to the Idaho State Tax Commission, Idaho’s overall tax burden is significantly less than Washington’s.29 It seems likely that Post Falls’s TIF districts attracted more business away from nearby Idaho cities, such as Coeur d’Alene, than from Washington state. Significantly, Coeur d’Alene created two urban-renewal districts five years after Post Falls created its first district, and two other nearby towns also recently created TIF districts.
Some states require little more than a public hearing to create a TIF district; others may require a study to determine if redevelopment is feasible. Only one state, Georgia, requires cities to ask voter approval to create a TIF district. Georgia also requires cities to obtain the consent of other taxing entities that overlap with the district.30
Though 13 states have no limit, most states limit the life of the district to between 20 and 50 years. Planners typically estimate what the tax increment will be over that time period. The city then sells bonds that can be repaid by that increment and spends the revenue from the bonds to purchase properties and clear existing structures. All but eight states and the District of Columbia allow cities to use eminent domain to compel landowners to sell property within TIF districts.31
Once existing structures are cleared, most cities also use TIF funds to make improvements within the district. Cities often build infrastructure such as streets, sidewalks, parks, sewers, water, and parking garages— infrastructure that developers would normally pay for themselves. The city then sells the land to developers, typically for far less than the city has invested.
In lieu of providing infrastructure, cities sometimes give some of the bond proceeds directly to the developers. In other cases, particularly transit facilities, sports stadiums, and convention centers, the city builds the actual structures and then manages, leases, or sells them.
There are many variations. In addition to property taxes, 17 states allow municipalities to dedicate incremental sales taxes to redevelopment, and three states allow them to dedicate incremental income or payroll taxes to redevelopment.32 Most states allow cities to create pay-as-you-go TIF districts, spending the incremental taxes (or any surplus tax revenues after making bond payments) on district improvements each year. In many such cases, the developer pays for the infrastructure and then the city rebates the incremental property and/or sales taxes until the developer’s costs have been covered.
Some states limit the amount of land a municipality can put in a TIF district. Oregon, for example, allows cities to put no more than 25 percent of their land area in a TIF district. Other states have no limit, and cities such as Mission Viejo, California; Port Richey, Florida; and Wheaton, Illinois, have either placed or proposed to place all land within their city limits in a TIF district—effectively claiming (since those states all have blight requirements) that 100 percent of the city is blighted.33
In addition to providing funds for redevelopment, TIF districts generally insulate cities from failure. Although most redevelopment agencies are run by boards of directors whose members are identical to the city councils, they are considered separate entities. If a TIF district fails to collect enough incremental taxes to repay its bonds, it can default on the bonds without jeopardizing the city’s bond rating. This allows cities to take on high-risk projects that developers might avoid even if they were guaranteed no increases in property taxes.
In 1991, the Englewood, Colorado, Urban Renewal Authority defaulted on $27 million worth of bonds sold in 1985 to support a retail development that failed and was eventually bulldozed.34 Bondholders, not taxpayers, paid the price. But this does not mean that TIF is a good deal for taxpayers. In fact, such defaults are rare because cities have many ways of capturing taxpayer funds to pay for TIF.
First, in many states, TIF agencies get rewarded for inflation. As property values increase due to inflation, TIF revenues rise even if the district does nothing to improve the area. Normally, such increased revenues would be used by schools and other tax entities to offset increased costs, but since the TIF districts are capturing those revenues, other tax districts must either raise taxes or cut back on services.
In some states, property taxes are indexed to government budgets, not to inflation, so increased property values do not automatically boost TIF revenues. But TIF agencies have other ways of using fluctuating property values to capture revenues. For example, in Idaho, when property values decline (as they did in the recent recession), the base value of the property (the portion whose taxes go to schools and other traditional tax entities) also declines. When property values recover, the base value remains at its lowest level, so TIF districts capture "incremental" tax revenues that, prior to the recession, had gone to other tax districts.
Second, in most states, TIF districts gain when other tax entities persuade voters to increase taxes. Say a school or library district convinces voters to pass a bond levy that increases taxes by $1 for every $1,000 of property value. Taxes are increased both inside and outside of the TIF districts, but the increased revenues inside the TIF districts go to TIF, not to the school or library district.
For example, in 2006, voters in a fire district in Northglenn, Colorado, agreed to increase the local fire district’s tax rates, an increase that the fire district admitted was needed mainly because local TIF districts had taken so much money from the fire district. Yet the increase also increased TIF revenues, effectively rewarding the urban-renewal agency for taking money from the fire district.35
Third, TIF districts get credit for development that would have taken place in the district anyway. If a city creates a TIF district out of a neighborhood that is already being gentrified by private developers, all the taxes on new development in the neighborhood go to the TIF district even though that development would have taken place without the TIF district.
Fourth, TIF districts get credit for development that takes place within their boundaries that would have taken place somewhere nearby anyway. In a growing region, new homes, shops, offices, and other developments will be built somewhere. TIF subsidies may attract such development to the district at the expense of development somewhere else in the region. The result is no net increase to the region’s total tax base, but a net decrease to the tax revenues for schools and other entities that must compete with the TIF agencies for funds.
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