by Ginger Harris*
Missouri is one of over 40 states that authorize the use of tax increment financing or “TIFs” by local governments. Under TIF, the increased tax revenue associated with a proposed project— the “tax increment”—is used to help build the development. TIF law allows a local government to sell bonds, thereby borrowing against future tax revenues to help finance a project.
Prior to TIF, local governments subsidized development projects by giving property tax abatements. TIFs are more valuable to developers, however, since the upfront value of TIF is greater than the “present value” of future tax abatement. TIFs are also useful to local governments that are bumping up against constitutionally mandated maximum tax rates.
But abuse of TIFs has had very significant negative effects. Furthermore, TIFs introduce enormous inequities and inefficiencies into local economies. The way TIF districts are created treats taxing jurisdictions unequally. Typically half or more of the representatives on TIF commissions represent the sponsoring municipality, with the rest divided among all other affected jurisdictions—school, fire, sewer, library and other districts, plus the county.
Some TIF projects treat existing businesses unfairly. A TIF used to subsidize a retail project, for example, gives unfair advantage to stores in that project over competing stores. When people shop at a new TIF mall they spend less at the old mall. That not only penalizes other retailers, but also contributes to our throw-away economy.
TIF projects sometimes fail, leaving the jurisdiction with defaulted bonds, as has happened in the city of St. Louis. But even if a taxing jurisdiction eventually benefits from a TIF, surrounding jurisdictions often suffer. When shoppers spend money at a TIF mall in a neighboring community, they spend less in their own communities. Thus, their own community loses tax revenues. TIF projects often cause increased traffic, leading to street widening and loss of safety for pedestrians, cyclists and transit users.TIF subsidies also distort the market by enticing developers to locations that are not economically or environmentally appropriate—just to benefit from a subsidy. As we’ve seen with the opening and closing of big box stores around the country, their owners have no loyalty to the communities where they locate—here today, gone tomorrow, leaving white elephants in their wake.
Studies in Minnesota and Wisconsin have found that TIF subsidies contribute to urban sprawl. Originally designed to spur development in disadvantaged areas, TIFs have come to be widely used for suburban development, often in prosperous communities.
Projects can be eligible for TIF for three purposes: (1) to eliminate “blight,” (2) to help “conserve” an area on the verge of becoming “blighted,” or (3) to spur economic development. This third category has been misused to justify TIFs for “greenfield” projects that convert farmlands, forests or floodplains into shopping malls, hotels, offices, or (occasionally) even residences in exurbia. The law says a TIF is justified only if the development would not occur “but for” the subsidy. However, current law is lax about requiring such proof of the need.
Because of the negative consequences of TIFs, citizens in some St. Louis area municipalities have organized to force referenda on TIF projects. In 2000, citizens of Olivette put an anti-TIF/anti-development referendum on the ballot and won. Citizens of another St. Louis suburb attempted to block a TIF project in the Missouri River floodplain, but city officials ignored their petition, won a court battle, and completed the project. The Ozark Chapter’s Transportation and Smart Growth Committee is studying TIFs and following several bills in the General Assembly designed to tighten criteria required for a TIF or to ameliorate its impact: SB282, SB80, and HB91. If you’d like to help, contact me at gingerharris@charter.net.
*Much of this article was written with the help of Professor Kenneth P. Thomas, Political Science Department, University of Missouri–St. Louis.