Tax increment financing (TIF) is the most widely used local government program for financing economic development in the United States. TIF is used in almost every state and has been implemented in virtually every kind of city—central business districts, urban industrial neighborhoods, small towns, suburbs, and even farmlands on the urban fringe. TIF is the only real economic development tool that cities can pull out of their toolbox.
Tax Increment Finance policies are generally development focused. When using TIF, cities are required to consider the development needs within the identified area and determine the potential need for change based on assessed value, job creation and public improvements. While most TIF districts (TID) succeed in creating a “solid and robust” revenue base of new assessed value which is normally the primary policy goal, it can be debated as to whether that economic growth creates benefits across the entire city. The policy rarely analyzes potential equity impacts across the whole city because scoping the impacts creates so many variables that projects become worthless.
The State of Wisconsin and the City of Lake Mills consider the creation of new tax base as the only option for generating additional tax revenues and TIF as the only City tool for generating new tax base. The analysis of the revenue generated by new development is easy and very accurate. Consistent with most cities in the United States, we use TIF to stimulate new private construction by installing new public infrastructure. The required project plans provide detailed analysis of both the new revenues generated and the cost of public infrastructure.
TIF projects usually involve large-scale investments in public infrastructure to create the physical foundation for the long-term development of relatively sizeable areas. A Project Plan is primarily written to provide new public infrastructure investment which is not easily financed out of the city’s existing local tax base, especially because of the legal limits on raising taxes. TIF works well because cities are largely dependent on their own resources to finance the public infrastructure. The city’s ability to increase revenues by raising taxes is constrained by local politics, competition with other cities and towns, and state constraints on the city’s ability to increase property taxes. The city’s primary fiscal goal is to increase the value of taxable properties which results in increased net new construction revenues. This process is sometimes referred to as fiscalization. As already stated, TIF is an ideal tool for creating a “solid and robust” revenue base of new assessed value.
This fiscalization is evidenced, and underscored, by TIF’s increasing use for vacant or undeveloped land on the urban fringe and for commercial projects. Truly blighted areas are less likely to attract new investment, even with substantial public-supported and infrastructure investments; because of the enormous costs of brownfields, lack of adequate traffic counts and deteriorated structures. Vacant land in less developed areas of the city or on the urban periphery is more likely to yield a significant increase in assessed value and, thus, in tax revenue growth. Commercial projects are attractive because commercial land is typically assessed at a higher percentage of value than industrial.
The public-private relationships encouraged by TIF and the public funds used to recruit or retain private investment continues to be a source of political conflict and adds to the debate about city policy direction. The state constitutional public purpose requirements are a reminder of the longstanding concern about the potential for public sector corruption.
City policy has to consider the equity of public intervention into private competition when the City is providing direct aid to a private enterprise and balance that with the goal of achieving economic well-being for its citizens. TIF is simultaneously popular and controversial because of its central role in enabling the City to work closely with private businesses in promoting development that has the potential to impact competition and the well-being of citizens.
When TIF projects include commercial uses that might impact nearby competition, the classical assumption is that market economies work on forces, such as supply and demand, where the best determinants of what is right for the citizens’ well-being is determined by private competition. Lake Mills would be classified as having a mixed economy. Mixed economies allow market forces to drive most of their activities, typically engaging in government intervention only to the extent that it is needed to provide stability. Although the market economy is clearly the system of choice here, there is significant debate regarding the amount of government intervention considered optimal for efficient economic operations. The city has used TIF to intervene for the public purpose of creating jobs, increasing tax base and providing needed public infrastructure.
Cities’ policies are used to create competitive markets where more than one producer competes with others to satisfy the wants and needs of a large number of consumers. In a competitive market no single producer, or group of producers, and no single consumer, or group of consumers, can dictate how the market operates. Nor can they individually determine the price of goods and services, and how much will be exchanged. The Federal government has historically considered it in the public interest to encourage competition and discourage monopolies.
Competitive markets theoretically form when the possibility of profits provides an incentive for firms to enter the market. The markets will form because entrepreneurs are willing to take risks associated with producing and supplying goods. This is because consumers would be prepared to pay for the good, and producers can charge consumers at the point of consumption, from which they can earn revenue and make a profit.
Tax increment programs can have the potential of distorting the tax system, and it could be argued that whoever is given a break is benefiting at the expense of their competition. This could distort the basic economics of businesses and costs the city revenue needed for services essential to economic activity. The city could possibly be served better by targeting the incentives to achieve particular results, such as, traffic flows or leeds building projects.
However, the Lake Mills proposed policies on TID incentives in the Gundlach Development Agreement are designed not to be giveaways, but instead are a method to level the competitive playing field. We took the position that when a company decides to locate in Lake Mills it has certain disadvantages, not the least of which are the required city regulations that add substantial costs to a project that existing businesses are grandfathered under, such as, landscaping, traffic islands, driveway separation, stormwater quality and quantity management, traffic lanes, water and sanitary sewer line extensions, traffic light modifications and electric system upgrades. These regulations have added hundreds of thousands of dollars to the cost of opening a business in the city and the TID was the City’s method of reducing the impact of these regulations.
The City has remained extremely conservative by determining to use tax increment financing only in cases where the City has the financial capacity to provide the needed public assistance, are when the Council deems it fiscally prudent to provide such assistance and the developer can clearly demonstrate that the development will be able to meet its financial and public purpose commitments.
With the recent adoption of the Project Plan, the City Council is enabled to make TIF-eligible expenditures for development within TID#4, as well as out of District expenditures if they are related to the District. Financing for the proposed project will be done through bond issuance as reimbursement to the developer for certain identified project costs. The City will use the authority of a Tax Incremental District to finance the public improvements. The City anticipates financing the entire cost of the public improvements included within Table I assuming the developer is able to achieve the development benchmarks contained within the approved term sheet between the City and developer. With the proposed financing contained within the Project Plan, the developer will finance the improvement costs upfront and will be reimbursed after a City bond issuance based on final construction.
The TID#4 area clearly has the potential for stagnant or improper use because of defective or inadequate layouts of streets, faulty layouts of lots in relation to size, shape, accessibility or usefulness, or for other causes and also should be re-planned with assembly of land for development in the interest of the general welfare because of widely scattered ownership, tax delinquency or other reasons.
The Economic Feasibility Study provides a summary of project costs, proposed debt service schedule, and projected tax increment revenues on an annual basis during the duration of the District. Current projections indicate that all project costs of the district should be financed by tax increment revenue within the twenty-seven year statutorily-required retirement period.
The Project Plan can be utilized to direct and manage growth in a neighborhood in consideration of both a neighborhood-specific and citywide policy framework. The Council may want to add requirements to the development in exchange for TID incentives, such as, requiring a LEED design of the buildings.
Cities like to use experts to tell them what economic impact a new project will generate, or how the cost and benefits should be measured, or how many TIF dollars will be generated. Decision-makers want a clear answer to point to, and the experts projection becomes its own living creature. The fundamental problem remains the same. Eventually an unexplained and unexplored uncertainty that is buried in the assumptions and methods behind the projection changes the number. Some seemingly innocuous assumption will change and the actual impact of the project will change dramatically. Councils and their staffs appear to have as their only choice to run with the experts projection and deal with the inevitable down the road.
Instead of accepting the projection, it is preferable to demand to know the plausible range of jobs, tax dollars, economic impact, etc., given what we know. Or ask for a range of scenarios — what happens to the projection if the building doesn’t fill up as fast as they project, or the average payroll turns out to be less, or the cost of steel spikes in the middle of construction. Will the city remain fiscally sound?
