LAND USE TOOL ANALYSIS:



LAND USE TOOL ANALYSIS:

Tax Increment Financing

Andrea Clinkscales

Brian Henry

UDP 598A: Land Use I

Professor Born

February 28, 2007

Introduction

Tax Increment Financing (TIF) is a popular community development tool. It is a method for local jurisdictions to leverage future gains in property taxes to invest in current infrastructure improvements and other economic development initiatives. TIF has evolved over time as the planning context for its use has changed. Use of TIF began during the era of the Federal Urban Renewal Programs in the 1950s as a strategy for local governments to fund their share of urban renewal projects. The first TIF enabling law was passed in California in 1952, followed by Oregon in 1961.[1] As federal programs for local community development began to lose funding in the mid 1970s, with the problem accelerating in the 1980s, TIF became increasingly popular—as early as 1975, 56% of cities larger than 100,000 were using TIF. By 1987 at least 33 states had adopted TIF-enabling legislation, and by 2001 48 had adopted such measures.[2]

Defining TIF

The following is a description of how TIF works. TIF freezes the tax assessment value of properties in a given base year in a specific geographic area for a set number of years. Taxes based on property value within the TIF district can only be applied to the base year assessment until the time period of the TIF has expired. Therefore, all taxing jurisdictions, from school districts to counties and other special taxing districts, collect a set amount of taxes from the TIF properties for the life of the TIF. However, as real property values rise, the taxes actually collected in the TIF district will be greater than this base amount. These incremental increases year by year are siphoned off into a special TIF fund. The money collected in this fund is designated for use within the TIF district, usually for infrastructure or other public improvement projects. These incremental increases to the fund represent a steady income flow for a set period of time, allowing bonds to be issued to fund larger investments earlier than normally possible.[3] The figure above illustrates the concept of TIF.

The Theory of TIF

The basic principle of TIF is to spur economic development that otherwise would not occur. TIF is one among an array of economic incentive tools. For instance, if a particular area is stagnant or in decline, investment in public infrastructure such as roads, parks, community centers, pedestrian amenities, or even revitalized public housing will make that area more attractive to private investment. This, in turn, raises area property values, which increases taxes as well as livability. Without investment enabled by TIF, the private investment would not have arrived. Some view TIF as a market failure correction that allows the economy to function at the most efficient level. Using the previous example to illustrate, suppose that the declining area described above has plenty of qualified workers who are willing to work, but there are no jobs to employ them. Left alone, the potential in this area would not be met by private capital. However, with TIF the market is corrected and provides a net gain for the economy. [4] From the pragmatic view of planners and other officials charged with economic development and community revitalization, TIF is attractive because it alleviates the pressures on tax revenues and makes these monies available for a variety of other services and projects that then spur proactive investment in public facilities.

Pros & Cons: When to Implement TIF

To best understand when TIF is appropriate, a discussion of pros and cons is helpful to define the issues surrounding this controversial planning tool. The fundamental point of contention with TIF and other economic incentive subsidies is a two fold question which is a topic of heated debate by economists. Would new development occur without a TIF, and if so, can the development produce a net gain? And, does TIF have any bearing on the decisions of private investors? There is academic research supporting both sides of this debate.

Outside of this fundamental dispute are several other important arguments made for and against TIF. Proponents point out that TIF is not a direct or new tax. This makes it appealing to elected officials and the public. In addition to not being a new tax, TIF projects are self-financing. Important projects are paid for by the area in which improvements are made, and these projects are free from obligations set by federal guidelines. Another cited advantage is that TIF bonds do not generally affect the state’s overall debt ceiling, and have fewer checks than general obligation bonds issued by a state. One of the most important advantages of TIF, as compared to other economic incentives, is that it is flexible and can be specifically controlled to focus on a particular problem by providing a wide array of projects with different impacts, which work in concert with private development.[5]

Detractors of TIF counter these arguments with several points. One of the biggest criticisms of TIF, and what often sparks controversy in the public arena, is its impact on tax rates and other jurisdictions independent of the TIF district. TIF inherently takes money away from a jurisdiction as a whole (such as a city or county), and particularly impacts independent taxing jurisdictions such as school districts, airport authorities, or other special taxing districts. For instance, when tax assessments are frozen, the growth in revenues to supply educational services is limited. This may be especially problematic when the growth generated by TIF incentives actually produces a greater burden of services demanded. This could result in the increase of tax rates, the only way to produce more revenue when assessments are frozen. Another criticism is the equity issue of who is gaining and who is paying for TIF, particularly when an area is not judged as blighted, or the TIF is seen as a handout to developers at taxpayer cost. Finally, the complexity and cost of administering TIF may substantially reduce the net benefits of this tool, especially if the interest rates for TIF bonds are greater due to the higher risk of such bonds compared with general obligation bonds.

These arguments form a broad assessment of the positive and negative aspects of using TIF. An effort to capitalize on the positives and minimize the negatives, forms a good outline of when to use TIF effectively. As mentioned earlier, careful analysis of the net benefits of the projects and TIF’s impact on other taxes is an important requirement to using them. If the benefits to the whole community do not outweigh the costs, TIF may not be the best choice. An area should also be relatively limited in geographic scope, should be judged in need of assistance, and hold a genuine prospect of improving. TIF should not be used as a substitute for a Capital Improvement Program or as direct developer subsidies. In sum, much of the strength of a TIF depends on the conditions and intentions of its use. Peter Ryner, Director of Community Development for Peterborough, New Hampshire, summarized these findings best commenting in an online discussion of TIF: “As I see it, TIF is another tool in the community toolbox; works best in portions of community where new development is anticipated; and should be focused at a rather limited set of specific improvements. It does not take the place of regular capital improvements; is really only a bookkeeping concept, but wow . . . it has accomplished so much.”

TIF Cases Studies

As mentioned above, the conditions in which TIF is used are closely tied to outcomes and vary greatly. While the concept of TIF function is straightforward, implementation is more complicated, and differs based on the TIF state enabling laws. The public-private agreement and redevelopment plan upon which a TIF district is established must be carefully crafted. The following case studies illustrate TIF implemented in practice and tell the story of many concepts described thus far.

Case Study 1: The Portland Development Commission and the Pearl District

In 1958, the citizens of Portland, Oregon voted to create the Portland Development Commission (PDC). An agency that uses urban renewal as a tool to focus attention and resources in blighted or underused areas, the PDC improves neighborhood livability by using public funds to stimulate private sector investment, job creation, and expansion of the tax base. It is controlled by a five-member board of commissioners who are local citizens appointed by the Mayor and approved by City Council. Quasi-governmental in nature, the PDC’s executive reports to the board of commissioners rather than directly to the Mayor or other City Commissioners. The intent of this structure is to allow independent program implementation and resource allocation as opposed to direction focused on any one City Commissioner. Though still a department of the City, the PDC employs over 200 staff, and is nationally unique as compared to agencies in other major cities for its greater degree of coordination where urban renewal, housing, economic development, and redevelopment issues are typically dispersed among several agencies.[6] The PDC may control no more than 15% of Portland’s acreage and is steadily approaching this limit.[7] It has three major service themes in 11 Urban Renewal Areas (URAs), which are almost exclusively funded by TIF: housing; neighborhood revitalization; business expansion, retention, and recruitment.

One of the most successful URAs is the River District, which is oriented along the Willamette River. Many of the River District achievements can be credited to Hoyt Street Properties, a major landowner and developer in a sub-area of the River District called the Pearl District. Located north of Burnside St, the Pearl District is one of Portland’s most distinctive, thriving, upscale neighborhoods. In 1994, Hoyt Street purchased the old Burlington Northern rail yard, a 34-acre Brownfield site occupied by abandoned warehouses, empty offices, and an unused railroad track. This area represents the northern half of the Pearl District and today is called Hoyt Yards. Its initial site development was hampered by the Lovejoy Street ramp approach to the Broadway Bridge, which divided the property in half. A major development breakthrough was negotiated in 1997 when Hoyt Street Properties and the PDC reached a redevelopment agreement that provided for the relocation of the ramp, thus opening the property to higher densities and walkability. The PDC dealt with the ramp, and in return, Hoyt Street Properties promised to convert the site into a world-class, mixed-use, urban community. In 2004, the halfway point of the venture was complete with nine architecturally diverse, multi-level residential communities, three internationally renowned parks, and many gallery, restaurant, and retail spaces.[8] This type of public-private partnership is a good example of a situation in which TIF investments can facilitate new development. The Pearl District has become a popular destination and, for many, the focal point of art, entertainment, and fine dining.

Another aspect of the Pearl District that made it an ideal candidate for TIF redevelopment was that it already had a strong potential for improvement. The transformation began in the 1980's when the availability of low cost warehouse-to-loft conversions attracted a number of artists to the area. It was the beginning of a major Northwest migration and resurgence of city living.[9] Adventurous investors began to buy the old warehouses and converted them into unique living spaces. Art galleries and eateries followed close behind. These conditions, along with its central location near downtown, blighted characterization, and a private partner with a feasible proposal, made the district a perfect candidate for TIF investment.

The Pearl District is not without its critics, though. Some complain about the lack of affordable housing, and that the new glitz and glamour has priced market pioneering tenants out of the market. Others, like Shelley Lorenzo of the Portland League of Women Voters, specifically criticize the PDC for the TIF districts.[10] The theory stands that once the Pearl’s 20-year TIF district expires, the City will be getting so much additional tax revenue from increased property values caused by new development that waiting out the TIF will have been worthwhile. However, the Pearl’s average five-year appreciation rate of 47% is revenue that the City will never collect. Critics like Lorenzo fear the City won’t let a profitable URA like the River District expire, threatening services like public schools that are already in severe danger.

In spite of this, Steven Shain, River District URA Manager, fiercely defends TIF and its success in the Pearl. He describes the PDC/Hoyt Street relationship as “symbiotic” and purely “contingent” on the correct adherence to the development agreement around which the TIF was initiated. Without the TIF, he affirms, the PDC couldn’t fund affordable housing, parks, and infrastructure improvement projects that balance the neighborhood and make it livable. For example, the PDC agreed to remove the Lovejoy ramp, implement the Streetcar, give loans to affordable housing developers, and in exchange Hoyt Street Properties agreed to increase housing densities and give property to the PDC for park space. Further, home owner dues from Hoyt Street Properties’ units continue the symbiotic relationship by making the area attractive and preserving investments. Shain counters critics by noting that perspectives such as Lorenzo’s are invalid because the Pearl was blighted to begin with and wasn’t generating significant property tax revenue in the first place. Besides this, Shain insists that with TIF, the PDC has been able to fund numerous affordable housing projects in the River District, with another slated for next year. In the absence of TIF, private developers would be unable to finance affordable housing on expensive real estate.

In addition, certain protections are in place to ensure long term gain. For example, the City monitors the density of Hoyt Street Properties to ensure that the conditions of the agreement are being met. If Hoyt Street defaults on the development agreement, the City can recover the damages in court.[11] As well, if tax increment revenues surpass what is needed to meet PDC debt obligations, that additional money goes to the general fund. In sum, Shain feels the Pearl District has become a Portland icon with attractions such as the simultaneous artists' receptions on the first Thursday of every month, historic preservation, and green building. These gains persuasively validate TIF investment.

Case Study 2: TIF in Chicago

Illinois was the 25th state to adopt TIF as a development incentive with the passage of the Tax Increment Allocation Redevelopment Act in 1977. Illinois ranks third in the nation for the number of TIF districts per state, with 458 districts. The Illinois Department of Commerce and Community Affairs oversees TIF and uses five major categories to classify them: Central Business District, Shopping Mall/Commercial, Industrial, Mixed-development/Non-Central Business District, and Housing.[12]

In Chicago, TIF is the dominant economic development tool used by Mayor Daley’s administration. It affects all parts of the City, with 129 TIF districts that cover nearly 30% of the land area, generating nearly $400 million in TIF funds. Chicago TIF districts last for a 23 year period. To create a TIF district, the City must follow steps required by state law, but has considerable leeway to implement the program as needed. In general, the process is as follows:

1. An alderman, developer, and/or community development organization enters into discussions with the City Department of Planning and Development.

2. A consultant is hired, either by the developer or the City, to conduct an eligibility study and create a redevelopment plan. The City must send a public notice that an eligibility study is underway, but at this time is not required to hold any public meetings (until step 4).

3. In cases where 75 or more residential units are in the TIF, or ten or more occupied residential units will be removed as a result of the TIF, the City must have an public hearing on the housing impact of the plan.

4. The completed eligibility study and redevelopment plan are presented jointly at a meeting of the City of Chicago’s Community Development Commission (CDC), which then orders a public hearing to be scheduled.

5. Independent of the CDC review process (steps 1-4), a Joint Review Board then reviews and votes on the proposal 14 days after it arrives to the CDC.

6. The official public hearing takes place at a regular CDC monthly meeting, held during the afternoon. At the public hearing, the TIF proposal is presented and public comments are allowed. State law does not require the City to respond to those comments or act on public input regarding TIF districts, only that a public hearing takes place.

7. The CDC meets after the public hearing (often immediately following the hearing), and approves the TIF district proposal. The CDC almost never votes down a TIF proposal.

8. The proposal goes to the Chicago Plan Commission if it involves zoning and land use changes. The Plan Commission accepts public comments on the land use aspects of the TIF, though this public hearing closely resembles those held by the CDC.

9. After the CDC public hearing, the proposal goes to the City Council for designation.[13]

Although the process described above suggests adequate regulation of TIF, many question the equity of TIF districts. The report findings from the 2002 Neighborhood Capital Budget Group (NCBG), a coalition of 200 Chicago organizations that studies local public investment, address concerns in a study entitled, "Who Pays for the Only Game in Town" (the title referencing Daley's characterization of TIF). According to the report, 67 percent of all Chicago TIFs were created after 1996, representing 13.4 percent of the entire property tax base.[14] This indicates TIF’s recent momentum and breadth. Other critics have pointed out the massive impact this has on Chicago Public Schools. One study shows that Chicago Public Schools will lose a projected $631.7 million in property tax revenue that it could have received if the 36 TIF district samples had the opportunity to grow at their pre-TIF rates.[15]

Unlike the checks and balances in Portland, Oregon, Chicago TIF revenues aren't itemized on property tax bills and there is no annual TIF budget or independent oversight.[16] While most Chicagoans don’t know TIF exists, the NCBG notes that other neighborhood organizations and taxpayers express regular concern with TIF negative impacts. Residents claim that TIF is causing gentrification, displacement, and the attraction of replacement populations, while long-time stakeholders are forced into less desirable, but more affordable neighborhoods. Further, TIF in Chicago uses imminent domain and thus has the capacity to swiftly alter a community’s historic character with force. Many fear that over-use of TIF will lead to higher property tax bills, as less of the property tax base is available to local government agencies for daily services. In addition, some fear TIF development will increase property tax rates faster than people’s incomes. For instance, property taxes in the hot condo markets are projected to increase by 100 percent in 2007.[17]

Chicago’s TIF excesses have led some to push for more accountability and transparency with regard to TIF use. This summer, Cook County Commissioner, Mike Quigley, introduced three TIF-reform proposals.[18] While opposition from the Mayor and others may squash the proposal, negative publicity is affecting perception of TIF and raising awareness due to Commissioner Quigley’s good government approach.[19]

TIF in Washington

The concept of TIF was first presented to the Washington State Legislature in 1969.[20] In 1982, the Legislature passed the Community Development Refinancing Act (Chapter 39.88 RCW) which enabled TIF. However this was ruled unconstitutional by the state Supreme Court in Spokane v. Leonard (1995). Efforts to amend the state constitution to allow TIF enabling legislation were rejected by voters in 1973, 1982 and 1985.

TIF in Washington was resurrected by passage of the TIF Act in 2001. However, there are two limitations in the Act which severely limit its usefulness. The first is that the Act expires in 2010, which means that TIF districts cannot be created which last beyond that date. This set a very short window for bond issuance and retirement. The second is that the law does not allow TIF bonds. It only allows the district to collect money as a revenue source to be used toward general obligation bonds for redevelopment. This constrains the flexibility and independence of traditional TIF. Finally, the constitutionality of the new Act has not been tested, although the provision on which it failed (the use of school funds) has been removed by disallowing the siphoning of school taxes in TIF districts.

Overall, the TIF Act is conservative approach to authorization of TIF. Other provisions which support this are the fact that only 75 percent of the increment can be captured, and fire protection districts which overlap the proposed TIF area have veto power over its creation.[21] However, assuming its renewal in 2010, the new law could provide a valuable new economic development tool to planners and other decision-makers in Washington.

Conclusion

TIF has had a long and varied history with mixed results and much controversy. Its track record is a function of its flexibility and local specificity, which has fostered different uses and interpretations. TIF will continue to be a popular tool because local jurisdictions are always on the look out for creative ways to improve their community and facilitate investments in infrastructure. The future use of TIF will also be a function of the funds and tools available for community development from federal and state sources. If these traditional sources of investment dollars continue to be limited, TIF will remain popular. A political climate in which new taxes are difficult to pass makes this alternative attractive.

More debate and academic research is needed to determine the power of economic incentives to produce net community benefit. Furthermore, an open public process will be important to help ensure equity issues are addressed when TIF is used. However, TIF should not be marginalized based on its weaknesses. In specific circumstances, TIF can have a significantly positive role in community development.

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[1] Stiteler, Sarah Jane. Tax Increment Financing as a Mechanism for Community Redevelopment. Master of Urban Planning thesis, University of Washington, 1983. Seattle: Universtiy of Washington, 1983.

[2] Johnson, Craig L., and Joyce Y. Man. Tax Increment Financing and Economic Development: Uses, Structures, and Impact. Albany, NY: State University of New York Press, 2001.

[3] Johnson, Craig L., 17-26.

[4] Johnson, Craig L., 2.

[5] Royse, Mark. “Advantages & Disadvantages of Tax Increment Financing.” Economic Development Review 10 (1992):  84.

[6] Portland Development Commission website:

[7] Jensen-Classen, Jolene. Strategic Partnership Coordinator in Public Affairs at the PDC. Personal interview. 23 Feb. 2007.

[8] Schlosser, Jackie. Agent with Hoyt Street Properties. Personal interview. 21 Feb. 2007.

[9] Shain, Steven. River District URA Manager at the PDC. Personal interview. 23 Feb. 2007.

[10] Hagerman, Christ. City of Portland Land Use Planner and Professor of Geography at Portland State University. Personal interview. 19 Feb. 2007.

[11] Thalhamer, Karen. Housing, Planning, and Policy staff at the PDC. Personal interview. 23 Feb. 2007.

[12] The Illinois Tax Increment Association website:

[13] The Neighborhood Capital Budget Group:

[14] The Neighborhood Capital Budget Group:

[15] Milner, Conan. “The Price of Daley's $1 Billion School Development.” The Epoch Times 22 June 2006.

[16] Joravsky, Ben. “Repeat After Me: TIFs Are Great.” The Chicago Reader 6 October 2006.

[17] Joravsky, Ben. “Whose Slush Fund Is It Anyway.” The Chicago Reader 13 October 2006.

[18] Joravsky, Ben. “Repeat After Me: TIFs Are Great.” The Chicago Reader 6 October 2006.

[19] Mike Quigley, Cook County Commissioner 10th District:

[20] Stiteler, Sarah Jane, 2.

[21] Nave, Jeffrey. “Tax Increment Financing Resurrected.” Municipal & Public Finance News July 2001: .

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Source: Stiteler, pg. 5

Conceptual TIF Scenario

Increasing assessed value with redevelopment

tax increment

Frozen tax base

TIF base year

Assessed Value

Time

The left photo shows the Pearl District pre-TIF. The right photo, post-TIF.

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