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A Comprehensive Approach To The Assessment of Tax Increment Financing (Tif) Projects
A Comprehensive Approach To The Assessment of Tax Increment Financing (Tif) Projects
OF PUBLIC BUDGETING, ACCOUNTING & FINANCIAL MANAGEMENT, 16(3), 394-412 FALL 2004
INTRODUCTION
Competition between states and communities for jobs, investment
and economic development continues to intensify. This competition has
fueled (and is fueled by) a significant increase in the use of state and
local incentive programs. One of the most popular incentive tools used
today is commonly known as Tax Increment Financing (TIF). First used
in California to foster redevelopment in blighted urban areas, TIF
programs have been adopted by forty states, and they are being
developed in rural and affluent suburban areas (Klemanski, 1989). The
use of TIF programs has long been the subject of debate and
-----------------------
* Thomas G. Johnson, Ph.D., and James K. Scott, Ph.D., are Frank E. Miller
Professor, and Associate Professor, respectively, Harry S Truman School of
Public Affairs, University of Missouri-Columbia. Dr. Johnsons research
interests include rural and regional economic development and local public
finance. Dr. Scotts research interests include rural and regional development
policy and public involvement in local governance.
happened with or without the TIF funds, projects which simply move
activity from one part of the state to another, and projects which displace
other economic growth elsewhere in the state.
A HYPOTHETICAL CASE
The nature of the Missouri TIF program can be best illustrated by
introducing a hypothetical TIF district in Missouri. In Figure 1, County
A is in a predominantly rural part of the State with $100 million in
assessed property value. School District B has $70 million in assessed
property value but $10 million of that is located in an adjoining
County. City C is the county seat, with half of the Countys assessed
valuation - $35 million. Assume that the city establishes a TIF district
that includes $10 million in assessed valuation. Assume that the city
develops a new industrial park in the TIF district and repays the bond
with revenue generated by the tax increment.
The tax increment finance program freezes tax bases within the
district at their level at the time of the imposition of the TIF. The tax
increment is the tax revenues collected on the incremental tax basenew
taxable property in the TIF, increases in the assessed value of existing
FIGURE 1
Taxing Districts Affected by TIF Project
County A
School District B
TIF
City C
COUNTY A
398 JOHNSON & SCOTT
property in the TIF, and increases in the tax rate on all property in the
TIF. This implicitly assumes that the tax base would not have increased
without the investments made possible by the TIF program. The
organizers of the TIF in this case, City C, argue that without
improvements the growth rate in property tax base inside the TIF would
be zero over the life of the project. Any growth that would have
occurred without the proposed industrial park is lost to both County A
and School District B for the duration of the TIF program.
At the local level only property tax revenues are affected by TIF. In
Missouri, cities and counties derive a relatively small portion of general
revenues from property taxes. On the other hand, school districts rely on
these taxes for a major source of funds to support public education. In
effect, the TIF authority is investing other peoples moneythat of
taxpayers in City C, County A, and especially School District B.4
Missouri law requires a local TIF authority called a TIF Commission.
However, representation from School Districts, or any other taxing
authority affected, is not required.
may have much higher marginal value (a high opportunity cost) if used
by other taxing authorities.
improvements; and new retail outlets in the TIF will likely displace sales
in other jurisdictions as well.
The net economic impact to the state must be positive for the project to
be approved. This net impact will take into consideration the direct and
indirect benefits of the project as well as the costs. This will likely be the
most important criterion when making the determination.
One of the most important aspects of the project is also one of the
most difficult to evaluate. That is the probability that the project would
not occur but for the subsidy. Unfortunately, the answer to this
question is not easily attained. Only with an examination of both the
quantitative and qualitative impacts of the project can a proper decision
be made. The decision will eventually come from the DED director with
extensive input from the staff. Of course, political considerations will
often be a part of the decision making process. However, requiring a
formal and standard process for assessing the fiscal and economic effects
of the Super TIF on all affected jurisdictions will limit political
discretion, and likely lead to a higher return on public resources.
district is located, the county, and the school district which includes the
city, parts of the county and parts of a second county.6 Table 1 shows the
assumed changes in property assessment in each of the jurisdictions.
Table 2 shows the assumed changes in retail sales and sales tax revenues.
TABLE 1
Assumed Property Assessments
Base Year Property Portion within TIF Portion within City
Tax Base District
TIF District $10,000,000 $10,000,000 $10,000,000
City $50,000,000 $10,000,000 $50,000,000
School District $80,000,000 $10,000,000 $50,000,000
County $100,000,000 $10,000,000 $50,000,000
TABLE 2
Assumed Retail Sales and Sales Tax Increments
Base Year Increment in Retail Sales Increment in
Retail Sales Retail Sales Tax Rates Retail Sales
Taxes
TIF District $50,000,000 $250,000
City $100,000,000 $400,000 2.00 $8,000
School District $125,000,000 $500,000
County $125,000,000 $500,000 2.00 $10,000
State $125,000,000 $1,000,000 3.50 $35,000
TABLE 3
All Growth due to TIF Project
Distribution of Responsibility Revenues
Paid by Property Valuation Gain $180,000
Paid by Natural Increment $0
Paid by Super TIF $0
New Sales Taxes $18,000
Cost to City -$8,000
Cost to School District $0
Cost to County -$10,000
Total TIF Revenues $180,000
State Tax Increment $235,000
county. In this case the TIF district gets exactly the $180,000 generated
by the TIF investments. Since the school district does not levy a local
sales tax, it receives no new revenues. Thus, all jurisdictions, except the
school district, benefit from the TIF project.
Table 4 describes results from a very different scenario. In this case,
the growth in tax revenue would have occurred entirely without the TIF
project. Here, the incidence of costs and benefits is quite different than
in the first scenario. In this scenario, the entire TIF District revenues are
made up of costs to other jurisdictions. The city bears almost $36,000,
the school district over $112,000 and the county assumes over $19,000
TABLE 4
Natural Growth
Distribution of Responsibility Revenues
Paid by Property Valuation Gain $0
Paid by Natural Increment $12,372
Paid by Super TIF $0
New Sales Taxes $0
Cost to City $35,897
Cost to School District $112,500
Cost to County $19,231
Total TIF Revenues $180,000
State Tax Increment $235,000
A COMPREHENSIVE APPROACH TO THE ASSESSMENT OF TIF PROJECTS 407
TABLE 5
Moderate Natural Growth
Distribution of Responsibility Revenues
Paid by Property Valuation Gain $90,000
Paid by Natural Increment $3,213
Paid by Super TIF $0
New Sales Taxes $9,000
Cost to City $14,919
Cost to School District $58,065
Cost to County $4,804
Total TIF Revenues $180,000
State Tax Increment $235,000
TABLE 6
Impact of Substituting Super TIF Funds for Local TIF Funds
Distribution of Responsibility Revenues
Paid by Property Valuation Gain $85,954
Paid by Natural Increment -$834
Paid by Super TIF $117,500
New Sales Taxes $18,000
Cost to City -$12,812
Cost to School District -$15,199
Cost to County -$12,609
Total TIF Revenues $180,000
State Tax Increment $235,000
predicted and used as the basis for negotiations between the taxing
authorities regarding the portion of the tax increment to be paid to the
TIF authority. In other words the simulator calculates the exact level of
transfer necessary to leave the other tax authorities unaffected by the TIF
program. This means that in Table 7, the Taxes Paid by Natural
Increment is zero. Because of the careful analysis, no jurisdiction has
been hurt by the TIF. The City and County get the new sales tax
revenues making their cost negative, the school district breaks even, and
the TIF collects more revenues than under other assumptions.
TABLE 7
Impact of Adding Super TIF Funds and Using Impact Analysis to
Calculate TIF Benefits and Costs
Distribution of Responsibility Revenues
Paid by Property Valuation Gain $86,787
Paid by Natural Increment $0
Paid by Super TIF $117,500
New Sales Taxes $18,000
Cost to City -$8,000
Cost to School District $0
Cost to County -$10,000
Total TIF Revenues $204,287
State Tax Increment $235,000
A COMPREHENSIVE APPROACH TO THE ASSESSMENT OF TIF PROJECTS 409
CONCLUSIONS
This paper describes Missouris current TIF program and identifies
some potential problems with the program. Specifically, it describes a
number of perverse incentives that are inherent with TIF projects. In
light of these perverse incentives, it outlines a comprehensive framework
for estimating the net future fiscal impacts with and without proposed
TIF projects for all affected jurisdictions. Finally, it illustrates how the
framework can be used to reach better economic development policy
decisions at both the state and local levels. TIF is a policy tool that has
come under increasing public controversy. However, this paper
demonstrates that it is possible, using careful analysis and negotiations
involving all affected jurisdictions to target the use of TIF to the most
appropriate areas, and to devise win-win solutions for all jurisdictions
involved. Specifically, it requires careful projection of the likely
economics of the district in the absence of the TIF program, including
the tax revenues and needed public expenditures. It also requires a
careful analysis of the incidence of benefits and costs among the various
jurisdictions. On this basis, the affected jurisdictions can negotiate the
details of the program so that all jurisdictions (and thus taxpayers)
benefit. Furthermore, the proposed approach assures that the identified
incentives for abuse are all but eliminated. Projects which do not
generate sufficient net benefits will not be undertaken, because at least
one of the jurisdictions will be made worse off by the TIF. There will be
little incentive to develop TIF programs for growing areas because the
natural increment will not be available to the TIF authority. Similarly,
there would be little incentive to enlarge the TIF district or include non-
blighted areas. Finally, and possibly most importantly, it will make all
impacted jurisdictions supporters of sound projects and will reduce the
political and transactional costs of regional development programs.
ACKNOWLEDGEMENTS
The authors wish to thank George Rafael, formerly Director of
Research for the Missouri Department of Economic Development for his
assistance during research for this article. We also appreciate the helpful
comments of three referees. University of Missouri Outreach and
Extension provided general support for the project.
410 JOHNSON & SCOTT
NOTES
1. The debate over the benefits and costs associated with TIFs is part of
a much larger controversy among analysts and policy makers over
the use and abuse of various economic development incentives.
Extensive research shows that state and local incentive packages are
largely ineffectual in attracting new business or industrial
investments (Cf. Bartik, 1991; Lynch, 1996; Johnson and Bailey,
1996). Some researchers describe the competition between states
and localities in the use of various tax incentives as a race to the
bottom (Brueckner, 1997) that severely limits governments
capacity to deliver necessary public services. For purposes of this
paper, the authors choose not to engage this controversy, in order to
respond to a more immediate and particular policy research request.
2. See Missouri State Statute 99.845.
3. Economic activity taxes are the total additional revenue from taxes
which are imposed by a municipality and other taxing districts, and
which are generated by economic activities within a redevelopment
area over the amount of such taxes generated by economic activities
within such redevelopment area in the calendar year prior to the
adoption of the ordinance designating such a redevelopment area,
while tax increment financing remains in effect, but excluding
personal property taxes, taxes imposed on sales or charges for
sleeping rooms paid by transient guests of hotels and motels,
licenses, fees or special assessments.
4. Many Missouri school districts find it very difficult to gain voter
approval for a property tax increase. Typically, a reduction in
anticipated growth in the property tax base in a particular area will
lead to a reduction in services to constituents throughout the District.
Not all states require school districts to subsidize TIFs to this extent.
For example, the State of Minnesota commits additional State funds
to compensate Districts affected by TIFs for the life of the project
(State of Minnesota, Office of Legislative Auditor, 1996).
5. Retail development often enhances the quality and range of services
available to community residents, which makes the area a more
attractive place to live. However, for these purposes, it generates no
net fiscal or economic benefits for the State or region.
A COMPREHENSIVE APPROACH TO THE ASSESSMENT OF TIF PROJECTS 411
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412 JOHNSON & SCOTT