Local and state governments use various tools to encourage development in economically challenged areas. Tax-increment financing (TIF) has been a leading tool used for this purpose. TIF allows cities and towns to borrow against an area’s future tax revenues in order to invest in immediate projects or encourage present development. When used properly, TIF can promote enduring growth and stronger communities. When used improperly, however, TIF can waste taxpayer resources or channel money to politically favored special interests.
To protect the public interest, governments should impose strong safeguards that ensure that TIF projects are implemented through a transparent, accountable process with clear and compelling goals.
Governments must use care in choosing when to use tax-increment financing. The public can benefit from subsidies that bring lasting economic development to declining or stagnant areas. However, tax-increment financing can be wasted on projects that:
• Fail to achieve public goals. By definition, TIF diverts money from schools, parks, and other important services. TIF projects certainly won’t be justifiable, however, if they are used to support projects that fail to bring the hoped-for investment or harm the community in other ways.
• Enrich special interests at the public’s expense. Poorly designed TIF programs can give government officials a tool to lavish subsidies on favored or well-connected developers – regardless of the project’s public benefits.
• Encourage development in areas where it is least needed. TIF is intended to spur redevelopment of areas in difficult economic straits; but the tool has also been used to fuel development of previously undeveloped areas. Fort Worth, Texas, for example, used TIF financing to lure the big box sporting goods chain Cabela’s to a tract of prime, newly developed land that was declared “blighted” due to the presence of a stream and lake on the property.
The process of awarding tax-increment financing often takes place without sufficient public awareness and input – creating the opportunity for favoritism and corruption.
• TIF often lacks transparency: The public often lacks the tools to evaluate whether a particular TIF project makes sense. In some states, TIF budgets are not published for public review. In addition, not all states require the completion and publication of growth forecasts that would enable the public to evaluate the costs and benefits of TIF subsidies.
• TIF often lacks accountability: TIF is undertaken in the hope of generating specific benefits—increased employment, land value, and tax revenue among them. Many TIF laws do not, however, require follow up reporting that would enable the public to determine if the goals of the project were realized.
• TIF can create “slush funds” that lack public oversight and accountability: In some jurisdictions, TIF revenue can be spent at the discretion of mayors or other public officials. Chicago’s TIF funds have traditionally been disbursed through a separate budget overseen by the mayor, and not even shared in full with the city council. Funds may be allocated to political allies or pet projects – or may continue to be used for projects inside a TIF district long after the project originally intended to receive the TIF funds was completed.
To prevent these problems, states and municipalities should adopt strong rules governing the use of TIF districts and similar development subsidies. In short, rules should ensure that TIFs are targeted, transparent, accountable, and democratically governed.
• TIF districts must be targeted and temporary. TIFs should only be used in service of a specific development strategy, and only in cases where evidence shows that they are likely to succeed. TIFs should not become an all-purpose tool for woo developers. They should only be targeted toward areas in special need of development, for projects that are unlikely to occur without public intervention, and with a defined time limit at which point the property’s tax revenue will once again be used for general public purposes.
• Subsidy recipients must be held accountable for meeting goals. TIF agreements should include measurable targets for success, and regular performance reviews should measure progress towards those benchmarks. Where possible, municipalities should retain the ability to demand return of some or all of the money used to subsidize private investors in the event that development promises are not fulfilled.
• Information on TIF must be transparent. Because TIF has long-term implications for a jurisdiction’s finances and ability to provide public services, the decision to create a TIF district should come with the highest level of transparency and public participation. In addition, jurisdictions should supply detailed, ongoing information about the finances and performance of TIF projects via the Internet, following “Transparency 2.0” standards of budget and spending disclosure.
• Citizens must have the tools to evaluate the benefits and trade-offs of TIF. Governments should account for the costs of TIF districts as part of a jurisdiction’s overall budget – enabling the public and decision-makers to evaluate the trade-offs involved in tax-increment financing and the impacts on other public services.