When Jerry Brown took office as governor of California promising to balance the state’s insanely unbalanced budget, one of his top targets was the state’s 400 urban redevelopment agencies. Using Tax Increment Financing (TIF), these quasi-independent entities siphoned roughly $5.7 billion yearly in tax revenue away from schools and other tax entities. Eliminating the agencies, Brown argued, would help the state close its $28 billion budget deficit.
While TIFs started first in California and proliferated fastest there, they are spreading across the country. And Randal O’Toole, a senior fellow with the Cato Institute, wants to stomp them out. With TIFs, local governments borrow money to finance development projects and repay the bonds with increased tax revenues generated by that project. It sounds like a win-win idea, but in “Crony Capitalism and Social Engineering: The Case against Tax-Increment Financing,” O’Toole argues that TIFs have been abused around the country and that state legislatures everywhere should repeal their TIF laws.
I happen to be a big fan of TIFs when properly administered. I co-wrote a column, “TIFs: a Template for Development in the 2010s,” with my friend Ken Powell, an investment banker with Stone & Youngberg, the nation’s largest underwriter of TIF bonds. I have to concede that O’Toole makes a number of useful points. But I think it would be foolish to jettison this valuable re-development tool at a time when state and local governments are, and will continue to be, financially strapped.
O’Toole levels several criticisms against TIFs. They:
- Subsidize businesses that likely would have located in a locality or nearby anyway without the subsidy;
- Capture funds that otherwise would have been allocated to schools, fire departments and other public purposes;
- Promote the building of stadiums, convention centers and New Urbanism projects that would never fly without government subsidies; and
- Give politicians a way to show favoritism to developers who repay the favor with big campaign donations.
I have no doubt that these charges are true at various times and places across the country. But O’Toole makes no effort to present a balanced case. He focuses exclusively on the negative. With the right protections in place, the problems he cites need not arise. How can we ensure that TIFs are not abused here in Virginia?
First, make Community Development Authorities (CDAs), the entities that create the special tax districts here in Virginia, totally transparent. Board meetings should be open to the public. CDAs should publish annual reports detailing their finances. The developer’s interests should be clearly spelled out. If we did that — gee, we already do — that would make TIF project financing more transparent than most government-funded projects!
Second, require that all tax revenues be used to pay for public infrastructure — no direct subsidies for developers. Ideally, there should be a requirement that “public” improvements must truly benefit the public. In other words, paying for streetscapes in a mixed-use neighborhood would be OK, but paying for an access road that serves only the developer’s property would not.
Third, put developers and bond holders on the hook for failed projects. If tax revenues fall short of what’s needed to support the debt service, bond holders can seize the developer’s property. If that’s not enough, bond holders are out of luck. As long as government doesn’t promise to make good on bad deals, bond holders will function as very good arbiters of risk. Simply put, they won’t invest in risky, speculative projects with weak economic underpinnings. If the bond holders balks, some deals won’t get done. Too bad. That’s the price of market discipline.
Fourth, put a cap on the tax increment –50%, say — that can be applied to pay off the bonds. This would raise the hurdle for economic performance, but it also would ensure that the local government would gain additional tax revenues to offset the increased demand for services by businesses and residents of the CDA project.
What O’Toole omits from his analysis is the fact that traditional methods for financing infrastructure all require taxes, too, and they often wind up subsidizing private developers. Sometimes the projects are big enough to warrant public scrutiny, but often the details — the dollars spent, what public money is spent on, government liability if projections aren’t met — are hidden from public view. If done right, TIFs can stimulate private investment, create more transparency and provide more accountability.
