Miracle or Threat?
Run! It’s about TIF!
As I put it in my third sentence below, tax increment financing as a topic is complicated and dull. As a complicated and dull person, I was naturally drawn to it, and did piece after piece about it for both Illinois-based and national magazines. Because making TIF intelligible in terms that non-expert readers can make sense of, writing about such things can be oddly satisfying to the craftsman.
As for TIF as implemented in Illinois, it was a useful tool that was borrowed and misused by influential interests. As one would expect.
Most people who read past the sports and the comics know that TIF—tax increment financing—is controversial. Fewer know why this model form of local government initiative is controversial, or care to. That's because TIF as a topic is also complicated and dull, which is much worse.
If you listen to its many advocates, TIF is the nearest thing yet devised to a miracle cure for the poor fiscal health of many Illinois cities. The pro-TIF Illinois Tax Increment Association sounds a bit like a patent medicine peddler when it explains how "financially strapped local governments can make the improvements they need, like new roads or new sewers, and provide incentives to attract businesses or help existing businesses expand, without tapping into general funds or raising taxes." It probably safely removes warts, too.
Academic economists, do-gooder groups, and local school districts beg to differ. To them, TIF as too-often-practiced in Illinois is a threat to the Commonwealth. It is over-promised and over-used and applied where it is needed least. It encourages sprawl and encourages massive transfers of wealth from local taxpayers to national and multinational corporations. TIF-financed spending is poorly regulated, and accountability provisions are weak.
These are all good reasons to question TIF practices, if not necessarily to rewrite the TIF act. TIF also is undermining Illinois's system of local government finance. In a report published last spring titled A Tale of Two Cities: Reinventing Tax Increment Financing, Cook County Commissioner Mike Quigley reminded anyone paying attention that a city can, using TIF, offload onto overlapping taxing entities some of the costs of economic development and the political costs of the resulting higher property taxes.
That's nice for City Hall, less nice for those overlapping taxing entities. In effect, those non-municipal entities fund the city's economic development program with their own forgone revenues, which will eventually have to be made up either by levying higher taxes on properties outside the TIF or by reducing services. The former amounts to what Quigley for one calls a secret tax hike. In tax year 2005, for instance, TIF districts in Cook County diverted $53 million from the county government and $6 million from the forest preserve district, effectively forcing county and district tax rates to be seven percent higher than they would have been without the TIF diversions.
The weight of such offloading falls especially hard on school districts, which make the biggest tax demands on local property and cannot tax the new value in TIF-ed areas for a generation or more until the TIF district expires. A number of problems flow from making local governments wait for their inheritance, so to speak, after helping to create new wealth. For example, good local schools matter more than infrastructure or even local taxes in attracting the best kinds of new industrial development; by shorting them, Illinois's best economic development tool can undercut the larger aims of economic development policy.
TIF abuse also can subvert long-established local controls in the allocation of public money. In Oak Park recently, village officials agreed to help the local elementary school district out of its fiscal jam—a fiscal jam that has been made worse by the village's aggressive use of TIFs. The village used TIF funds to purchase and lease back a school district office building. Providing backdoor funding for schools was not the official purpose of this particular TIF district; worse in the eyes of lovers of local democracy, the arrangement was approved after the school district opted against asking its voters for more money in a referendum the district was likely to lose. In effect, owners of property within the TIF district end up funding school aid without having a chance to vote on it.
School districts are increasingly disinclined to wait patiently for TIF districts to expire to collect their share of the goodies. When Champaign's downtown TIF district breathed its last in 2005, for example, the General Assembly gave the city authority to extend it a further 12 years, as the law allows. Hard-up local schools collectively negotiated a fund-sharing agreement with the city under which any part of the TIF fund declared surplus to the TIF district's needs would be split by the schools and their fellow non-municipal taxing bodies.
Norm Sims, executive director of the Illinois Tax Increment Association, notes that revenue sharing of this and other sorts is becoming much more common. So does Sen. Christine Radogno, a Lemont Republican and longtime TIF critic. ''There is more sensitivity on the part of municipalities to be sure that everyone is taken care of," she says.
The deal ended the City of Champaign's political problem, and eased the schools' funding problem. Such arrangements create problems for the state of Illinois, however. By removing the future value of TIF property from the district's property tax base, a TIF district depresses the local resources available to the district to support itself, with the result that the district is entitled to more state school aid—enough in the case of Champaign Community Unit School District 4 to make up roughly 80 percent of what is lost to the TIF.
The city and the district could have negotiated what's known as a carve-out, in which parcels of land that have been developed are removed from the TIF district and put back on the tax rolls while leaving the rest of the TIF district intact. City halls don't particularly like this—it is the tax increment from such properties that fund its TIF after all. But schools don't like it either. A carve-out would, by putting those properties back on the rolls, boost the equalized assessed value of the District 4 property tax base, with the result that the state would cut its aid; money remitted to local governments by TIF districts through intergovernmental agreements, however, is not counted as part of their local effort under the state school aid formula.
"It's free money they don't have to count," says Radogno. "As the use of TIFs becomes more common—when you put it all together, what's this doing to the state aid formula?"
TIF, in short, has proven a great tool with which municipalities can rob Peter to pay themselves. In Oak Park, for example, local officials estimate that 13 percent of the property taxes collected goes to taxing jurisdictions outside the village. As one Oak Park official derisively noted, that's hundreds of thousands of dollars a year of other people's money that the village gets to play with. Unfortunately, much of it belongs to Cook County, which needs it to pay for programs such as public health and jails that affluent Oak Parkers seldom use, and, more important, that poor Cook Countians need very much.
It's easy to cast mayors as villains in TIF dramas—indeed, it is often politically necessary. But that is over-simple. Some mayors do exploit TIF to play sugar daddy, but if some mayors get too cozy with developers, well, maybe it's because developers, unlike lawmakers in Springfield and Washington, deliver the goods that mayors need to run their cities. These days the successful mayor is the mayor who thinks and acts like a CEO. A revenue system that rewards local leaders whose allegiance is to the bottom line and who regard voters as mere shareholders means a further penetration of business culture into the civic realm.
Reforms in the form of caps on the amount of tax increment, more detailed budgeting, and a passel of transparency measures have been proposed. Radogno is among those who would like a whole new program, what she has nicknamed "TIF Lite," in which municipalities would take perhaps only half the new property tax increment or take it for fewer years.
Does the process need to be more transparent? Yes. More accountable? Yes? Does it need to be trimmed back a la Radogno? Probably. But it won't happen. Of course Illinois's system of funding local governments is not rational, efficient, or fair, but that's the sort of thing they worry about in Wisconsin or Minnesota. A formidable array of clout—developers, attorneys, municipal officials—likes the TIF law just the way it is. TIF, says Radogno, "is the only law that has its own lobbying association."
Not even TIF's fiercest critics want to see it abolished. TIF is a useful tool when used appropriately by responsible public officials. The fact that the Illinois TIF program is not transparent and is not accountable and has lax standards is not because it's a TIF program, but because it's an Illinois program. We let insurance companies decide health care policy instead of doctors, and unions set education policy and power companies set energy policy. Why not let developers set local government finance policy? ●
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