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The Right Tool for the Job? An Analysis of Tax Increment Financing

November 1, 2002
By Developing Neighborhood Alternatives project

In March 2003, the Developing Neighborhood Alternatives project--a joint project of the Center for Economic Policy Analysis, Jewish Council on Urban Affairs, Heartland Institute, and Statewide Housing Action Coalition--will release The Right Tool for

tax documents


In March 2003, the Developing Neighborhood Alternatives project--a joint project of the Center for Economic Policy Analysis, Jewish Council on Urban Affairs, Heartland Institute, and Statewide Housing Action Coalition--will release The Right Tool for the Job? an analysis of tax increment financing with case studies and interviews of Chicago-area TIF projects.

The complete report, in two Volumes, will be available by mail for $20 each, pre-paid, from The Heartland Institute. The full text in Adobe Acrobat’s PDF format will be available for free at The Heartland Institute Web site, www.heartland.org



1. Tax increment financing (TIF) is seldom evaluated from a community perspective.

Tax increment financing (TIF) has become the most commonly used economic development tool in many cities throughout the United States, including Chicago. It is widely heralded as “one of the last remaining fiscal devices for repairing areas of the city afflicted by urban decay.”<<B>1> But TIF is also a controversial tool, accused of failing to create promised new jobs, subsidizing gentrification, and trampling community visions and private property rights.<<B>2> If you are concerned about economic development, poverty, community renewal, or private property rights, you need to understand TIF.

Since TIF has been promoted and used as a community development tool, it is crucial to examine what happens to communities after a TIF district is instituted within their borders. However, to this point, there has been very little evaluation of how TIF affects a community. Generally, evaluations of TIF’s impact on a community focus only on the claimed benefits of TIF--how many jobs will be brought to the community, how many new businesses will be available to residents, etc.

These developments are often taken out of the context of the community; the evaluations may say that 100 jobs were brought to a community, but they won’t say if community residents had an opportunity to fill those jobs, or if they are newly created jobs or jobs that are simply shifted into the TIF district. Similarly, an evaluation might point to the number of household units TIF financing will help construct, but it will not evaluate whether community residents are more likely to benefit from or be displaced by that housing. Additionally, most existing analyses do not look at how the fabric of a community is affected by a TIF; that is to say, how many community relationships may be disrupted or severed due to businesses and individuals being displaced?

Our work provides the basis for public understanding and discussion of TIF from a community standpoint. We studied five TIF districts in Chicago to show how a community-centered analysis might be performed. The case studies included both qualitative data on neighborhood-wide changes and interviews with individuals and organizations affected by the TIF district. We also performed a policy analysis, examining TIF law to see what types of development TIF would best be able to facilitate, and what types it can only perform with great difficulty.


2. TIF favors large, new projects over smaller rehabs and expands the planning and policy powers of municipal governments.

Funding source: TIF needs to generate significantly higher property taxes to create the “increment” used to retire bonds and other expenses associated with the economic development plan. TIF revenue is calculated using the change in equalized assessed values (EAV) and the combined rates of all taxing bodies with claim to the area, including municipalities, school districts, counties, etc.

Justification for funding source: TIF can be used only in areas that would not experience an increase in property values “but for” the stimulus of TIF spending. If the “but for” clause does not hold, TIF simply diverts funds from school districts and other taxing bodies.

Access to funding source: TIF must be formally initiated by a municipality’s planning department, and the final plan of the district and each subsequent expenditure must be passed by municipal ordinance.

Allowable expenditures: Most of the 12 categories of allowable expenditures relate to physical development. There are also allowances for spending on job training, day care, studies related to the district, and payments to other taxing bodies in lieu of taxes.

Powers allocated by TIF: Along with providing funds for the expenditures mentioned above, TIF expands the planning and police powers that the municipality holds within district boundaries, including eminent domain.

Implications: Due to the need for increased property values, TIF favors large projects and new construction over smaller projects and rehabilitation. Definitions of blight tied to the “but for” clause tend to make municipalities bring organizations into the district, rather than developing existing organizations. Due to the legislative processes required for TIF, organizations and businesses with political and economic clout are the most likely to benefit from TIF. The extended powers granted by TIF allow the municipality and organizations with clout to impose their visions on communities.


3. TIF has only a limited impact on economic development.

The five case studies produced for this report found:

Change in equalized assessed value (EAV): The increase in EAV of each TIF district since its formation was far greater than the increase for the city over the same time period.

Net change in number of businesses: Two of the three commercially oriented TIF districts and their surrounding areas experienced a net loss in businesses. The third had a net increase, but at a rate slower than the city average. The two residentially oriented TIF districts and their surrounding areas saw net increases in number of businesses above the city average.

Net change in number of businesses by type: Most of the TIF districts and their surrounding areas saw a net increase in the number of retail, FIRE, and service establishments, while experiencing a net decrease in the number of construction and manufacturing businesses.

Net change in number of jobs: Each TIF district and surrounding area saw a net decrease in total jobs that was faster than the citywide decrease.

Net change in number of jobs by type: Four out of the five districts and their surrounding areas saw a net increase in the number of construction and manufacturing jobs. Three out of the five saw a net increase in the number of retail, FIRE, and service jobs.

Change in residential property sales: The two residential TIF districts and their surrounding areas saw dramatic increases in the number of residential sales. One of the commercial districts and its surrounding area saw a similar increase, while the other two declined.

Change in housing sale prices: Data were mixed--in some instances, median housing prices increased faster than the citywide median, in other cases slower. In the two residential TIF districts, the sale prices of the TIF-subsidized housing were considerably higher than the citywide median.

Implications: In these five districts, TIF did not significantly or consistently increase employment or residential property values.


4. TIF creates winners and losers.

Interviews conducted for the Chicago-area case studies show TIF puts political and economic power in the hands of some interest groups.

Public participation in TIF process: In general, the larger and older a group was, the better it felt about its participation in the planning process. Smaller groups, or groups on the political outside, usually felt dissatisfied with the participatory process. Many existing local business owners also felt shut out of the process.

Interviewees’ perceptions about who is receiving TIF benefits: Again, the more established an organization or business was, the better chance it had of accessing TIF benefits, which gave it a more positive view of the process. Smaller organizations and businesses that could not access the process thought the distribution of benefits was less fair. For example, a local optometrist could not get into a TIF-funded strip mall, while several national chains could. Organizations in the South Loop supporting single-room occupancy hotels had much more difficulty accessing the process than did the Near South Planning Board.


5. Recommendations.

Seek out alternatives to TIF. Communities seeking to spur economic growth should carefully consider alternative strategies before choosing TIF. Tax increment financing has not been proven to be effective at generating either jobs or new businesses. It has an ambiguous effect on housing markets, determined partly by how TIF districts are designed, but usually harms low-income renters and homeowners. Methods of encouraging economic development that are more compatible with the goals of stable and healthy communities and justice, and that allow community members to peaceably pursue their own visions of their community’s future, ought to be pursued first.

Provide better information to the public about the effects of TIF. Until now, there has been little data collected and reported to the public about the impact of TIF in Chicago. This project has shown that such analysis is possible and enlightening. Additional analysis would be a simpler task for government bodies who have more resources at their disposal than the groups in this project.

Make TIF decision-making procedures more inclusive and fair. Much of the damage done by TIF occurs because public access is limited and comes too late in the process to affect key decisions. Decisions involving TIF should be made openly and transparently. Municipalities receive considerable powers through TIF, so special review procedures are justified to ensure these powers are used well.

Municipalities must ensure that community members have strong oversight of TIF, including watching over the early stages where eligibility studies and redevelopment plans are created. This oversight should include giving community members the opportunity to say whether they want TIF in the first place. TIF dollars are coming directly from the community, so decision-making about how to spend those dollars should come from the same source.

Distribute the benefits of TIF more fairly. The fact that TIF creates winners and losers, rather than being a “win-win” process, is a major problem that can be addressed only partially by reforms. In some cases, “distributing the benefits of TIF more fairly” may mean not using TIF at all, but finding alternate ways of spending the money that would have gone to fund TIF. Communities are better off focusing on “win-win” strategies that create widespread benefits by removing obstacles to work, investment, and communication. This development would reflect and enhance the existing character of the neighborhood.

In cases where TIF is used, the potential for abuse or unfairness in a TIF district could be minimized if companies that benefit from redevelopment agreements were required to hire locally and pay wages and benefits sufficient to allow community residents to stay in their community, if they so choose. Local business owners in the community should have a right to participate in plans that might adversely affect them by raising rents or subsidizing new competitors.


Notes

<<A NAME="#1">1> Editorial, “Daley Endangers the TIF Tool,” Chicago Tribune, July 27, 1997. See also Grace Bazylewski, “In Defense of TIF Districts--A South Suburban Municipal Perspective,” Illinois Municipal Review, April 1998, pp. 15-16.

<<A NAME="#2">2> See Richard F. Dye, “A Comparative Analysis of Tax Increment Financing in Northeastern Illinois,” Journal of Urban Economics, March 2000; Civic Federation, “Assessing the Impact of Tax Increment Financing in Northeastern Illinois,” March 1997; Neighborhood Capital Budget Group, “Chicago TIF Encyclopedia,” 1999; Michael Dardia, “Subsidizing Redevelopment in California,” Public Policy Institute of California, 1998.

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