Municipal leaders say TIF is one of the most important tools available to fund urban renewal projects. But analysts and critics are calling for a re-evaluation. Is value capture a better alternative? Read on…
Land Lines October 2018
Quarterly Magazine of the Lincoln Institute of Land Policy
The Hidden Costs of TIF
Reconsidering a Vaunted Economic Development Tool
Paraphrased excerpt:
TIF (tax increment financing) is undergoing scrutiny lately. Municipal leaders say TIF is one of the most important tools they have to regenerate urban areas, particularly in postindustrial legacy cities. And they have embraced it since it took hold in the 1950s: The United States now has at least 10,000 TIF districts across 49 states (Merriman et al. 2018). But critics say TIF has become little more than a subsidy for the private sector, diverting revenue away from schools and other important services, and contend that many TIF programs are woefully lacking in transparency.
Tax increment financing runs the risk of functioning more like property tax incentives for business—another flawed practice that often fails to deliver on promises but remains in widespread use.
Molly Metzger, a professor at the Brown School of Social Work at Washington University in St. Louis. “If we continue to incentivize everything, it’s not benefiting the whole city, and it’s not building the tax base—a tiny fraction benefits.” Metzger helped found a group, called Team TIF, which serves as a watchdog over the way the city uses this public-finance mechanism. So far, the group has held public meetings and produced informational materials to raise public awareness.
Tax Increment Financing versus Land Value Capture
There is a difference between tax increment financing and land value capture. In a TIF district, development is financed by calculating the property tax revenue the project will generate over a defined time period—for example, 20 years in the future. That money is effectively plowed into making the development happen in the first place, in a kind of front-loading process. This anticipated future revenue is calculated by projecting what land and property owners would pay, under whatever local property tax system is in place, based on assessed value.
Land value capture, on the other hand, allows communities to recover and reinvest land value increases that result from public investment and government actions, such as a new subway line or a rezoning. The increases, also known as the land value increment, are measured to reflect the impact of those public actions, whether infrastructure or a new park or an expanded building envelope. The revenues from that calculation can be used for a range of improvements for more equitable urban development, such as affordable housing and infrastructure.
Because the approaches are based on different underlying concepts, they are not equivalent. Value capture purists argue that the increases in value attributed to public investment belong to the public; a portion is simply being recovered.
As David Merriman writes in the Lincoln Institute report Improving Tax Increment Financing (TIF) for Economic Development, the public captures no more of the value created by public investments in a TIF district than it would without the TIF district. In fact, he says, “if some TIF revenues are used to subsidize private activity, as is the usual case, TIF is more properly a device that ‘transfers’ value to, rather than ‘captures’ value from, the private sector.”
Land value capture instruments include betterment contributions, special assessments, charges for building rights, exactions, and impact or linkage fees, to name a few.
Cities may well be at a crossroads on TIF—namely, whether to end it or mend it.
Joan Youngman, director of the Department of Valuation and Taxation and a senior fellow at the Lincoln Institute, said there are clear steps cities and states can take now to improve the performance of TIF. As tempting as it might be to stick with something familiar, those seeking more equitable development might consider skipping TIF and developing alternative tools for financing infrastructure, affordable housing, and economic development.
Comment:
Indeed, value capture is very different from TIF. Private property values rise in an urban sub-area due to the presence of public amenities and infrastructure, population growth, general property upgrading, and location advantage. This rise is reflected in land values. The underlying concept is that land values are community generated while building values derive from private capital investment. Thus, local government as the steward of land, has the right and obligation to claim land values for public use and accordingly minimize the tax burden on building values.
Value capture ‘captures’ land value increments from the private sector. It appropriates rising values which if not captured would become private windfalls. This is especially true in newly-designated rail transit corridors – like Southwest Corridor in Portland. The prospect of transit access and up-zoning for Transit Oriented Development near transit stations triggers a rise in land values.
The city of Portland released a plan that anticipates the use of urban renewal districts to pay for development projects along the Southwest Corridor. TIF, the mechanism used to fund urban renewal projects, diverts general property tax revenues usually for a period of up to 20 years. Would TIF districts surrounding transit stations be the appropriate financing tool for public investments in TODs? Why would we want to divert annual property tax revenues needed for schools and general fund revenue and leave land value increments to become windfalls? This simply allows market forces to drive up residential lot prices, making housing less affordable. Then we ask taxpayers to support bond levies to subsidize affordable housing. Does this make sense?
Value capture is a special assessment separate from the general property tax. A value capture mechanism in the form of Transit Benefit Districts would capture the annual “betterment” or uplift in land value on all privately-owned parcels within designated station areas. By targeting rising values attributed to transit improvements, TBD special assessments would help dampen land price inflation and discourage speculative land holding which slows down the redevelopment process. This also prevents land holders from passing on higher land costs onto new owners wanting to invest in building improvements for the new occupants of TODs.
Better to use unearned land value increments to build and preserve affordable housing. Value capture requires no diversion of property tax revenues and no special bond levies.
