Trouble with TIFs

Published September 4, 2013 at the Rock River Times

Rockford’s 32 Tax Increment Finance (TIF) districts cost taxpayers $2.75 million in 2012, according to a recent report by Finance Director Chris Black. That deficit was projected to increase to $11.38 million by 2023, before the trend reverses. This alarming news has led to the creation of a committee to look into the financial status of each TIF district. As long as this committee is impartial and objective, it could represent a positive step toward curbing Rockford’s TIF addiction.

What is a Tax Increment Finance district? In short, TIF districts are designed to help blighted areas by diverting public revenue toward redevelopment and improvement in those areas. The property tax allocated to various government entities within a designated district is “frozen” at the point the district is created. Any future increase in property tax revenue is captured in a fund and used to finance public infrastructure or reimburse private developers.

In theory, improvements spurred by the use of TIF will raise property values, which in turn will generate more money for the fund. This is money that would otherwise have gone to other taxing bodies, such as a county government or school district. This effectively deprives them of that revenue for the life of the TIF district. They continue to receive the same share of property taxes they received when the district was created.

A city will often sell bonds to finance improvements in a TIF district, betting that improvements paid for by the bonds will raise property values. This action creates a debt that must be paid with any future revenue. If property values fall, however, the district will have insufficient revenue to pay off the debt, and money from the city’s general fund must be used.

Tax Increment Financing was created in California in 1952 and slowly spread to other states. Illinois adopted TIF in 1977, and by 2003, 48 states permitted it in some form. In the summer of 2011, however, California abolished Tax Increment Financing. According to the San Diego Union Tribune, this action released nearly $1 billion dollars in trapped tax revenue to California public schools.

Several studies have tested basic assumptions about Tax Increment Financing, and the results were not favorable. In 2000, the University of Illinois Institute of Government and Public Affairs released a study showing that TIF districts actually hinder economic growth. This study looked at 235 cities, towns, and villages in northeastern Illinois (excluding Chicago) and analyzed the change in assessed property value for the years 1980-84 (the pre-TIF adoption period) and 1992-95 (the post-adoption period).

Their findings contradicted the notion that TIF districts increase property values, and showed a much higher rate of growth for cities without TIF districts. They concluded, “If the use of tax increment financing stimulates economic development, there should be a positive relationship between TIF adoption and overall growth in municipalities. This did not occur. If, on the other hand, TIF merely moves capital around within a municipality, there should be no relationship between TIF adoption and growth. What we find, however, is a negative relationship. Municipalities that use TIF do worse.”

In 2003, the Developing Neighborhood Alternatives Project found that development within TIF districts was offset by losses in jobs, real estate values, and the number of businesses in areas within four blocks of any given TIF district. That same year, Nathan Benefield at Loyola University Chicago found no correlation between the presence of a TIF district and surrounding home values. This means TIF districts do little to spur economic development and reduce blight. His results can be found in a research paper titled, “The Effect of Tax Increment Financing on Home Values in the City of Chicago.”

Furthermore, TIF districts deprive local taxing bodies of future increases in revenue for the life of the district, which is 23 years. Normally, the annual rise in the cost of basic services is offset by increased property tax assessments. While property tax revenue for basic services is “frozen” within a TIF district, costs of those services continue to rise. The deficit can only be made up by cutting basic services or raising taxes elsewhere.

Despite these concerns, use of Tax Increment Financing has grown exponentially in Rockford over the past 13 years. 29 of the city’s 32 TIF districts were created after the year 1999. 22 of those were created under Mayor Larry Morrissey’s administration, which began in 2005.

The creation of an official committee to investigate Rockford’s TIF districts is a step in the right direction. However, it is imperative that its members are willing to ask tough questions and demand answers from all parties involved, both public and private. We need to know why TIF districts continue to be created despite clear evidence of their shortcomings. Anything less would call into question the seriousness of this effort.