Progress Regress

Dan U-A and DebtorsPrison, in the comments to DP’s Tales of a Blighted Block, suggested that I write a post about Tax Increment Financing. I imagine that it looks like I came out of nowhere with my objection, but my ears prick up when I see that acronym.

In the comments, I provided a link for a Chicago newspaper’s own series of articles on the subject. As a sort of war journal, the Reader provides possibly the best resource I’ve come across so far. An excellent opinion piece opposing TIFs appeared in Reason magazine. Although the author’s objections are not the same as mine, they are valid and thoughtful.

I’m going to take a shot at putting TIFs more simply.

While I’m not a TIF expert yet, I did quite a bit of reading on the subject in the lead-up to the primary, and Michael Nutter’s support for TIF helped tip me away from supporting him. It’s a subject which looks gnarled and impenetrable from a distance, but flattens out before too long. What it is is essentially an argument for a different kind of redevelopment than we saw under Mayor Street’s Neighborhood Transformation Initiative-- faster, probably more effective on the surface, but at a much higher cost to the communities it would purport to be helping.

Nutter’s economic plan, which can be downloaded as a PDF here, calls for “a Neighborhood TIF program that directs new funding to neighborhoods that need a boost.”

The diplomatically written paper seems aware of the dangers inherent in TIF, because it stipulates that “It must be done in a smart, disciplined way” and that “A portion of this will be available to neighborhood small businesses as grants or low-interest loans.” (If anyone reading this knows what that portion will be, I’d like to know, too.) The problems is that whatever progressive face we graft onto TIF, we are still speaking of a program which not only sparks gentrification, but essentially uses gentrification as its primary development tool. Maybe because of this, TIFs are popular with politicians seeking reelection or higher office; they appeal to the economic strata which vote more and control more of the media dialogue than the strata which are hurt.

In this sense, TIFs reflect Nutter’s stolid fiscal conservatism. They’re especially popular (secretly popular?) with conservatives because they’re a form of “back-door taxation”--when, like Nutter, a politician has promised to cut taxes, TIFs are a good way to demonstrate real forward motion *before* the tax burden appears. (I say “secretly popular” because TIFs tend to be pitched as the tool to enact populist support for the poor, which is not exactly a conservative mainstay. The best word to place TIF on the political spectrum--at the risk of outtalking myself--may be “neoliberal.”)

And TIFs *are* popular. First introduced in California during Earl Warren’s governorship, TIFs have hit AARP age in style: every state--and the District of Columbia--but Arizona has passed enabling legislation. (Would it be bitchy to point out that Phoenix is now bigger than Philly? Probably.) TIFs win over legislatures by proffering a simple deal: if you permit us to build and renovate in this area, property values will increase, which means that your revenues will increase, and new private construction will appear, which means that there’s more property to tax. TIFs argue that they’re a good investment in future rather than current value.

This provides a special danger to Philadelphia, where the “success” of Northern Liberties and the predictions for Port Richmond, Fishtown, and Kensington have led to rumblings of wild real estate speculation. (I will *never* use the nickname.)

In a city already designated the “sixth borough” of New York by art students and hipsters, there’s an inherent danger in selecting the “targeted areas” written about in Nutter’s plan. Philly’s already displaced residents from West and North Phillies who were near the universities. (I’ve seen it myself near Temple Hospital, where I live. My apartment building is owned by New Yorkers and plagued with absentee maintenance. Heads up: East Tioga is the Gowanus to Ontario Park’s Boerum Hill.) And I can only imagine (literally, since Nutter provides so few specifics) that West and North will be the directions TIFs head. Nutter’s welcome to write that some of the TIF cash (which will be between eight and ten million by the end of Nutter’s first year) will be provided to actual residents of the neighborhood--but that’s the only way that the plan will work. If the portion is not large enough, if there are not levied some sort or real estate protections, if TIF is not the lead story in every Philly newspaper, than the residents who are supposed to benefit--and who, it should be said, largely rejected Nutter at the polls--will be steamrolled by new private development aided by the government.

I don’t know what City Council can--or will--do as far as limiting Nutter neighborhood TIF program, but DiCicco’s comment in DebtorsPrison’s post was a warning shot. It’s absolutely essential that Philly’s neighborhood groups get on this immediately--if Nutter is willing to become a citizen’s mayor (and a man who won 37 percent of votes is not yet one), than we can only hope he’ll be open to hearing our concerns over what will happen to our neighborhoods.

I'm very excited to be having this conversation

I don't have time now--stupid endless bar review exercises--but am interested to read what looks like ongoing critical reporting on Chicago's experiments with tax increment financing. I first encountered TIFs in class this past year with someone who wrote a lot of that Nutter plan, and there are certainly a lot of questions not only about how it works but how and to what ends it would be deployed here.

I'll try to actually say something about all this--any excuse to do a couple less practice multiple choice questions--but just wanted to say that it's good we're talking about this and that you're researching it.

Jennifer

God, reading my own heading

I sound like such a dork but I really do get excited about this.

Jennifer

Don't be so hard on yourself

No one could possibly think that being all aflutter about TIF is anything less than ultra-hip.

I'm confused

I read your whole post, and gather that you are critical of TIFs in several ways, and yet I have come out the other end without actually knowing what a TIF is. Can you spell it out in a few sentences, or do I have to do an independent research project to join the conversation?

Edit: (two linked articles later) is it something like a tax abatement?

acm

Good Jobs First on Tax Increment financing

ACM sorry this comes a bit late but a link follows to Good Jobs First they provide a description of TIFs.

http://www.goodjobsfirst.org/accountable_development/tif_basics.cfm

Good Jobs First is the best source for grounded research on the impact of economic development subsidies of all kinds.

Thanks for this TIF post

Hmmmm. Looks like I have a lot of learning to do to bring myself up to speed on this, especially with it being part of Nutter's plans. Thanks for starting this discussion.

Just off the top of my head, in my neighborhood, just designated the 9th and Ellsworth Redevelopment Area, I think TIFs would be counterproductive. As I described in my post 'Tales From A Blighted Block,' which started all this, the past couple years have seen a lot of private investment, particularly from Hispanic and Asian immigrants, improving the neighborhood. Seems to me a TIF would mean that the tax gains from this already-existing, organic private community development would be siphoned into repaying whatever the city designates as a TIF-worthy project.

Am I understanding this correctly?

Whoa! I'm beggining to think I should be miffed about TIFs

Ok, the value of gentrification is one thing that can be resonably debated. But here's a quote from one of the linked articles that was particularly troubling:

But the Addison South TIF comes at a cost. Like all TIFs, it raises property taxes, no matter what the city insists to the contrary. A TIF freezes the amount of property taxes the schools, the parks, the county, and other taxing bodies receive for a term of 23 years. So if a property in the Addison South TIF generates $100 in property taxes for the schools and parks when the TIF is created, that’s all the schools and parks will be getting until 2030. Any additional revenues generated by new development or rising property values are diverted into the TIF. To make up for the money they’re losing, the other bodies wind up raising tax rates or cutting services.

Is this the kind of set-up Nutter proposes? Fund private development based on future tax growth through handouts to developers -- and then deny schools and parks in the designated areas any revenue (for a fixed period of time) that would be derived from that future development?

Let me see if I got this right: The plan is to create growth in blighted areas and then specificially exclude the most needy entities in those areas from receiving benefits?

Please tell me that I'm missing something here.

It would seem to be easy

It would seem to be easy enough to solve. The City merely has to forgive the part that goes to the City coffers, but not the part that goes to schools.
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"yes adam gave some informative comments but he also seems to sprinkle a little adam dust on it." - merkin

I'm not getting how your comment

fits the scenario. Or maybe I'm not undestanding the system.

(1) City forks over money for infrasctucture development on the speculation that the ensuing private development will bring in increased property taxes.

(2) City fixes the tax revenue directed towards schools at the level it is when the TIF is created.

(3) As the increased tax revenue comes in, City directs money to further reimburse the developers, and pockets the rest. But none of it goes to the schools and parks in the TIF region.

In that scenario - where is the City "forgiving" anything? I guess you're saying that arrangements could be made to direct the increased revenues to schools and parks - so that's the reason for my question - what kind of system is Nutter already committed to?

Say the current breakdown is

Say the current breakdown is 50% property tax goes to schools and 50% goes to the City.

City fixes the property tax revenue, except for the school district portion. That continues going to schools and increases as the value goes up. The City only fixes the 50% it gets. Therefore, the school also benefits for the increased development and property tax realization.

This would make sense since quality of schools is a large variable in value of housing.

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"yes adam gave some informative comments but he also seems to sprinkle a little adam dust on it." - merkin

And to clarify the

And to clarify the procedure, this is how I understand TIFs work.

Let's take a theoretical Philly scenario. Let's do a one mile stretch of the Waterfront on Delaware Ave.

1) Say that zone currently generates $10 million dollars of property tax revenue a year.

2) City does a bond issue for $100 million dollars to sponsor low interest loans for people to develop that zone.

3) Say every year the property taxes gained go up $10 million dollars.

4) The amount "fixed" is the original $10 million. That still goes into the normal procedure for property tax (part to the school and the other part to the general fund).

5) The increased revenue, the "increment" of $10 million a year IS COLLECTED. It just goes direct to paying for debt acquired. It does not go to the school or general fund.

6) Once the debt is paid off, the new revenues then fall into the school and general fund.

So, do not get confused. The increased property values ARE COLLECTED. It is just that the increased revenue goes to paying for the debt, not to city services, until the debt is paid off.

The drawback of the scenario I mentioned in another thread is if you never realize that valuation, or do over too long of a time frame.

For the negative of doing a poorly planned TIF area, let's do another hypothetical. Let's say a stretch of marshland next to the airport.

1) Current revenues are $10 million a year for that TIF zone.

2) City does a bond issue for $100 million dollars.

3) Tax revenues increase only by $1 million. (very few people want to live on a marsh next to an airport).

4) That means, not counting interest on the bond issue, it would take over 100 years to pay back the bond.

5) Even worse if properties go derelict and developers go bankrupt because of lack of sales. You could end up with half developed areas, increased bond debt and lost momentum.

So, what I was proposing is, make an exemption where the part of the tax increment (increased property tax revenue) that goes to the schools, still goes to the schools and does not go towards the TIF debt for that zone.

So, if property tax revenues go up $10 million dollars, $5 million goes to the schools and the other $5 million goes to the TIF debt.
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"yes adam gave some informative comments but he also seems to sprinkle a little adam dust on it." - merkin

First of all

apparently not all of the incrased revenues go to retiring the debt:

The first tax stream is based on the original assessed value of the property before any redevelopment; the city, county, school district, or other taxing body still gets that money. The second stream is the additional tax money generated after development takes place and the property values are higher. Typically that revenue is used to pay off municipal bonds that raise money for infrastructure improvements in the TIF district, for land acquisition through eminent domain, or for direct payments to a private developer for site preparation and construction.

I realize that the taxes are collected - but where those addtional revenues go seems to always be in places other than schools and parks. (Another article mentions that the costs needed for infrastructure development - widened roads, say - amount to a "hidden cost").

You propose that a different structure be created. That's great. When you're running for mayor I'll support you on that issue. But again, the question I have is what is in Nutter's plan. Maybe the next time you talk to him you should suggest your idea.

When I see him the 25th, I

When I see him the 25th, I will see about bringing it up. ;)

Other than that, my initial response which you replied looking for clarification, was about how schools don't necessarily have to suffer since you can just legislate that they can continue to gain increased revenue.

As for Nutter's plan, I do not know. I will see if I can find out.
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"yes adam gave some informative comments but he also seems to sprinkle a little adam dust on it." - merkin

And in response to your scenario

I excerpt:

But even if the dedicated tax money from a TIF district suffices to pay off the bonds, that doesn't mean the arrangement is cost-free. "TIFs are being pushed out there right now based upon the 'but for' test," says Greg LeRoy. "What cities are saying is that no development would take place but for the TIF....The average public official says this is free money, because it wouldn't happen otherwise. But when you see how it plays out, the whole premise of TIFs begins to crumble." Rather than spurring development, LeRoy argues, TIFs "move some economic development from one part of a city to another."

Development Would Have Occurred Anyway
Local officials usually do not consider how much growth might occur without a TIF. In 2002 the Neighborhood Capital Budget Group (NCBG), a coalition of 200 Chicago organizations that studies local public investment, looked at 36 of the city's TIF districts and found that property values were rising in all of them during the five years before they were designated as TIFs. The NCBG projected that the city of Chicago would capture $1.6 billion in second-stream property tax revenue--used to pay off the bonds that subsidized private businesses--over the 23-year life spans of these TIF districts. But it also found that $1.3 billion of that revenue would have been raised anyway, assuming the areas continued growing at their pre-TIF rates.

The experience in Chicago is important. The city invested $1.6 billion in TIFs, even though $1.3 billion in economic development would have occurred anyway. So the bottom line is that the city invested $1.6 billion for $300 million in revenue growth.

The upshot is that TIFs are diverting tax money that otherwise would have been used for government services. The NCBG study found, for instance, that the 36 TIF districts would cost Chicago public schools $632 million (based on development that would have occurred anyway) in property tax revenue, because the property tax rates are frozen for schools as well. This doesn't merely mean that the schools get more money. If the economic growth occurs with TIFs, that attracts people to the area and thereby raises enrollments. In that case, the cost of teaching the new students will be borne by property owners outside the TIF districts.

I realize that these articles tend to be from only one perspective - but the more I read, and the more I think about how money influences development in this City, the more I am skeptical about whether these programs aren't essentially scams for builders.

More short and mostly-uninformed comments from me!

But just as we are setting up the boundaries for this discussion, the big background is that we're talking about areas that wouldn't get good--or maybe even any--development if left at the hands of the private market.

So, TIFs developed and are ideally used to help leverage areas that are stuck in a bad spiral of abandonment and disinvestment. And despite the ridiculously heady real estate speculation that's happened around a lot of this city, when Dan and I were out canvassing the Northwest we say the acres and acres of near-abandoned neighborhoods, blocks and blocks still very isolated from positive development and redevelopment.

Why I'm "aflutter" (totally the right term!) about the discussion, though, is that I'd thought of them in mostly those terms--clever device for the government to be able to get good things done when the private market doesn't want to dirty its hands--but the original post and linked articles put a curious aspects of TIFs into stark relief: what exactly is the future that we are banking on to pay off the debts and where is the place of community residents in that future landscape?

Jennifer

Well, that is the other

Well, that is the other thing to keep in mind. No matter what incentives there are, developers won't build unless they can make money and you can't make money if no one will buy.

Just because you build it, it doesn't mean they will come.

Philly is not Chicago where nearly every area is desirable if there was a decent place to live. Philly has the issue of redevelopment primarily emanating out from Center City overflowing. The cup finally spilleth over and people were willing to take chances north of Vine St. and south of South St.

If you think about it, where I live (north of Girard ave) is not so much of a gamble since I am a 10 minute walk to Fairmount or a 25 minute walk to Rittenhuose. I still at least get the amenities of Center City in the interim. In the Northwest and Southwest, for example, you don't necessarily get those amenities, so the level of desirability is stunted to a degree.

So, TIFs would have to be very very thought out because if it doesn't work out, you have debt that won't be covered by future revenue.

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"yes adam gave some informative comments but he also seems to sprinkle a little adam dust on it." - merkin

TIF Sword

TIF's really are double edged swords. On the one hand, some of these TIF communities desperately need development, and the city needs to be sharing a big chunk of the risk. If the city removes itself and avoids tools like tax increment financing, then all you will have are dollar stores and check cashing centers because no developer would bother putting large pools of money into a poorer neighborhood without some type of public safety net.

On the other hand, you do have the phenomenon that you point out in Northern Liberties. A TIF project improving neighborhoods so much that they become too expensive for middle-low income families, who will have to move North or into Camden. The point of a TIF is not to build the neighborhood up so that richer families will find it suitable to move into, but rather to build it up so that existing community members can access local resources. There have been cases of the former in the past, which substantiate the main TIF criticisms.

I didn't support Nutter, but I don't think he's wrong to support TIFs. To make it worth the City's wild, he needs to directly link tax increment financing with moderate income job creation, that really is the key to making TIF successful in Philly. Only give TIF capabilities to businesses that will create new jobs and fill those jobs with people from the immediate community, not with recent college graduates or 6-figure executives. TIFs can work though; Chicago has proven this.

Thanks for writing this column! Definitely a subject worth discussing further.

TIFs & Philly

Great thread. I am a total TIF nerd and am thrilled to see that others are into this topic!

I thought you may all be interested in a report from the Controller's Office that looks at how Philadelphia uses TIFs - it's totally different than how it works in Chicago or anywhere else. It shows how well our TIFs have done at generating the expected revenue and job creation, and makes recommendations to improve Philadelphia's use of this tool. And there is a good basic explanation of how TIFs work in general.

The report starts on page 58 of this PDF:
http://www.philadelphiacontroller.org/publications/fpau/MidYear_04.pdf

Re: TIFs and Philly. Huh?

Thanks for the link - very interesting.

But how do these statement reconcile:

Yours

It shows how well our TIFs have done at generating the expected revenue and job creation, and makes recommendations to improve Philadelphia's use of this tool.

and from the link

The Controller's Office identified a consistent failure of TIF projects to meet projected revenue estimations.....For the TIF districts that have been settled [only 9 out of 30 TIF districts approved] it remains unclear if the city is getting what it paid for.

Indeed, the parts I read are decidely non-commital about the advisability of TIFS, and cite studies that indicate that they may actually stifle development.

*edit*

Maybe I misread your comment - maybe when you said it "shows how well" TIFs have done here you didn't mean to imply that they have, in fact, done "well," but just to say that the documents report on their level of success?

TIFs & Philly

I didn't mean to imply that Philadelphia's TIFs are doing well in terms of job creation. Better wording would have been that the report evaluates the performance of TIFs. Sorry for the confusion.

Cheers

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