Tax Increment Financing: A freebie without calling it a freebie?

Robbing Peter to pay Paul?

Tax Increment Financing (also called Revitalization Incentives) sounds impressive, but how does this type of financing really work? Who benefits? Who is hurt?

Tax Increment Financing allows municipalities and counties to create a special district where they can set a base property tax level. For a period of time (normally 10-15 years), any property tax collected beyond the base level can be used for “infrastructure improvement” in that district.

“Infrastructure improvement” is loosely defined and can be used for a variety of things including: public improvements, site preparation, remediation, architectural fees, land acquisition write down, utilities, and financing costs. It can be used to attract large companies like Microsoft or provide local developers with money. For example, the developer of Cherapa Place received $25 million for site work, architectural work, engineering, and a parking ramp.

Normally Tax Increment Financing districts are located in blighted areas. The argument is the money provides companies with an incentive to clean-up an area that would otherwise remain depressed.

One of the big problems with a Tax Increment Financing district is that property taxes escalate for everyone in the district and the surrounding areas. Some individuals and companies might not be able to afford the artificially elevated taxes.

Also, there is concern that it is unfair for a few individuals or companies to use tax proceeds. After all, none of us get money for architectural work to improve our house or construct a garage and driveway even though it would improve property values in the area.

In addition, there is concern that these incentives transfer costs that would normally be borne by a business to taxpayers who receive little to no benefit. For example, the increased property taxes from Cherapa Place were passed on to the tenants/residents. So basically, the developer received a $20 million grant.

While there are arguments that Tax Incentive Financing helps beautify a blighted area, it appears that it is another way for a city or county to provide a large company or a local developer with a freebie without calling it a freebie.

PS — A few readers have asked about the data on the TIF districts in Sioux Falls (see page 70 of the Sioux Falls Budget). This table shows the increments that are used for the incentives (freebies). For example, the increment for TIF 24 Steel District is $52.3 million ($53,879,300 - $1,591,054 base) and the increment for TIF 23 Foundation Park $166.6 million ($170,137,500 - $3,522,542). Between all the TIFs about $526.1 million dollars ($579,857,800 - $53,731,737) can be used for incentives (freebies). Yes, that’s half a billion dollars in handouts.