Leave it to my friend, Jule Zavon, to keep asking questions until I can explain these public financing concepts in clear, simple terms. Julie and I went to Walnut Hills High School and should have graduated together in 1973 except that she left at the end of her junior year to start college early. These days, she speaks four or five languages including Russian and isn’t afraid of tackling a bit of public finance on the side.
Yesterday she sent me an email and suggested I write another blog post about the relationship of Tax Increment Financing to the Oakley Station garage and include my answer to her simple question, “How much cheaper for a developer is TIF financing than other forms of financing?”
First, let’s review a simple definition of the TIF concept, courtesy of the villiage of Shaumburg, Illinois (municipalities present these definitions in their most favorable light as they are using them):
TIF stands for Tax Increment Financing. A tax increment is the difference between the amount of property tax revenue generated before TIF district designation and the amount of property tax revenue generated after TIF designation. Only property taxes generated by the incremental increase in value of TIF district are available for TIF projects. Tax rates do not change when a TIF is created. TIF districts do not increase taxes.
Now my answer to Julie’s question:
Here’s where the documents on the Oakley Station Garage get very confusing, Julie. TIF financing. All my reading of these agreements and I have not yet been able to identify the language that differentiates TIF District grants from TIF Project Financing.
In a 2013 Brown University study published in Socio-Economic Review, “Tax Increment Financing, Economic Development Professionals and the Financialization of Urban Politics,” The author, Josh Pacewicz, lays out the history of TIF — originally a funding method of last resort for “blighted” neighborhoods — and looks at how it has evolved.
- Because developers’ reputations depend on successful outcomes, “they become invested in these solutions, which are frequently expensive.”
- Politicians in the two cities used for the study expressed concern that TIF was “corporate welfare,” that it produces unsustainable debt, and that repaying it diverted crucial resources. “Despite such reservations, however, city council always unanimously approved TIF packages during my fieldwork,” the researcher states.
- Frequently, “politicians and other urban leaders who hire development professionals do not understand TIF’s mechanics and are unable to directly evaluate the technical virtuosity of development professionals.”
- “The special status of development professionals in urban politics has co-evolved with a set of professional incentives that do not align with the city’s long-term fiscal outlook,” the author concludes. “First, they have an incentive to fund large development initiatives, which can allow them to move to a more prestigious position in another city before the long-term fiscal consequences materialize. Second, they have come to identify their professional identity with the capacity to creatively solve any problem, and this gives them an incentive to create ever-more elaborate, and generous, financing schemes with TIF.” –