Thursday, October 05, 2006

Understanding TIFs (Revised 10/06/06)

In yesterday's entry, Nicholas Johnson, "Why Do They Hate America?" October 4, 2006, I suggested that TIFs and other corporate welfare programs operate contrary to the notion of a "free private enterprise" system standing on its own. Blogger "From Right to Left" (James Eaves-Johnson) appended a comment to that blog entry that I thiink calls for me to respond with more than can conveniently fit in a brief comment. He writes:
From Right to Left said...

I was actually talking to a number of people about Richard Florida's ideas today, and they seemed generally supportive of the Hyronymous TIF.

For me, the difference with TIFs is that they are simply an agreement to not increase assessment value on a property for a period of years when that property is undergoing major development. It is not shifting money from taxpayers to developers. It is merely refusing to demand more money from developers immediately after they complete their development.

If we are going to rely on property taxes as a source of revenue, we also need to find a way to avoid the anti-development incentives produced by property taxes. One way to do that is through TIFs. I am certainly opposed to taxpayer funding, the use of eminent domain, and government financing for private development. However, TIFs seem like a far better alternative precisely because they do NOT involve taxpayer funding.

My response:

1. I claim no expertise on this subject. I've never applied for a TIF, nor considered one as a public official. I don't teach the subject, and haven't researched either the law of economics of them. So everything below may be based on erroneous premises.

2. Assumptions:

(a) money is fungible. A dollar is a dollar is a dollar.

(b) Money has value only in relation to time. There is no such thing as "$1000." There is only "$1000 last January" or "$1000 a year from now." As the Iowa couple who won the jackpot just discovered, when they "won $200 million" they found themselves with only about one-third of that, "$67 million."

(c) "A penny saved is a penny earned." E.g., if mortgage interest rates go down, and I refinance, and my monthly house payments are now $100 a month less, that is identical to my mortgage payments staying the same, but my pay going up $100 a month. From the standpoint of a business, and its bottom line, there is no difference between a $16 million dollar "gift" (i.e., Iowa Values Fund grant) and tax forgiveness of $16 million in taxes I thought I was going to have to pay (or any other cost reduction). Both drop an extra $16 million to the bottom line.

(d) There are "opportunity costs" associated with financial, as with other, decisions in life. If you're in the service sector, and can bill out your time at $50 an hour, and have a backlog of cusomer requests, and decide that you're going to volunteer 10 hours a week to pro bono services, if you do nothing else you'll be left with $500 a week less than you used to have. Of course, your other options are to work 60 hours a week instead of 50, or raise your hourly rate to $62.50. But otherwise you're going to have to cut your expenses by $2000 a month. Another example: A family may want both a relatively expensive summer vacation trip and a new car. Their budget is such that they can't have both. Thus, whichever they choose their "opportunity cost" for that decision will be their inability to acquire the other.

3. I am assuming that property taxes are assessed and paid according to some uniformly applicable formula (within categories, such as "residential" and "commercial").

Example (with totally arbitrary numbers): A vacant lot is valued at $100,000. The tax rate is 1%. The taxes are $1000 a year. A building is put on the lot; now its value is $1,000,000 and at 1% the taxes are $10,000 a year. Ten years later it's valued at $7,000,000 and the taxes are $70,000 a year. OK?

4. As I've confessed, I don't know how TIFs work; my understanding (or confusion) is based on what I've read. I can think of two possible hypotheses. (a) One is that, in my example, the owner of the building continues to pay the $1000 a year in taxes, notwithstanding the fact that everyone else with comparably valued property would be paying $10,000. (Or, what would be the same thing, the owner pays the $10,000, but then gets a "refund" of $9,000.) And then, say, ten years later, the property tax jumps from $1000 to $70,000 a year, at which time the owner starts paying the more appropriate rate.

(b) The other is that, ten years later, the owner has to pay, not only the $70,000 a year from then forward, but also has to make payments to cover the tax foregiveness enjoyed during the intervening years (plus interest).

5. If either of these is true, the owner of the property has received a financial benefit. (a) In the first case, the owner has enjoyed "cost avoidance" -- which, as noted in 2(c) above, is the same as additional income (from the taxing authority). (b) In the second case, the owner has had the use of money, interest free, for a period of years; and given the change in value of money over time (as noted in 2(b), above) this also constitutes a transfer of money from the taxing authority to the owner (essentially an interest free loan).

6. If I'm right so far then, under 2(d), above, there has been a "cost" ("opportunity" and otherwise) to this transaction for the taxing authority and the other taxpayers. (a) Assuming uniformity of taxation (3, above) the TIF is an exception. (b) The result, whether under 4(a) or 4(b), above, is that (under the principles of 2(d)) the taxing authority's options are to (1) cut program support by an amount equal to the money transferred to the owner (or that the authority failed to collect from the owner), or (2) raise the taxes paid by all the other taxpayers in order to avoid the need to cut the support of previously funded programs.

7. From Right to Left says: "
It [a TIF] is not shifting money from taxpayers to developers. . . . I am certainly opposed to taxpayer funding . . . and government financing for private development. However, TIFs seem like a far better alternative precisely because they do NOT involve taxpayer funding."

Based on what I've just written (which I acknowledge may be wrong) I would disagree. I see no difference once it reaches the bottom line between saying (1) "everyone has to pay taxes, and you do, too; but we're going to give you a gift from grateful taxpayers of $1,000,000 for coming to our town," and (2) "everyone else has to pay taxes, and you do to; but you're not going to have to pay us $1,000,000 of those taxes that you'd otherwise have to pay."

The only way that's "not shifting money from taxpayers to developers" is if taxes aren't increased, but programs have to be cut; and that requires a very unusual definition of "money." If I'm dependent on the city's bus system, and the city decides, to make up for the taxes it's not collecting under a TIF, that it will eliminate the city buses, I have lost the value of that daily bus service (which may take the form of the savings I enjoy by not having to own a car). I used to have the "money" represented by that value; I'm still paying the same taxes, but I don't have that value any more; where did it go -- it went to the proud beneficiary of the TIF. Sounds like "shifting money" to me.

8. There are, of course, many other problems with TIFs besides their irrational and unfair impact on the programs that take the cuts.

(a) They are unfair to the TIF beneficiary's competitors who do have to pay their fair share of the cost of public programs benefitting everyone. Those competitors are, thereby, subject to a competitive disadvantage.

(b) They are open to corruption and croneyism, paybacks for campaign contributions, bribes or other favors.

(c) TIFs are the public budgeting equivalent of violating the advice in "how to manage your money" columns and books: always go shopping with a shopping list. TIFs are, for a taxing authority, what impulse buying is for the rest of us. Budgeting is, if anything, more important for those who are managing public finance than for those of us managing our own personal finance. Approving a TIF is like our seeing something in a store, saying, "Gee, I've got to have that," and then finding out, come the end of the month, that we no longer have enough money in the bank to pay the rent. Public expenditures ought to be based on a zero-based budgeting process that looks at every past, present and potential future public program, its costs, wastes and efficiencies. There should be comparative benefit-cost analyses of potentially competing programs, and a kind of triage of those that pay back so much they should be expanded, those that should continue as they are, and those that should be cut (or eliminated). Taking up individual TIF requests as they are presented totally undercuts that process.

(d) They involve government intermeddling in what ought to be the decisions of owners and investors (as, in this case, the discussion about the number of apartments vs. condos, and floors devoted to a "hotel"). If "a camel is a horse built by committee" Iowa City's next TIF-ed project is going to be a building designed by committee -- some members of which want to optimize the developers' profits, others who want to optimize the taxing authority's tax revenues, and none of whom are solely focused on the public's welfare (e.g., in this context, "affordable housing").

(e) There is no sure fire way to know where the truth lies when a developer says (as in this case), "Gee, we just couldn't think of going ahead with this project unless you'll increase the profits we will make from the venture as a result of the multi-million-dollar contribution of corporate welfare dollars from taxpayers." The odds that any given taxing authority will end up having paid out more via an individual TIF (or outright grant) than would have been necessary are very high indeed. (I.e., no public money ought to be going into for-profit ventures that the developer-owner, investors, venture capitalists, and bank loan officers combined don't think worth it without subsidy. But if public money is going to be handed over to private developers anyway, how much should it be? "Trust me, this is how much I'll need," isn't a very satisfactory analytical tool.)

(f) There are few, if any, guarantees the taxpayers will ever get a return on their dollars. If there are profits they go to the developer; if there are losses they are picked up by the taxpayers.

(g) Not only do TIFs involve the rankest ideological hypocricy (state funding of "free private enterprise"?!), but they really distort the market forces at play, and what happens to a city's growth and development (compared with what happens when the system for making these decisions is left solely to the best judgment of entrepreneurs, investors, venture capitalists and loan officers -- restrained only by reasonable zoning restrictions).


I'll conclude as I did in yesterday's, "Why Do They Hate America?" [
Nicholas Johnson, "Why Do They Hate America?" October 4, 2006].

Not only do I not object to rational and equitable economic development, I think it's essential to providing the American people with basic necessities -- including jobs -- as well as the more civilizing elements of life. [Nor do I object -- if it need be said -- to 100% public funding of such things as roads, schools, libraries, parks, and so forth (after subjecting these expenditures to the same kind of analysis suggested in 8(c), above). As we move along the continuum away from the more conventional public enterprises it may become more iffy; but even then -- say, if the City of Iowa City wanted to build the proposed TIFed tower as a 100% City-owned project -- I'm certainly willing to listen to, and evaluate, any proposal from a position of pragmatism rather than ideology.]

What I object to are programs in the name of economic development that are not effective, or are unfair, or too expensive, or that have negatives outweighing any possible benefits, are difficult to administer, and return less benefit for the cost than alternatives might provide.

"Put aside the costs, ethics and morality of subsidizing private enterprise; if all that doesn't bother you at least focus on the fact that such programs don't work. Our governor offered Maytag $100 million to stay. They left. In case after case, businesses given taxpayers' money have gone belly up, or never produced the promised jobs, economc growth, and increased tax revenues.

"I would actually support economic growth programs that have been proven to work; programs that are fair, rational and benefit all businesses -- and citizens -- in the state of Iowa.

"Those who've studied the matter say that business is attracted by a skilled workforce (which requires the uninonization, liveable wage minimums, universal single-payer health care, and other economic supports to keep workers here); it also requires quality, and affordable, K-12, community college and university systems (which will require more funding); good transportation systems (buses, trains, roads and bridges, Mississippi and other rivers); communication (reasonably priced broadband, quality newspapers, television and radio); forests, parks and trails (for hiking, biking, camping, hunting, fishing and boating, which will require some restrictions on the hog lot and fertilizer runoff that pollutes rivers, streams and lakes); the support for the arts that Richard Florida talks about, and so forth."

Build that and we will have economic development -- rational, sound, free private enterprise economic development, grounded on solid fundamentals.

Build that and they will come.


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John Neff said...

If the property tax rate is capped (and not all of them are) a loss of property tax revenue is not replaced by taxes paid by other property owners. The most likely outcome is a reduction of services provided by the taxing agency to the citizens.

If the rate rate is not capped then the property tax revenue lost by granting a TIF could (there is political risk in doing so) be replaced by increasing the rate. In such cases the tax burden is shifted to property owners who do not have TIFs.

The School district suffers the most from this arrangement because they depend on property tax revenue and intergovernmental fund transfers for income. The IGFs from the State of Iowa for school districts and both city and county governments have been shrinking (when measured in constant dollars) for the past ten years.

What the Governor and the friendly folks in the legislature also do it to cut one year and restore part of the cut the following year and claim that they increased funding. They get away with this fraud because nobody paid any attention to the watch dogs and they have given up.

From Right to Left said...

Nick, you raise a lot of good points. Some of them I would disagree with, but I think it will take me more time than I can comment here. Your best arguments, in my opinion, are in point #8. I actually appreciated Karen Kubby's call for TIF guidelines in the Press-Citizen recently specifically because of those objections. I'll let you know when I have a chance to put together an analysis of the points you raise. Thanks for the thoughtful analysis.