There is a good deal of debate among and between economists, public officials, anti-tax groups, editorial writers, and the for-profit beneficiaries regarding the wisdom and equity of this approach, as well as other systems of taxpayer funding for private projects.
Sometimes the different approaches pop up in family discussions. So it has been with my son, Gregory Johnson, ResourcesForLife.com, and myself.
A recent exchange, involving an article he wrote and posted on his Web site that triggered an ongoing exchange on Facebook, I thought worth preserving on this blog for what it might contribute to the evolving thinking of others who are trying to formulate their own opinions on this significant public policy issue.
From my perspective, although Gregory challenges this, as you'll see below, he began his approach to TIF policy some months ago with an effort to justify the use of TIFs from Iowa City taxpayers for the downtown, highrise projects of Marc Moen, an innovative developer and friend of Gregory's. (In his article, below, some of this continues, as he notes, following his listing of standards for awarding TIFs, "The Moen Group would be one example of a developer that would pass the above requirements." And again, "Interestingly, the developer being awarded the experimental TIF money (MoenGroup.com) would actually pass the above 7-question qualification assessment test.")
I also like Marc Moen, though I'm relatively confident given my positions he would not consider me a "friend," and I have a similar (though not identical) approach to his with regard to what Iowa City's downtown (laid out in 1839), needs in the 21st Century. My objections, such as they are, primarily address the propriety of using taxpayers' money to fund his projects -- not him, or the design of his buildings.
Whether that was in fact Gregory's starting point or not, Gregory is now making a real effort to come up with a sensible, balanced approach to cities' use of TIFs, recognizing both their inherent disadvantages and the likelihood they are going to continue to be used whether we like it or not. As he puts it (in the very last lines reproduced in this blog essay): "The reasons for not using TIFs to fund private enterprise are well founded and seem to outweigh the benefits. However, it seems that municipalities across the nation don't care (including ours). That being the case, if we are going to have inappropriate uses of TIFs, should there be a decision process? That's what I'm exploring."
Here, then, are yesterday's exchanges, starting with the major portion of his opening article, and then progressing to the exchanges within a Facebook discussion.
“TIF was designed to channel funding toward improvements in distressed, underdeveloped, or underutilized parts of a jurisdiction where development might otherwise not occur. ” [Source: Wikipedia]
Experimental TIF Use. In recent years, municipalities have implemented experimental uses of TIF-Based funding to include urban development projects that are private business ventures. Without taxpayer consent, city council members are taking tax revenue and giving it to private business owners. This has resulted in public protests from groups that, given the chance, would otherwise vote down such initiatives were they bonds to raise funds for public projects. In theory, the rationale for giving tax revenue to private enterprise is that the initial loan will be repaid in substantially higher property taxes. Once repaid, the ongoing tax revenue will be a benefit to the city.
The goal of experimental TIFs is a long-term increase in property tax income that should recuperate the original investment. Additional financial support allows developers to build beyond what they might have otherwise been able to. This may include aspects of sustainability, urban beautification, and mixed use space that might typically not be considered. Developers seeking maximum profits may create single-use ugly buildings with little consideration of sustainability. Developers given additional financial support may create multi-use attractive buildings with a greater investment in architectural design and sustainable practices.
Usually the only developers who get selected for such experimental projects are those who have a past record of success in the community, and a base of community support for their projects. Communities should be leery of special financial incentives extended to unknown out-of-town developers who have not demonstrated any commitment to the local community and may skip town when the going gets tough.
For communities considering experimental uses of TIFs as an investment, it is advisable to use a dollar cost averaging approach to their implementation, particularly when their use involves giving tax payer money to private enterprise. Because this use may be a risky investment, and because they typically involve tax-free contracts that extend decades, a city can quickly get overextended if the city government becomes “TIF-happy” and erodes the public tax base.
TIF Qualification Assessment Checklist. In general, people are either in favor of experimental TIF use or against it. I would propose that people should be neither “For” or “Against” the use of TIF-Based funding. Instead, communities should utilize a checklist to determine when a TIF should or shouldn’t be used. Below are some questions that should be asked which should rule out about 99.9% of all requests for TIF-Based funding of private projects.
(1) Previous Interest. Has the developer previously shown an interest in the community, or is the TIF a bribe to get an otherwise uninterested and uncommitted developer to build in your community? If the developer has previously shown an interest in the community, without any special favors, then continue to question #2, otherwise TIF should not be used.The above list of requirements may seem like an impossible set of requirements for any developer to meet. However, there are developers that meet such requirements. The Moen Group would be one example of a developer that would pass the above requirements.
(2) Mixed Use. For the other projects the developer has in the community, are those utilizing best practices of mixed use spaces that will enrich an area by having retail space, office space, and residential living? If YES, then continue to question #3, otherwise TIF should not be used.
(3) Past Success. Have the other projects of the developer been successful? If yes, continue to question #4, otherwise TIF should not be used because that would not be a TIF it would be simply TF (tax funding) without a guarantee of an ‘increment’ in tax revenue if the project fails.
(4) Architecture Evaluation. Certainly there are many genres of architecture, and just as many opinions about what is attractive. For the style of architecture being proposed, is the building considered to be attractive by those who appreciate that style of architecture? For example, if the proposed development uses modern design, do people find it to be an innovative and attractive example of modern architecture? If yes, continue to question #5, otherwise TIF should not be used.
(5) Beautification. Businesses and investors generally look at the bottom line and profits when planning a project. An ugly poured cement building or unimaginative brick facade would be popular choices. Similar to question #4, does the proposed development project place value on the aesthetic appearance of the building in a way that demonstrates the developer’s passion to look beyond profits to envision ways that architecture can be a form of habitable art and community beautification? If yes, continue to question #6, otherwise TIF should not be used.
(6) Property Management. Is the developer simply looking to turn a quick profit by constructing a cheaply-made building and then selling it without making any long-term commitment to ensure the property is cared for and the businesses within it are profitable, or, instead, is the developer taking a personal interest in the long-term management and oversight of the property? If the developer is taking an interest in the long-term care of the property, then continue to question #7, otherwise TIF should not be used.
(7) Commitment. If the developer thinks their project is so wonderful, ask them this simple final question: “Would you be willing to actually live in the buildings you are constructing and reside in the neighborhood where you develop?” Most developers will say no, and you can tell them to seek private funding. However, if you have a developer who has answered yes to all of the above questions, then such a developer should probably be retained and well supported by the city because developers like this would be very hard to come by and can be a huge asset to any community.
There is a commentary and response to the above found at the bottom of this page. In summary, those opposed to giving public tax revenue to private developers would conclude that no decision tree will change the fact that taxes aren’t meant to support private business.
Case Study – Iowa City. In Iowa City, we’ve had several experimental uses of TIF-funded development projects that fall outside their traditional use and best practices. This has raised a significant amount of public outcry, partly because tax payers did not vote on or approve this private enterprise business use of their tax dollars. Interestingly, the developer being awarded the experimental TIF money (MoenGroup.com) would actually pass the above 7-question qualification assessment test.
Dollar Cost Averaging. Because TIF funded private projects represent some risk, the principle of dollar cost averaging should be used. By waiting 7 to 10 years between TIF funded projects, there is enough time to reassess their success, and spread out risk, and spread out the depletion of the municipal tax base revenue.
TIF Concerns. The remainder of this document will explore TIF concerns and potential problems with TIFs. As mentioned above, in recent years, TIFs have been used as a mechanism for taking tax payer money and handing it over to wealthy developers and private business. These are some additional concerns about TIFs that makes their use for private enterprise prohibitive in any circumstances. I believe these are valid concerns that may take precedence over any possible benefit of experimental TIF use.
Infrastructure Needs Come First. Roads, schools, libraries and other shared community infrastructure are traditional government undertakings. Funding private enterprise with tax payer dollars is not.More information about TIFs can be found online on the FromDC2Iowa blog where the inspiration for much of the above content is available.
Public Input is Essential. Although voter approval is not required, citizen participation is essential and any city government that does not seek citizen input does so to the detriment of the entire community. TIF funding is similar to public bonds and should be treated the same way.
Enhancing or Expanding Wealthy Developments Isn’t Essential. When TIFs are used to make posh and upscale living even more decadent, they run the risk of broadening the gap between the working poor and wealthy in a community. Initially TIFs were intended for urban renewal and low-income housing. The intention was to give the underprivileged a leg up. Giving the wealthy a financial boost at the expense and sacrifice of the poor seems backwards.
Free Marketplace. Most of us believe in the power and effectiveness of the free marketplace to produce equitable and responsible outcomes. Businesses answer to consumer needs and wishes, or they feel the results in their bottom line. Providing tax payer funding reduces or eliminates these marketplace checks and balances. Additionally, TIFs create an imbalance in the marketplace giving some businesses an immense advantage over others.
Disparity of Profits and Losses. A TIF funded project distributes risks of loss and opportunities for profit inequitably because profits are guaranteed to be received by the developer, but if there are losses (if a business folds) the taxpayers will bear the brunt of that outcome.
Business and State Partnership. TIFs intertwine government and business in something that’s neither socialism or capitalism. TIFs represent an erosion of the democratic process whereby the tax payers are stripped of their autonomy, self governance, and money for the benefit of private enterprise. When officials give millions in taxpayers’ money to private, for-profit businesses, the temptations for good-old-boy corruption are great — and virtually impossible to uncover.
Business Incentives and Accommodations. It’s not necessary to give handouts to businesses to gain their approval. Changes in zoning regulations and building codes (for example) can help give businesses a boost without using taxpayer money. Municipalities compelled to bribe business as a means for pleading to win developers is a losing downward spiral that only ends after the last parcel of land is TIFed away. TIFs can devastate a government’s credit rating, thereby increasing the cost of future legitimate projects. Instead, municipalities should be firm and financially conservative when approving what businesses they allow to develop in a given area. Rather than asking, “What can we pay to convince you to develop in our community?” municipalities should be posing the question, “What will you give our community for the privilege of having a business here?”
Impact on Public Funds. Money shifted over to TIF use is pulled from the same collective pot that would otherwise fund schools, programs, and other government units. In the short-term, this creates a deficiency, and in the long-term, if profits are not as expected, there may be a permanent negative impact on other community funding needs.
Difficult to Determine Needs. In some situations, a city will be told by a potential developer that they can’t proceed with a project unless they receive a certain amount of funding from the city. It is difficult for a city to determine the actual needs of that developer, so the city will end up trusting the foxes to guard the henhouse as the money is trustingly handed over.
Higher Risk. Much of the ‘risk’ in business outcome success has to do with those governing and guiding a business. In a traditional business model, all those involved are equally committed to ensuring success. With TIF funded projects, public officials may lack the business experience required to ensure success, and having no personal financial money tied up in a project, there is little incentive to oversee and ensure the success of a project.
Payoffs to Win Business. Sometimes municipalities get into a bidding war trying to win over a certain business or developer. If a developer isn’t adequately committed to your community, and requires that you bribe them to come to your community, that’s not a good place to start a relationship. Choose only businesses and developers who are sufficiently ‘invested’ in your community that you need not bribe them to come. Businesses pick cities for reasons other than TIFs: workforce, local economy, schools, transportation, communication, quality of life. Focus on investing in those assets instead. Otherwise, the money you give to business will be diverted away from the infrastructure that would otherwise attract more business. Indeed, it’s in the best interest of many businesses to depress the local economy and reduce the quality of life in order to attract people who might fill low-wage jobs. So, businesses aren’t always the best friend of a local community or economy.
Risk of Corruption. When officials give millions in taxpayers’ money to private, for-profit businesses, the temptations for good-old-boy corruption are great — and virtually impossible to uncover.
And now, the Facebook exchanges:
Nicholas Johnson "Tough TIF Talk," http://fromdc2iowa.blogspot.com/2013/02/tough-tif-talk.html
In his latest effort to justify the use of taxpayer money (TIFs) for Marc Moen's buildings, Gregory Johnson offers, "Guidelines for Selecting TIF-Based Funding of Urban Development Projects," http://www.resourcesforlife.com/docs/item6947.
His "Guidelines" are a constructive step forward; I especially like the decision-tree approach.
However, with respect, I think they still fail to address the elephant in the living room.
So far as I know, none of the economists who oppose crony capitalism argue that there are NO benefits to taxpayer-funded pro football stadiums, for example, or TIFs -- such as short term jobs for construction workers, and a somewhat useful new facility.
But by that standard, there are also benefits from a teenage gang drug distribution organization -- jobs for otherwise unemployed teens, business training, a development of their math skills, sense of responsibility, and ability to work with others.
In short, the issue is NOT whether there are ANY benefits from a Moen project; of course there are, and he lists some of them. The issue is whether those benefits are enough to warrant taking money from the county and schools, subsidizing one housing/office building owner while forcing all others to compete with him without the benefit of taxpayer financing, undercutting banks and other potential investors with cheap taxpayer money when private funding might have been available for the same or a slightly modified project, the risk of corruption when officials are picking winners and losers, and on and on with the list of 20 problems with TIFs I have repeatedly referred to. See "Tough TIF Talk," http://fromdc2iowa.blogspot.com/2013/02/tough-tif-talk.html
In short, the issue is NOT whether Moen does, or does not, make any contribution to downtown Iowa City with his buildings.
The issues are: (1) Does he really NEED this taxpayer money to do what he does (perhaps in a slightly scaled down version)? And (2) Even if there ARE benefits to his projects, zero risks to taxpayers, and he is sufficiently impoverished that he could do nothing at all without taxpayer funding, do those benefits warrant the TIFs, given all the (a) other-than-financial adverse consequences as well as (b) taxpayer costs, and (c) opportunity costs (things the City doesn't/can't fund as a result of what it's given him)?
THAT'S the question that has still not been addressed by anyone to my knowledge, let alone answered to my satisfaction.
Gregory Paul Johnson These are all very good points and useful suggestions for expanding on the decision tree, if there is to be one. I recognize that some people feel any use of taxpayer money for private business is an inappropriate use.
Nicholas Johnson Permit me to offer an alternative response/argument you could make that I think would be more to the point and effective.
To say that "some people feel any use of taxpayer money for private business is an inappropriate use" is like saying (to use my example of the teenage drug gang) "some people oppose all teenage gangs."
It's true that some conservative capitalists would oppose TIFs as a form of corporatism or crony capitalism, a bastardization of pure capitalism, on ideological grounds. Capitalism includes the possibility of devastating financial losses as well as the possibility of enormous profits; they are offended by a "heads (i.e., profits) I win (i.e., keep the profits" and "tails (i.e., losses) you lose (i.e., taxpayers cover them)" system.
There are others who believe the only legitimate, constitutional use of taxpayers' money is for military expenditures.
Neither is what's involved here.
There are actual, very real harms (not to mention risks), produced by TIFs, some of which I've itemized in the Facebook entry, and linked blog essay. These are not observations derived from a belief that "any use of taxpayer money for private business is inappropriate," or some other ideological or political philosophy.
As such, they are analogous to the observations that drug dealing often leads to addiction, other health problems (and in the case of drive-by shootings, death), and is associated with other criminal behavior -- which are also not based on an ideological, or political, opposition to all teenage gangs.
It seems to me, therefore, that you have three possible arguments [with regard to any of the 20 categories of objections to TIFs]: (1) denial (e.g., "there is no data or other reason to believe that when the government underwrites a for-profit venture with taxpayers' money it creates an unfair advantage, tips an otherwise level playing field, or otherwise harms the non-publicly-funded competitors"), (2) trivialization (e.g., "yeah, there are a number of taxpayer-funded private profit efforts that are never completed or go belly up, but not many of them, and those that are successful can be very successful"), or (3) to borrow from Lilly Tomlin, "we don't care, we don't have to, we're the telephone company," or, as in this case, the City Council (e.g., "corruption is part of government; always has been, always will be; there are a thousand ways a beneficiary can reward a public official, you can't possibly track, let alone prevent, all of them; so there's some possibility with TIFs, too; so what?").
But I don't think you are persuasive in disposing of the real and serious adverse effects of TIFs when you fail to address them, and rely on the dismissive "some people" don't like any TIFs.
Gregory Paul Johnson Just to clarify, you mentioned that my article is my "latest effort to justify the use of taxpayer money (TIFs) for Marc Moen's buildings." It's not written with that myopic intent, but genuinely an effort to think broadly about whether TIFs should be used at all beyond their original intent. If so, then how would one make a decision. At present, there seems to be no rational decision tree being applied.
Gregory Paul Johnson I think any balanced presentation about TIF use should include mention of the 'very real harms and risks' associated with their use for funding private enterprise. That's why I included a summary of those dangers/concerns in my original article and also linked to your comprehensive article on the topic. There's a serious problem of tax payers not being included in the decision process of how their money is spent. I mentioned this in my article as well.
I've now revised my article to reflect the points/comments you made above. In case it wasn't clear, I changed the wording to state, "I believe these are valid concerns that may take precedence over any possible benefit of experimental TIF use." I plan to make further modifications as more comments come in.
I don't think that there are three possible arguments (1) denial, (2) trivialization, (3) not caring.
The reasons for not using TIFs to fund private enterprise are well founded and seem to outweigh the benefits. However, it seems that municipalities across the nation don't care (including ours). That being the case, if we are going to have inappropriate uses of TIFs, should there be a decision process? That's what I'm exploring.