Saturday, July 22, 2006

Are TIFs "Corporate Welfare"?

There is a July 21 comment in "'Takings': Eminent Domain and Iowa Values Fund," July 15, 2006, deserving of more than a brief reply. Here it is:

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Anonymous said...

You are confusing TIFs with Tax Abatement. Under tax abatement, a company can benefit financially by not having to pay taxes.

When a TIF is used, the company moving in doesn't necessarily get a monetary benefit. In most cases, the city or county uses TIF to build roads, water lines and other infrastructure in order to help facilitate the company's locating there. In my mind, it is much different than a cash payout.

Either way, the issue in question was whether or not the Legislature needed to pass a statewide ban on using TIF because somewhere between ONE and TWO percent of the city officials that were using TIF were abusing it.

In the end, legislators decided that local control was probably the way to go; that the countless communities that use TIF effectively to benefit their own taxpayers (by lowering taxes in the long run) should not be penalized because of a few morons, and that local citizens should vote out of office city officials who abuse TIF instead of running to Des Moines and asking for them to fix the whole state.

7/21/2006 08:34:03 PM
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So far as I know, even the most vigorous opponents of Tax Increment Financing have never charged its advocates with being terrorists, or otherwise persons in need of something akin to the "witness protection program." So why someone must take on a cloak of anonymity before saying a kind word on behalf of TIFs is not clear to me. But I, like the U.S. Supreme Court, acknowledge that there is sometimes a value to anonymous speech, and I certainly welcome comments from all directions.

Moreover, whoever this "anonymous" may be, she or he (hereafter "s/he") certainly writes as if they know what they're talking about -- a description I've seldom felt entitled to apply to myself with regard to any subject. I'm not trained as an economist, and struggled to understand (and write three columns about [December 22, 1998; January 5 and 19, 1999]) Iowa K-12 school district financing. I did OK as a law student understanding what was then the Internal Revenue Code, but whenever I've come close to grasping one of the intricacies of TIFs it has always burst in my hand, like one of those liquid soap bubbles we used to make with bubble makers when we were kids.

1. I guess the bottom line, for me, is that the capitalist, free private enterprise system ought to be able to live out its dream without taxpayer support. Officials' largesse with taxpayers' money -- when it is focused on a single individual, firm or project (as is often the case with Congress' "earmarks") -- always raises my suspicions (especially when preceded by campaign contributions). (Obviously, city-wide police and fire protection, trash collection, provision of a public library, and the filling of pot holes in the roads are another matter.)

2. Even though I can't always follow the shell-and-pea game involving exactly what is going to whom, when and for what, if there is a project that, say, a developer says s/he won't do, for financial reasons, and a governmental unit intervenes, and something financial transpires (even though we're not told, or can't figure out, what it is), and subsequently the project goes ahead, it seems to me reasonably intuitive (not proven, but a good guess) that the developer has somehow benefited from public money.

3. My sources, this morning (since I'm responding to a blog comment rather than writing a doctoral dissertation), are via Wikipedia. See "Tax Increment Financing," Wikipedia, which contains a fairly straight-forward description of TIFs, but with virtually no critique. So much so that Wikipedi felt obliged to provide a boxed caveat, "The neutrality of this article is disputed. Please see the discussion on the talk page." The talk page, "Talk: Tax Increment Financing," Wikipedia, as might be expected, does contain criticism. One example: to the extent TIFs involve "capturing" future taxes for the benefit of the developer, and property taxes aren't raised for everyone to cover that amount, the TIF deprives the other programs of that governmental unit of the share of those taxes they would have otherwise enjoyed. That's a complaint I have heard from Johnson County officials regarding the shortfall to the county as a result of the substantial use of TIFs by the City of Coralville. Wikipedia also contains links to other material, including Minnesota House of Representatives Research Department, "How TIF Works: Basic Mechanics," (undated).

4. The Minnesota publication would require at least a slight modification of anonymous' comment:

"When a TIF is used, the company moving in doesn't necessarily get a monetary benefit. In most cases, the city or county uses TIF to build roads, water lines and other infrastructure in order to help facilitate the company's locating there. In my mind, it is much different than a cash payout."

(a) The Minnesota report described uses of TIFs whereby the governmental unit buys property for the developer and either gives it to him or her, or sells it at a price below what the governmental unit paid. In that scenario what happens, from my perspective, is not "much different than a cash payout."

(b) As for infrastructure, I'd say "it depends." When I wanted an extra water line on my property, the City charged me for laying it in. My understanding is that the costs of street or sidewalk improvements are sometimes "assessed" against the adjacent landowners. Presumably, farmers who want to have roads going through their fields personally pay whatever costs are associated with grading. So when a City pays for a half-mile of road from a pre-existing public road to the future location of a factory, or shopping center, I'm presuming that the cost is something that, but for the City's generosity (and TIF), would have been paid for by the corporation or developer. If I'm right about that, then I would say that such improvements are also not "much different than a cash payout."

(c) Indeed, anytime a taxpayer is paying reduced (or no) taxes, or postponing the date when the taxes are due, or enjoying the benefits of having the taxes s/he pays being put in a special fund, all the benefits of which come back to the taxpayer (with the consquence of either raising others' taxes, or cutting the budgets of other public programs), it would seem to me that is not "much different than a cash payout."

5. Which leaves us with "public benefit."

(a) Might there be some public benefits from TIFs? Of course. There may be some additional jobs at the new shopping center (as distinguished from jobs being transferred from the former retail outlets, now out of business, to the new shopping center). At some point in the future (hopefully) there will be some property taxes actually paid by the beneficiary that are put in the tax revenue pool to benefit the budgets of all of that government's programs.

But there are two necessary additional analyses or issues.

(b) Benefit-cost analysis. Sure, there are benefits; but do they equal or exceed the costs paid by those receiving those benefits?

(c) And, benefit-cost analysis aside, there are benefits of that nature from every capitalist enterprise (the externality social costs of which do not exceed those benefits): jobs, taxes, the goods and services provided customers, etc. Given that the TIF costs are zero in these cases -- and putting aside the unfairness to competitors of favoring one business over others with the public largesse of TIFs -- isn't the public necessarily, mathematically, better off with the benefits of capitalist enterprises that go it alone than with those that suck money from the public trough (regardless of what the public program is called)?

I close as I began. I don't claim to know what I'm talking about, but this is how it seems to me.

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