Given the challenges of getting full Tax Increment Financing (TIF) in Washington State and the problems faced by a state like North Carolina that actually did make the leap, what should TIF in Washington look like if the constitutional barriers can be overcome? Here are some ideas that I gathered from various looks at TIF, though I am particularly indebted to an article by Richard Briffault in the University of Chicago Law Review.
So here’s my primer of sorts on how to do tax increment financing right:
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- Keep TIF simple—the easier and more straightforward the process is for local governments and developers to collaboratively use TIF, the more likely it is they will use it. If TIF becomes too complicated and opaque (see North Carolina example) cities and private parties are likely to opt for the status quo, and look to zoning or the bond market to achieve new development goals.
- Avoid debt limits—usually TIF bonds are revenue bonds, and therefore they are generally exempt from state and local debt limits—that’s a good thing for TIF’s success. Revenue bonds fund projects that generate money through fees, tolling, or special tax assessments—think toll roads or a waste water treatment plant. Exempting revenue bonds from state and local debt limits provides more flexibility to local governments, enabling them to make decisions without going before the voters for approval of a bond measure. The basic principle behind TIF is that it is financed using bonds with a promised source of revenue—increased tax collections from the development enabled by the spending—which makes it different from the General Obligation (GO) bonds that get paid out of a local government’s general fund.
- Fiscal sense—private developers have to be able to make a profit. Too many conditions on public benefits and limits on the product they create are likely to discourage private parties from participating in TIF. For example, using a TIF project to mandate the creation of affordable housing, or a certain number of acres of park space could be deal killers. Local governments should have flexibility to negotiate with private developers to decide what a local community needs most in public benefits from a project.
- Use TIF where there is growth—this means restricting the TIF tool to jurisdictions where there is a willingness to accept more growth—literally more people—in a smaller foot print. It is unlikely that TIF will work without density and the increased zoning capacity required for Transit Oriented Development (TOD). Washington should not use TIF to subsidize Greenfield projects that create big box stores or sprawling housing projects outside the Urban Growth Boundary—that would be a bad investment since state law is pushing growth inside the boundary and into compact communities.
- Share the increment—one way to help break down the resistance from junior taxing districts (see my earlier post) would be to share “the increment.” If a school district, for example, can get a reasonable percentage of the increased collections in property taxes, they might be more supportive of a TIF area being created. The danger, however, is spending too much of the increment on “buying off” local taxing districts so that the project falls apart. But this idea is worth looking into.
- Combine “fiscalization” with good planning—Briffault points out that TIF is a way of local governments engaging in fiscal policy—that is, generating economic activity by spending money generated by debt—rather than using land use planning and zoning to achieve a desired outcome for new development. That’s true, but it need not be a bad thing. Putting good planning together with smart fiscal policy at the local level can create positive outcomes, especially for TOD. That means the TIF tool should be tied to good land use planning including up zones necessary to accommodate growth.
- Limit process—effectively managing public process around TIF will be essential. The best way to do this is to regionalize and separate any TIF agency from the influence of local city councils. The Portland Development Commission, for example, is an agency that can be influenced by the Portland City Council, but is not a creature of it. Regionalization ensures a big picture approach and insulates leaders at a TIF agency from the small time politics of local city councils that can give outsized voice to NIMBYs.
If the day comes when Washington does achieve fully constitutional and robust TIF these are some ideas that could build on the success and avoid the failures of other states and jurisdictions. Building a strong TIF mandate is going to be critical as Washington considers the coming growth to the region and the need to put that growth in compact, walkable, livable, transit friendly and affordable communities.
Photo of multifamily development in Redmond by author.