Tax Increment Financing is an important tool for accommodating new growth in Washington, but it certainly won’t address all of Washington State’s growth challenges. Let’s consider some of the arguments against TIF (if you need to get more basics on TIF start here). The central criticism of TIF—the one that is most likely to give fodder to opponents—is that what began as an effort to rescue cities from blight, TIF has become a program rife with inequities and abuse that is actually contributing to sprawl. It’s an important argument to prepare for when putting together a TIF proposal.
One of the best TIF critics I have read is Greg LeRoy who is well versed in how the tool works and where it has gone wrong. The title of his article on TIF, “Greenfields, and Sprawl: How an Incentive Created to Alleviate Slums Has Come to Subsidize Upscale Malls and New Urbanist Developments” kind of says it all. LeRoy’s arguments and examples are compelling.
Finding this article interesting? Donate now to support our independent research!
From Blight to Economic Development
As I wrote earlier, TIF was originally conceived as a way to produce a local match for federal housing dollars. The original idea was that TIF could use debt to upgrade an area identified as “blighted,” increase the value of the underlying property, and then use the increased tax collections to pay back the debt that was taken on to make the improvements in the first place. Areas that were rundown, with low property values were ideal for this. Developers wouldn’t build there because the infrastructure costs were too high. But if a city could take care of those up-front investments—sidewalks, roads, or district energy for example—developers would be more likely to build. Because property values were low there was a lot of room for improvement for the underlying tax base, making that incremental increase in tax collections enough to cover the debt service.
Soon local governments figured out that blighted areas with low tax bases weren’t the only areas that could generate incremental increases that would arise out of publicly-subsidized infrastructure improvements. Gradually the definition of “blight” began to expand to the point it became almost meaningless in some states, while in some other states the term was abandoned altogether. States like Virginia and North Carolina simply substituted “economic development opportunity” for “blight” in their definition of what would constitute an area worth establishing as a TIF area. The problem, according to LeRoy, is that the more expansive definition caused a proliferation of TIF areas with a dangerous lack of focus. In fact, LeRoy argues that TIF has often aided and abetted sprawl rather than urban renewal, and it has subverted the intended public-private partnership.
Proliferation, Fiscalization, and Sprawl
The problem as LeRoy sees it is that politicians behave the way politicians often do, falling all over themselves trying to attract new business into their city or county. The TIF tool essentially became a giveaway to business. Cabela’s—a large outdoor sports big box retailer—won’t locate in an area unless they get generous subsidies, often using TIF. This use ends up creating land-uses that eat up open space, farmland, or habitat to set up a giant retail boxes surrounded by seas of parking and roads paid for using TIF. Not exactly the most sustainable outcome.
In LeRoy’s estimation, such wide authority is far too tempting for local government to abuse, resulting in huge windfalls for private developers and bad planning. As I mentioned before, TIF is essentially fiscal policy at the local level, allowing local governments to use their debt capacity to generate economic activity. It’s not exactly printing money, but TIF can provide the local economy a huge shot of economic activity and dollars. Faced with competition with other counties, states, or cities, local elected officials can use TIF far too often. And when multiple jurisdictions have access to TIF, there can be a race to the bottom as they extend themselves further and further trying to entice businesses to locate in a proposed TIF area. Tax dollars get diverted away from other important things like schools, and projects can end up being auto-oriented single uses rather than compact mixed-use development.
How to Respond to the Criticism
Washington State doesn’t yet have full TIF. But as state policymakers consider it, it’s useful to consider some ways to respond to the legitimate criticisms leveled by LeRoy and others. A couple of these points have been raised in earlier posts, but they are worth mentioning again.
- No density, no TIF—limiting the use of TIF to areas of potential density and within the state’s proscribed urban growth boundaries will prevent sellouts to big box sprawl. Local governments need to be told “no density, no TIF.” Only cities that are willing to support density and mixing of uses—housing, retail, transit, commercial—should be granted TIF authority.
- Fiscalization is OK—there is nothing wrong with using debt to make smart investments that will create economic activity now and in the future. If economic development is the purpose of TIF, it needs to be clearly defined and openly stated with measurable outcomes. Private developers need to make a profit, but use of the tool needs to be attached to some public benefit—even if that benefit is simply the increase in sales or property tax.
- Blow up the code—traditional zoning—the land use code—in Washington’s larger cities has become an obstacle. The code has become an accretion of things various city councils, over time, wanted to avoid rather than what they aspired to. Tying TIF authority to good innovative urban planning would create an incentive to race to the top rather than to the bottom when cities compete for new development.
Supporters of TIF ought to use LeRoy’s criticisms and examples to support the argument that TIF can lead to more sustainable outcomes—if used wisely. That means limiting the use of TIF to supporting the kind of sustainable development we need in cities. LeRoy points out (as I did in a post over the summer) that dense, urban areas provide a much better vein of property and sales tax to tap than sprawl—cities are where the greatest value can be found. And tyin
g TIF to innovative urban planning strategies will ensure the best outcomes.