Beware of priorities, pitfalls, in tax incremental financing
Projo Op-Ed, March 9, 2006
By Miguel Luna (Ward 9) and David Segal (Ward 1)
We designate a “blighted” area—where we’re hoping to see development—as a TIF district, and set the current year as the base year. The properties in this zone have an aggregate value, that we can calculate. During the base year, those same properties generated a certain amount of tax revenue—also a quantity whose value is known.
Per state law, cities tax just property, and property taxes are a direct function of property value. As expected development in the TIF zone comes to pass—as, say, surface parking lots become 30-story towers—the value of properties within the TIF zone will increase, and so will the taxes generated by those properties. This new tax revenue is the “increment” in TIF.
For each of the next 20 years, rather than putting those incremental taxes into the general fund—the fund where taxes usually go, and which we use to pay for schools, public safety, public works, etc—we’d divert a portion of the incremental value into a special fund, to pay for special capital improvements. In particular, we’d pay for those capital improvements by borrowing somewhere from $60-90 million, against on the order of $150-250 million in anticipated “increments.”
The proposed projects include funding of a downtown parking garage, improvements to Lasalle and Emmett Squares, improvements to and landscaping of the Broadway I-95 overpass, the demolition of Bishop McVinney Auditorium and reconnection of Westminster Street, and new parking at the train station. We’d also put $5 million into the city’s affordable housing trust fund.
TIF’s are seen as a potential alternative to the tax breaks that Providence has traditionally used to spur new development: They give developers a say in how the tax money they pay to the city is going to be spent, usually on “public” projects or private-public partnerships that benefit those very same developers. The majority of the proposed projects are of particular benefit to the Procaccianti Group’s downtown hotel and condo projects.
All indications are that this is the first of many TIF plans to be presented to the city. It’s clear that this TIF will be precedent-setting, and so it’s important that we get things right. We haven’t decided how we’ll vote on the downtown TIF —in part, because a final proposal has yet to be presented to us. But here are some ruminations:
1) Is it intellectually honest for us to designate downtown a “blighted” area? The major development projects that are expected to drive the increase in tax revenue—the Westin expansion, condos at One Ten Westminster, the Holiday Inn’s conversion to a Hilton, the new condos at Grant’s Block—are already underway, and seem to not require these incentives.
2) It would be tremendous to see all of the proposed infrastructural improvements come to fruition, but should they be our priorities? As it seems safe to assume that most, if not all, of the above privated developments are likely to be built with or without the TIF, should we really prioritize using the taxes that they produce for better downtown infrastructure over the alternatives of neighborhood infrastructure, schools, city services, tax relief, etc?
3) Assuming we prioritize the recommended infrastructural improvements, do we really need to do all of this borrowing, and rack up new debt? It’s a basic tenet of responsible financial management that one should borrow only when it’s absolutely necessary. Wouldn’t it be more prudent to do one or two infrastructural improvements per year, and pay as we go, rather than borrow to do them all at once? And wouldn’t the product likely feel more organic and better-integrated into our city’s fabric? It’s the general concensus that the 1996 and 2000 bond issues for infrastructure were imprudent, and in 2004 the Journal editorialized against Rhode Island’s unusual habit of borrowing to do regular road maintenance. How is this plan substantially different?
4) The success of a TIF district is predicated on gentrification—on changing neighborhoods in ways that increase property values.
In a tif district, if property values don’t rise, increased tax revenues from within the district won’t pay off the bonds that have financed the TIF projects, and rank-and-file taxpayers will foot the bill. If property values do rise, the neigborhoods in and around the TIF district can change substantially and irrevocably.
Gentrification is good for some people—particularly so for speculators and property owners who are looking to sell. Its effects are neutral for some. But for a substantial number of people—renters, homeowners who are having touble paying their taxes—the effects can be devastating.
The State of California and other jurisdictions require that at least 20 percent of TIF revenues be used to support affordable housing within the given TIF district, to help offset gentrification and displacement caused by rising property values. The $5 million proposed for affordable housing amounts to well below 20 percent of the expected TIF revenues. Ensuring that jobs created by TIFs go to residents of TIF districts and surrounding neighborhood would also help offset the negative effects of gentrification.
5) There’s a huge parking problem downtown, but it remains unclear how revenues from the partially-TIF financed garage would be split between the City and other financiers.
6) It’s been said that one purpose of the TIF is to “push development energy westward.” Downtown still has a very limited and relatively affluent residential base. But neighborhoods to the west of downtown are longer- standing, and more economically fragile. So long as equitable development measures like inclusionary zoning and first source hiring aren’t in place, rote development to the west of downtown could cause substantial displacement of existing residents.
7) According to the Journal, a study of Illinois TIF’s by Professors Richard F. Dye and David M. Merriman, indicates that “Municipalities that use TIF do worse. Their study showed that while land values and tax revenue rose within the TIF borders, growth in non-TIF areas slowed significantly.” According to said study, “Municipalities that elect to adopt TIF stimulate the growth of blighted areas at the expense of the larger town.”
According to Jason Hardy, an associate at Chicago’s Center for Economic Policy Analysis, “At best, TIF dramatically increases property values and property taxes, raising and spending millions of dollars simply to shuffle economic activity rather than create anything new….Schools, park districts, and municipalities across the state [of Illinois] are losing millions of dollars in revenue because of TIF districts and, in the end, they will come away with very little, if any, net benefit.”
If such a scenarios are likely to manifest in Providence, are we willing to sacrifice potential development in truly blighted areas for increased development downtown?
8) When many other jurisdictions create TIF districts, they also institute community boards which meet regularly with developers and the government, provide oversight, and have some input into how TIF funds are spent. Shouldn’t Providence?
We’re not dead-set against TIFs, but we are skeptical of them. These are our questions—we look forward to working with our communities to develop answers.