TIFS as Crony Capitalism?

I’m on the mailing list of the libertarian Cato Institute (and the Republican and Democratic parties, among other strange bedfellows). I am fond of Cato–not because I agree with them on very many issues, but because–unlike the Republican Party–they are intellectually consistent. So I was very interested to receive a (snail mail–no link) report titled “Crony Capitalism and Social Engineering: the Case against Tax-Increment Financing.”

For those of you unfamiliar with TIFs, the concept is fairly simple. In order to induce development of projects that would not otherwise be economically viable (sometimes called the “but for” test, as in “but for the economic assistance, the project wouldn’t be built), the municipality caps the property taxes at the rate being paid prior to the new development, and plows the added taxes into the development for a period of time, in order to bridge the gap.

The Executive Summary makes several points:

1) By diverting the “extra” tax dollars generated to the project, those dollars are lost to the schools, libraries, fire departments and other urban services. In a sense, those services are also subsidizing the development. (To which proponents of TIF financing would respond, yes, but if the project would not otherwise get built, and if the abatement ends after a reasonable period of time–after which those urban services do receive the extra income–everyone benefits.)

2) Studies have shown that cities are not really applying the “but for” test. Many of these projects would have been built without the extra help. (Whoops!)

3) The new developments impose added costs on schools, fire departments, etc., so other taxpayers are either subsidizing the added burden imposed by the development until such time as the abatement ends, or getting reduced services during that time.

4) No matter how well-intended these programs, officials will often give in to the temptation to use TIFs as a vehicle for crony capitalism, providing subsidies for developers who in turn provide campaign funds to those same officials.

The Cato report has other problems with TIF financing, primarily because it is often used to support denser in-city developments over suburban low-density ones. In my opinion, that’s an argument FOR rather than an argument AGAINST–as the techies might say, that’s a feature, not a bug. But it is hard to argue with their other criticisms.

This is what makes policymaking so difficult. If  TIFs are used as originally intended–and used selectively–they can be a very useful tool.  When I was in city hall, in the early days of their use, I was a proponent. But at that time, TIFs were being used by urban governments to level the playing field–to compete with the lower costs of suburban development. Over the years, the tool has been adopted by smaller bedroom communities like Carmel and Greenwood–and developers have learned to play “let’s make a deal,” in essence turning TIFs into bargaining chips. One result has been that the “but for” test is history. And when the “but for” test was gone, so was the original justification for the program.

Unfortunately, selective use of TIFs has gone the way of the “but for” test. Here in Indianapolis, if news stories are to be believed, the Ballard Administration is proposing to turn the whole urban core into TIFs. (Okay, maybe I’m exaggerating a bit. But not much.)

It’s just further evidence that the Cato report is correct when it notes that TIFs have “become a way for city governments to capture taxes that would otherwise go to rival tax entities such as school or library districts.”