The ongoing tiff over TIF

Tax-increment financing, which is permitted in 48 other states, would be a powerful tool for encouraging more projects and amenities around light rail stations. Here's the case for its many benefits, and a look at progress and debate to date.

A parking garage at this BART station has helped fuel healthy development and transit ridership.

A parking garage at this BART station has helped fuel healthy development and transit ridership. Neighborhoods.org (Eric Fredericks)/Flickr (CC)

Among the significant changes needed to update Washington’s 123-year-old Constitution is amending it to allow for Tax Increment Financing (TIF), a public-development tool available in 48 other states (Arizona is the other state with no TIF). A recent financial analysis of TIF (discussed below) found that it could generate millions more for public infrastructure around light rail stations than other versions of TIF-lite currently available to local governments in Washington.

Tax Increment Financing allows local government to borrow against the increases created in property value by new development; that's the "increment" in TIF. A local government using TIF can take the property tax increases caused by a development in a discrete area and use those proceeds (which would ordinarily flow to the general fund) to service the debt it incurs to pay for nearby things like roads, drainage, sidewalks, and parks to accommodate the growth created by density around transit. The baseline property taxes, before the development, still flow to the general fund.

The advantage of TIF is that local governments can use future increases in property tax to support comprehensive redevelopment of areas around transit much earlier. That means growth can truly pay for growth, allowing public amenities like parks and sidewalks to be built at the same time as new people are moving into the neighborhood. The amenities, in turn, often trigger the private project, leading to the argument that the boost in taxes from the development wouldn't occur without this public incentive. After a period of time, 20 years or so, the incremental taxes revert to the general fund. 

TIF can support new development to increase aggregate demand for goods and services. That demand creates more construction and retail jobs, and new housing and commercial space. It's a powerful tool, as a trip to the Portland riverfront would demonstate; Portland is a leading example of creating public amenities through TIF.

Washington's Constitution doesn’t allow taxation based on property values, at least in the way we typically think of it. Your property taxes are assessed based on the taxing district's budget, not increases in your property value.

This budget-based system means your property taxes are a share of the city’s budget, for example, not a fixed percentage of overall value. That’s why your taxes can actually go down in economic good times because as overall property values increase, your share of the city’s budget goes down since there is more assessed value to tax. (Read more about how TIF works here.) 

As growth happens, how do we ensure that it doesn’t crowd out poor people in the community to make way for a new, wealthier group of people? To answer that question, the Department of Housing and Urban Development funded Growing Transit Communities, a project of the Puget Sound Regional Council intended to support creating “communities that all people can afford to live in, where they can walk or take a train or a bus to work, and have good access to shopping and other activities.”

Last year the legislature considered House Bill 1881, the Community Revitalization Financing Act (CRFA), legislation that included an amendment to the state Constitution that would have enabled local governments to create TIF districts to fund public infrastructure, especially in areas around light rail stations. (Disclosure moment: I am a long time advocate of Tax Increment Financing through Constitutional changes, and have offered unpaid technical advice and support to sponsors of HB 1881.) A sub-committee of Growing Transit Communities reviewed the CRFA along with a variety of other TIF-like development tools. The preliminary review included a hypothetical case study of transit-oriented development around transit stations.

According to the early estimates, amending the state’s Constitution through passage of the CRFA would generate as much as $66 million to service debt over 30 years in a case study of the BelRed station area in Bellevue. That compares to $5.8 million from Local Revitalization Financing(LRF), and $1.8 million from Landscape Conservation Local Infrastructure Program(LCLIP) championed by Forterra. Traditional TIF similar to Oregon’s would generate about $14.6 million.


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Comments:

Posted Mon, Apr 9, 8:41 a.m. Inappropriate

"Tax Increment Financing allows local government to borrow against the increases created in property value by new development" - so in other words it encourages local government to gamble on increased property prices created by new developments. This sounds like a rather dubious idea at best and a recipe for disaster if the new developments are a result of political correctness rather than hard nosed economics. How many local governments across the country have left their tax payers holding the can for failed TIF financed projects after a collapse in property values?

Posted Mon, Apr 9, 11:09 a.m. Inappropriate

I believe this is what Strong Towns calls a Ponzi scheme...

http://www.strongtowns.org/journal/2011/12/16/best-of-blog-the-growth-ponzi-scheme.html

Posted Mon, Apr 9, 12:22 p.m. Inappropriate

TIF is a bad idea.

TIF is the very worst combination of liberals who don't have any business sense and business people who have no concern for the public.

• If a project makes economic sense it will get built.
• If a project needs public subsidies to build it, then subsidize it transparently with public funds.
• If an area needs infrastructure improvements then the City should help property owners to form an LID. If they don't want to pay for the assessments in an LID then that is a good sign that the project doesn't make sense.
• Public officials do not have the judgment to make the business decisions implied by TIF. (Hiring more consultants does nothing since they are obviously FOR the project or else they wouldn't be hired.)

Roger, You are a smart guy. Don't you see the enormous mis-placed allocation of resources which comes with TIF? You get things like the Mall of America. Yes, TIF was instrumental with building it. If you get TIF you will invite all the sophisticated big-money developers to persuade local residents to pay for their project.

I am (if you know me) obviously think that development is a good thing (so long as we do good development, which is extremely possible.) But I can't fathom why liberals (so many of them) think that they can plan the TIF funny-money game and win.

Posted Mon, Apr 9, 1:39 p.m. Inappropriate

I'm "liberal" (whatever that means any more), but I oppose TIF for the reasons stated by the first three comments. We need an honest overhaul of our tax structure, not more 'feed the rich' band aids that create instead of solve problems.

Regarding David Sucher's second bullet; low income and affordable housing need subsidies, but they should be done so as to actually help lower than average income people find affordable housing, not line the pockets of developers to build $1,500 apartments.

Roger Valdez is smart; the real question is whose interests is he advocating to peddle this stuff.

louploup

Posted Mon, Apr 9, 5:14 p.m. Inappropriate

Roger - The only "on-gong" tiff is your continued advocacy of this bad idea.

What is it you want/need to build that you don't have?

Tax increment financing is a form of Revenue Bond - you expect new, anticipated revenues to pay for the improvement. Which is great. EXCEPT WHEN THEY DON"T.

Exhibit A: The Wenatchee Convention Center. Attendance projections turned out to be a pile of wishful thinking. Also see Gleckman, FROM DREAM TO DEFAULT (re: WPPSS Plants 1, 3, 4, and 5).

What happens when private developers get into the public purse? Think there might be a bit of lobbying? Influence peddling? A bit too much cheery optimism?

It has happened elsewhere. But not with my money. Leave the State Constitution the hell alone.

You want to do something for transit? Amend the 18th Amendment.

Ross Kane
Warm Beach

Ross

Posted Mon, Apr 9, 5:15 p.m. Inappropriate

Hi David,

I don't know that I can turn you into a TIF supporter, but I hope I can effectively respond to some of the points you rais.

• If a project makes economic sense it will get built.

I agree with you. But intervention can and should happen when the market needs a shove. That's what government, ideally, does: decide when there is a market failure and intervene. Now everyone is going to have a different threshold for when that intervention should happen, who it should benefit and what the benefits are. That's what legislators and councilmembers have to debate when they decide to intervene, and they are, ultimately accountable to the voters.

• If a project needs public subsidies to build it, then subsidize it transparently with public funds.

Constitutional TIF is using public credit and using transparently. Once local electeds decide an area could benefit from using TIF, and they designate that area, the property owners get to decide whether they want to pay. In the end, it really isn't public dollars but private value that is taxed to generate debt service. I'd be happy to see city council's vote outright subsidies for all kinds of things, including the purchase of buildings people in the public don't want to see developed. But that's not what Constitutional TIF does. It's a stretch to argue that there are public funds being used to subsidize private development in this model, since there would be no tax revenue without increases in value. Yes, they would be tax dollars used to retire public issued debt, but these are dollars generated from private value, not pulled from the general fund.

• If an area needs infrastructure improvements then the City should help property owners to form an LID. If they don't want to pay for the assessments in an LID then that is a good sign that the project doesn't make sense.

I agree with your first sentance, but not the second one.

The problem is that nobody is interested in doing LIDs at the City. I am all for a LID Tzar who would be tasked to produce as many LIDs as possible as long as they can pay for themselves--which they do.

But an LID can't scale the same way TIF does. LIDs can work wonders for smaller projects, but with TIF, we're talking about bigger upgrades.

The reasons property owners won't go for a LID are myriad, but it isn't only because the project is a bad one.

• Public officials do not have the judgment to make the business decisions implied by TIF. (Hiring more consultants does nothing since they are obviously FOR the project or else they wouldn't be hired.)

I would agree with you here. I am not all that impressed with the judgement of our officials who tend to pander to some of the worst ideas out there. But we don't need TIF for elected officials to do stupid things; they do that fine with the tools they have.

Constitutional TIF does come with the same problems all democratic solutions come with, the danger that a band of self serving or frightened Councilmembers will misuse it. But that just begs the question, why do we keep electing people like that?

I'm glad you and LoupLoup think I am smart, but I'm just relaying some basic info here. Constituional TIF is a very narrow use of public financing for very specific and sustainable purposes.

I think many of the objections you may have about TIF apply to the traditional TIF in Oregon and other places. As I say in the story, Washington's Constitutional TIF would be a pure ad valorem tax on value generated by PRIVATE investment using public financing. I know I risk hyperbole here, but that is pretty cool.

Is there risk associated with Constitutional TIF? Sure, but as a developer you know that risk is part of the business. What this does is put the public in true partnership with the private, sharing risks AND benefits. Too often these deals are one sided, with one party taking most of the risk and the other none.

Posted Mon, Apr 9, 5:26 p.m. Inappropriate

Ross,

I think you raise an important and true point: if the project falls apart the local government is on the hook to retire the debt.

But that is true of any use of public credit for any public purpose. But the example you use makes the point that even without TIF, purely public projects can miscalculate. Risk is inherent in our economic system, and effectively dealing with it is a task everyone--public and private--has to figure out how to do.

I agree that these bonds will function like revenue bonds, although they will be sold as GO bonds. But that's a governor on risk. If the proposed project is too risky, the price of the money goes up and likely kills the deal. That's why it's important to keep these bonds as GO bonds and exempt them from the limits typically set on that kind of debt. Let the investors (the lenders) have their vote on how risky the project is. If they think it stinks, they won't play.

Your argument about public finance would have us using cash from the general fund for all capital expenses, when wise use of debt can expand the good things that government can help build.

Posted Mon, Apr 9, 7:22 p.m. Inappropriate

Roger's like the credit company that sends kids pre-approved cards.

BlueLight

Posted Wed, Apr 11, 10:34 a.m. Inappropriate

TIR will not work in a budget-based property tax system like Washington State. Increases in assessed value do not create new revenues. Plus, any facility owed by the City of Seattle or King County or both will not generate any new construction revenues since government owned property is exempt from paying any property taxes.

The only way TIF will work in Washington State is to mimic Idaho's fix. You must create new taxing districts.

RSNoble

Posted Wed, Apr 11, 2:17 p.m. Inappropriate

RSN: As in Transportation Benefit Districts?

See Chapter 36.73.RCW: http://apps.leg.wa.gov/rcw/default.aspx?cite=36.73&full;=true

See also: http://publicola.com/2012/04/10/transit-bill-looks-dead-in-final-days-of-special-session/

afreeman

Posted Wed, Apr 11, 6:05 p.m. Inappropriate

AFreeman, does not matter. Private new construction does yield new revenues. Public development does not. Everybody believes increases in assessed value due to new development yields additional revenues. The answer is no, it does not, unless it is new construction. Besides, the rate for any re-distribution of a city levy, such as Seattle, would only be allowed for the non-voted portion of the city levy (less lid-lifts, voted bonds, and any portion of the city levy devoted to debt service). It probably would be less than $2.00 per thousand.

Any way you look at it -- a tax shift will happen upon the citizens of the city or county. Since the entire tax base must be used when determining levies (per DOR and the statutes) you cannot then allocate any revenues within a TIF district without double taxation to the affected properties.
Ultimately, the citizens are on the hook for the property tax portion of the bonds.

RSNoble

Posted Thu, Apr 12, 12:12 p.m. Inappropriate

RSN: Thanks for trying, but that is clear as mud. I know what does not work. What I need to know is exactly what kind of "new taxing districts" would mimic Idaho's and in your opinion be "the only way TIF would work in Wa state."

afreeman

Posted Fri, Apr 13, 11:21 a.m. Inappropriate

AFreeman, thanks for the polemics. Idaho's fix is to set aside/segregate the assessed values within any "development area" so as avoid any double taxation associated with the allocation of levies requirement to the total tax base of any taxing jurisdiction such as the City of Seattle. The new districts must be statutorily created by the State Legislature in Washington State to allow this set aside/segregation of assessed value to in turn allow a tax levy to service debt.

RSNoble

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