Tax Increment Financing - Criticism

Criticism

TIF districts are not without criticism. Although tax increment financing is one mechanism for local governments that does not directly rely on federal funds, some question whether TIF districts actually serve their resident populations. As investment in an area increases, it is not uncommon for real estate values to rise and for gentrification to occur. An organization called Municipal Officials for Redevelopment Reform (MORR) holds regular conferences on redevelopment abuse.

Here are further claims made by TIF opponents:

  • Although generally sold to legislatures as a tool to redevelop blighted areas, some districts are drawn up where development would happen anyway such as prime areas at the edges of cities. California has had to pass legislation designed to curb this abuse.
  • The designation as blighted, essential to most TIF implementation, can allow governmental condemnation of property through eminent domain laws. The famous Kelo v. City of New London United States Supreme Court case, where homes were condemned for a private development, was about actions within a TIF district.
  • The process arguably leads to favoritism for politically connected developers, implementing lawyers, economic development officials and others involved in the process
  • In some set-ups school districts within areas that are big TIF users are experiencing larger increases in state aid than those within areas that are not relying heavily on this mechanism. This may be creating an incentive for governments to over-TIF and to take on more risk. Governments are under no obligation to recognize when TIF would seriously harm a school district’s financial condition.
  • Normal inflationary increases in property values can be captured with districts in poorly-written TIFs, representing money that would have gone to the public coffers even without the financed improvements.
  • Districts can sometimes be drawn too large and capture value that would have been increased anyway for unrelated reasons.
  • Approval of districts can sometimes capture one entity's future taxes without its official input, i.e. a school districts taxes will be frozen on action of a city.
  • Capturing the full tax increment and directing it to repay the development bonds ignores the fact that the incremental increase in property value likely requires an increase in the provision of public services, which will now have to be funded from elsewhere (often from subsidies from less economically thriving areas). For example, the use of tax increment financing to create a large residential development means that public services from schools to public safety will need to be expanded, yet if the full tax increment is captured to repay the development bonds, other money will have to be used.

Read more about this topic:  Tax Increment Financing

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