Tax Increment Financing in New Orleans April 2003 Tax Increment Financing in New Orleans
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Tax Increment Financing in New Orleans April 2003 Tax Increment Financing in New Orleans BGR Board of Directors BGR Economic Louis M. Freeman, Chairman Development Committee David Guidry,Vice Chairman Terrel J. Broussard Dionne M. Rousseau, Secretary Jean C. Felts Lynes R. Sloss, Treasurer Louis M. Freeman Lauren Anderson David Guidry Kim M. Boyle Maurice L. Lagarde III Terrel J. Broussard Roderick K. West Robert W. Brown Sterling Scott Willis Bertel Dejoie Ann S. Wink Patricia C. Denechaud Jean C. Felts BGR Project Staff Russell S. Hoadley Janet R. Howard, President & CEO George D. Hopkins, Jr. Patricia E. Morris, Director of Research Jan S. Jobe Stephen Stuart, Research Analyst Hans B. Jonassen Peter Reichard, Research Analyst Yvette Jones Amy T. Pease, Publications Maurice L. Lagarde III Helen L. Williams, Executive Assistant Betty V. Lauricella Carolyn W. McLellan Acknowledgment Robert W. Merrick William A. Oliver This report is the first of BGR’s studies on Roger W. Peck the use of economic development incentives R. Hunter Pierson, Jr. in the City of New Orleans. BGR greatly Robert D. Reily appreciates the financial support of the Gregory St. Etienne individuals, companies and foundations that Roderick K. West made this study possible. The findings, Sterling Scott Willis conclusions and recommendations in this Ann S. Wink report are those of BGR and do not neces- Leonard Vance Wormser sarily reflect the views of its financial Mary K. Zervigon supporters. Honorary Board BGR William A. Baker, Jr. Bryan Bell The Bureau of Governmental Research is Harry J. Blumenthal, Jr. a private, nonprofit, independent research Edgar L. Chase III organization dedicated to informed public Richard W. Freeman, Jr. policy making and the effective use of Ronald J. French, M.D. public resources for the improvement of Paul M. Haygood government in the Greater New Orleans Diana M. Lewis metropolitan area. M. Hepburn Many Anne M. Milling This report is available on BGR’s website R. King Milling www.bgr.org. George H. Porter III, M.D. Edward F. Stauss, Jr. Bureau of Governmental Research 225 Baronne Street, Suite 610 New Orleans, Louisiana 70112 Phone (504) 525-4152 Fax (504) 525-4153 [email protected] www.bgr.org Table of Contents Executive Summary . .1 I. Introduction . .7 II. What is TIF? . .7 III. TIF in the United States . .8 IV. Why Do Local Governments Use TIF? . .11 V. Criticisms of TIF . .12 VI. Special Issues with Sales TIF . .14 VII. Louisiana TIF Statutes Relating to New Orleans . .15 VIII. TIF Use in Louisiana . .20 IX. Future TIF Use in New Orleans . .24 X. Recommendations . .27 Appendix A - St. Thomas TIF Appendix B - World Trade Center TIF EXECUTIVE SUMMARY A Brief Critique Recently, the City of New Orleans has TIF provides cash-strapped municipali- turned its attention to a widely used ties – of which New Orleans surely is local economic development tool: tax one – with a means of making invest- increment financing (TIF). Last fall the ment in infrastructure and economic City Council approved the City’s first development projects under severe sales TIF district in connection with the financial and political constraints. TIF redevelopment of the former St. Thomas has tremendous political appeal in that housing project. Another financing plan it can be implemented without raising with TIF-like characteristics utilizing the taxes and, in many cases, without hotel occupancy tax is under considera- obtaining voter approval. It has a cer- tion in connection with the proposed tain conceptual beauty in that the conversion of a portion of the World investment is, in theory, self-financing Trade Center into a hotel. A bill to cre- and the development supporting it ate a TIF district for the Lake Forest would not have occurred otherwise. Plaza Shopping Center site was recently Under closer scrutiny, the underlying introduced into the State Legislature. premise that a TIF is self-financing is Another to create a TIF district for a open to question. Because of the diffi- large portion of eastern New Orleans culty of making long-range projections, has been filed. In May, City Council will it is difficult to assess whether develop- consider a TIF-like arrangement for a ment in an area would have occurred Lowe’s Home Improvement Warehouse. without TIF. It is even more difficult to Recognizing the importance of the issue, determine whether, and to what extent, City Council has begun to develop gains in a TIF district are offset by stag- policies and procedures to govern the nation, decline, or reduced growth in use of TIF. other areas and businesses. To the extent that other areas and businesses What is TIF? are negatively impacted, the existing TIF is a financing mechanism that revenue base of the local government enables a local government to capture is reduced. In addition, successful TIF new tax revenues generated in a desig- districts can increase a local govern- nated area and reinvest them in that ment’s operating costs without providing area to fund improvements. The local additional operating funds to the local government freezes the tax base in the government. The end result in that case TIF district at the pre-development level is a transfer of the additional operating for a period of years.1 Taxing bodies costs to residents outside the TIF continue to receive the taxes on the pre- district. development base, but the incremental taxes are applied to infrastructure and Given the many unknowns surrounding other improvements designed to spur the performance of TIF districts, and the private sector development. In theory, types of dislocations that can occur, it is the TIF district finances its own revital- exceedingly dangerous to view TIF as ization and eventually generates larger free money. Rather, TIF should be con- tax revenue for the community sidered an allocation of future resources as a whole. and assessed with a stringency befitting Tax Increment Financing in New Orleans 1 other long-term investments of future t Sales TIF districts are more likely revenue. The investment should be than property TIF districts to cap- made only if it is effective, efficient, ture revenues unrelated to TIF equitable, and in furtherance of a investment, thus reducing current defined public policy. tax revenues available to the juris- diction. For reasons discussed below, property TIF, the most widely used form of TIF, is t Because sales TIF districts need preferable to sales TIF. Unfortunately, large, creditworthy retailers or because of the nature of the local tax shopping centers to generate sig- structure, property TIF is less practical nificant tax increments, the quest in New Orleans than in other jurisdic- for a TIF source can lead to land tions. In Louisiana, property TIF can use distortions, unnecessary subsi- only capture taxing bodies’ ad valorem dies for big retailers, and a distor- millage that is not dedicated to a special tion of a local government’s invest- purpose. In 2001, undedicated millage ment priorities. for the City of New Orleans was 14.91 mills out of 169.29 total mills collected t Subsidizing a retail operation with in New Orleans. Thus, for every $1 mil- TIF revenues gives it an unfair lion of incremental assessed value (or advantage over its competitors. $6.6 million of fair market value), only $14,910 out of $169,290 in total proper- t Unless contractually constrained, ty taxes paid would be available for a the retailer can enjoy the TIF sub- TIF district. If the general millages of the sidy and deprive the local govern- Orleans Parish School Board and ment of projected benefits by Orleans Levee Board are subject to cap- departing when the TIF period ture (a matter which is unclear), an ends. additional $15,500 would be available There are other factors that suggest that for TIF. The homestead exemption and TIF might not provide the most effective the exemptions enjoyed by nonprofits, solution to blight or economic develop- government, and some industries fur- ment issues. Regardless of the type of ther diminish the potential of property TIF, because the repayment obligation is TIF use by reducing the tax base. limited to a specific funding source, TIF debt is more expensive than general The tax structure, combined with obligation debt. Whether the premium requirements for voter approval of bonds paid to limit the obligation is worthwhile backed by property tax increments (but will depend on the particular circum- not for bonds backed by sales tax incre- stances. In some cases, such as the St. ments), skews the use of TIF toward Thomas TIF, it is clear that the City sales TIF. This is unfortunate, because could save millions of dollars in tax sales TIF suffers from more serious revenue by issuing lower-interest gener- problems than does property TIF: al obligation bonds. The capacity to t Sales tax revenues are more volatile issue such debt exists under the City’s than property tax revenues, a fact debt limit, which is 35% of gross that makes sales TIF debt financ- assessed value, or $816.8 million as ing riskier and more expensive. 2 Bureau of Governmental Research of Dec. 31, 2002. Debt outstanding as of businesses routinely turning to the of late February was $473.4 million, or City for subsidies and the prospect of 58% of capacity. freezing the tax base for a huge swath of the City. As in the use of other economic develop- ment incentives, the effective, efficient, As noted above, the effective use of and equitable use of TIF depends on the property TIF in New Orleans is severely wisdom, financial sophistication, and limited by the prior dedication of most integrity of those involved in the pro- of the tax revenues.