Emma González Roberts March 25, 2020 Tax Increment Financing and the Opportunity for Equitable Economic Development in Chicago Introduction Tax Increment Financing (TIF) is the most widely used tool for financing economic development in the United States.1 TIF is a place-based and race-neutral tool that was originally designed to address disinvestment by funding public infrastructure and private development in “blighted” areas. TIF has evolved to become a tool for financing all kinds of economic development and infrastructure projects and tend to take place in districts that are not a city’s most blighted. While TIF typically succeeds in growing a district’s property tax value within a set period of time, it is not clear that TIF improves economic opportunity and quality of life for cities as a whole. Rather, it tends to promote economic development and improve infrastructure in neighborhoods that are already economically stable, vibrant, or “up and coming”. In order for Tax Increment Financing to have the greatest positive impact on communities, cities should use a racial equity-based approach to designing, implementing, and evaluating this tool. This is especially true for cities with large minority populations, severe racial inequities, and persistent segregation such as the City of Chicago. A Brief History of TIF Tax Increment Financing originated in California in 1952 in response to Title I of the 1949 Housing Act (also known as Urban Renewal) which required cities to finance one-third of the cost of their urban renewal projects.2 The traditional way to finance redevelopment required residents to vote in favor of the city issuing public long-term debt. After residents repeatedly voted against these proposals, the state wanted to find a way to take advantage of the federal urban renewal money without needing to get voter approval. So, the California state legislature designed TIF.3 This ability to increase the tax base without needing to get voter approval or increase local taxation continues to be a key reason for why municipalities are so keen on using TIF. When President Nixon terminated the urban renewal program in 1973, the use of TIF to finance development and infrastructure skyrocketed. Today, 49 of the 50 states (all but Arizona) and Washington, D.C. have authorized the use of TIF. According to research by the Lincoln Institute of Land Policy, there were about 15,700 total TIF districts in the U.S. in 2018.4 However, Figure 1 shows how the use of TIF is not distributed evenly across the country. Of the ten states with the most TIF districts, eight are in the Midwest (Minnesota, Nebraska, Iowa, Wisconsin, Michigan, Indiana, Ohio). 1 Briffault, Richard, “The Most Popular Tool: Tax Increment Financing and the Political Economy of Local Government,” The University of Chicago Law Review, Vol. 77, No. 1 (Winter 2010), p. 65. 2 Lefcoe, George and Swenson, Charles, “Redevelopment in California: The Demise of TIF-Funded Redevelopment in California and Its Aftermath,” National Tax Journal 67(3), (September 2014), p. 719. 3 Davidson, Jonathan, “Tax Increment Financing as a Tool for Community Redevelopment,” 56 U. Det. J. Urb. L. 405, (1978-1979). 4 Merriman, David, “Improving Tax Increment Financing (TIF) for Economic Development,” Policy Focus Report, Lincoln Institute of Land Policy, (2018), see tables on pp. 26-29. 1 One hypothesis for why this is the case is because Midwestern states were hit particularly hard by deindustrialization throughout the 1980s and 1990s and were in need of financing tools to respond to the economic decline and population loss. That said, states in New England also experienced severe industrial decline during the same time period and do not leverage TIF to nearly the same degree. For example, while Massachusetts, Vermont, and New Hampshire state legislatures have all authorized TIF and have a handful of districts (2, 9, and 32 respectively), they all borrowed $0 in TIF debt between 2000 and 2014.5 Figure 1 Source: Merriman, David, “Improving Tax Increment Financing (TIF) for Economic Development,” Policy Focus Report, Lincoln Institute of Land Policy, (2018), p. 30. Interestingly, there is not a consistent relationship between the number of TIF districts a state has and the amount of TIF borrowing the state does. For example, while Iowa has the highest total number of TIF districts (about 3,340 as of 2018) the state only issued about $315 million of TIF debt between 2000 and 2014. On the other hand, while Colorado has only 140 TIF Districts, the state issued $1.6 billion in TIF debt during that same time period. Of the New England states, Maine uses the tool the most heavily with 483 districts and $31 million in TIF debt. One reason for this variance is that there are no national standards or requirements for the use of TIF. State legislatures have full jurisdiction regarding how and when to use the tool. While TIF began as a way to finance urban renewal projects and address “blight”, it has evolved into being a tool for economic development of all flavors. It even goes by many names—from Revenue Allocation District Financing in New Jersey to Tax Increment Reinvestment Zones in Texas. TIF is used in many different projects including the development of shopping centers, hotels, casinos, stadiums, tourist attractions, office space, parks, transportation facilities, housing, and everything in between. It has been 5 Ibid. 2 implemented in virtually every type of environment from central business districts, to distressed urban neighborhoods, to suburbs, to small towns, to even farmland.6 That said, there are some common elements that TIF shares across states. How TIF Works Tax Increment Financing is an economic development tool that creates special taxing districts to divert property tax money into specific development projects. The development is financed by the expected increase in property tax that the project itself will help create. University of Illinois at Chicago Professor David Merriman summarized it nicely when he said, “the most distinctive feature of TIF is that the revenues used to fund economic development are generated by that same economic development.”7 While each state legislature determines its own rules and regulations for TIF, the following steps are consistent across the country: 1. Designate geographic areas or “districts” with clearly defined boundaries. 2. Determine the duration of the district (typically 20 to 30 years). 3. Assess property taxes within the districts and establish base values. 4. Pursue projects within or adjacent to the district that encourage economic development. 5. Finance the projects with the anticipated increases or “increments” in property taxes (typically by issuing municipal bonds). 6. When the district retires, the increased property tax value becomes the district’s new base value and goes back to the overlying City budget. Figure 2 provides a helpful visual aid to understand how this tool works. Let’s say that the City of TIFLandia designated a new TIF district in the year 2005. Per City of TIFLandia regulations, the TIF district will be in place for 23 years. At the time of designation, the City determined that the district has a total assessed value of $130 million. That is the base value for the district that will continue to go towards the overlying governments—the City, County, and local school district to provide general public services. The dotted blue line shows an example of what a district could expect to see in terms of increased property tax value over a period of 15 years. The neighborhood changes, buildings are built, infrastructure is maintained, and the assessed value increases from $130 million to nearly $200 million. Now, the orange line shows what, in theory, a district could expect to see when TIF is in place. By borrowing against expected gains in property value, TIFLandia was able to finance more economic development and infrastructure projects within the district. Over the same 15-year period, those projects increased the property tax value from $130 million to over $400 million. In theory, that development and the substantially increased value it created would not have been possible “but for” the Tax Increment Financing. 6 “Missouri Supreme Court Clear TIF to Redevelop Blighted Farmland,” Rouse Frets White Goss Gentile Rhodes, P.C., (December 26, 2012). Accessed March 24, 2020. https://rousepc.com/missouri-supreme-court-clears-tif-to-redevelop-blighted-farmland/. ​ ​ 7 Merriman, David, “Improving Tax Increment Financing (TIF) for Economic Development,” Policy Focus Report, Lincoln Institute of Land Policy, (2018), p. 14. 3 Figure 2 Source: Merriman, David, “Improving Tax Increment Financing (TIF) for Economic Development,” Policy Focus Report, Lincoln Institute of Land Policy, (2018), p. 7. Beyond the six steps listed below, states have a lot of leeway with how they implement TIF. For example, Maine’s statute maintains the intention of addressing blight stating that downtown districts must be in a “blighted area or an area in need of rehabilitation or redevelopment.” 8 Illinois’ statute outlines three kinds of districts—blighted, conservation, and transit. Conservation districts are defined as “rapidly deteriorating and declining” areas that “may soon become blighted if their decline is not checked.” 9 Meanwhile, Iowa’s requirements are even more nebulous, permitting TIF in any “economic development area” as long as the municipality designates the area “appropriate” for urban renewal.10 Apart from the concept of “blighted” having a permanently fuzzy definition, there are many ways in which the implementation and use of TIF varies. Below is an attempt at a comprehensive list of questions that states are able to answer for themselves when it comes to TIF. 1. What is the goal of TIF? Is it to improve blighted and distressed areas? Improve quality of life? Create jobs? Promote economic development more broadly? 2.