Report: TIFs fall short of economic development promises

Report: TIFs fall short of economic development promises

A new report analyzes the effects of “tax increment financing” on communities across the nation – and calls into question the merits of the widely used development tool.

An economic development tool used by local governments across Illinois may not be working as advertised, according to a new report by University of Illinois at Chicago professor David Merriman for the Lincoln Institute of Land Policy.

Analyzing over 30 studies on the impact “tax increment financing,” or TIF, has had on communities across the country, Merriman found that the practice “often fails to deliver economic growth beyond what otherwise would have occurred” and is likely to “simply result in the relocation of economic activity” rather than the creation of it.

TIF is a mechanism by which municipalities provide special economic incentives to private developers in an effort to revitalize “blighted” areas. When a local government designates an area as a “TIF district,” the existing Equalized Assessed Value of each property parcel within that district is frozen for 23 years, capping the property tax revenue available to local taxing bodies. Any revenue generated above the EAV is then diverted into a TIF fund, from which subsidies are delivered to private companies in exchange for investment in the TIF district.

In Illinois, however, the vagueness of what constitutes as “blighted” allows local governments to create TIF districts in affluent areas as well. TIF districts located in affluent neighborhoods captured nearly half of the $660 million Chicago collected in TIF revenue in 2017. More than $650 million – nearly one-third – of property tax revenue generated in Chicago goes to the city’s 143 TIF districts.

In addition to ambiguous “blight” standards, states such as Illinois require what are called “but for” tests when establishing TIF districts. These tests are intended to demonstrate that economic development within a proposed TIF district would not otherwise occur, “but for” TIF incentives. However, these requirements are often too relaxed, Merriman notes, and fail to meaningfully curtail the misuse of TIFs.

Laws governing TIFs are frequently designed in such a way that enables abuse of public funds, according to the report, redirecting revenue that would have otherwise gone toward public services into opaque slush funds. For example, in Chicago, which boasts more TIF districts than the other nine largest cities combined, property tax revenue lost to TIF funds leaves the city’s public school system scrambling for alternate funding sources.

The report also finds that lacking transparency throughout TIF programs facilitates the abuse of TIF funds. In Chicago, a joint investigation by the Better Government Association and Crain’s Chicago Business found in 2017 that Mayor Rahm Emanuel’s administration obscured $55 million in TIF funds that paid for renovations at Navy Pier.

To improve the performance of TIFs, Merriman recommends that states strengthen their “but for” requirements, increase public access to information about the use of TIF funds, and give municipalities and school districts the ability to opt out of TIFs altogether.

Fortunately, some state lawmakers have taken steps toward reducing TIF abuse. Two bills with bipartisan support – Senate Bill 2880, filed by state Sen. John F. Curran, R-Downers Grove, and House Bill 5230, filed by state Rep. William Davis, D-East Hazel Crest – would impose a stricter definition of “blighted area,” limiting TIFs to areas that are truly underserved.

Absent any mechanism for ensuring effectiveness and transparency, TIFs too often serve as slush funds for the politically connected. Illinoisans deserve a system that encourages economic activity without squandering scarce public resources on special favors for private businesses.

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