Tax increment financing: A primer

Tax increment financing: A primer

Local governments create TIF districts to encourage development in “blighted” areas; but TIFs often don’t deliver on promised economic benefits, while they do divert tax dollars from other uses and create opaque slush funds for the mayor to reward insider developers.

Anyone who has lived in or near Chicago at any point in the last decade has undoubtedly heard the term “TIF.” But what exactly are TIFs, and how do they affect the city?

Tax increment financing, or TIF, is a mechanism by which local governments provide economic incentives to developers to redevelop blighted neighborhoods. TIFs freeze the existing Equalized Assessed Valuation for a designated area and collect all tax revenues above that rate due to increased property valuations for use in the TIF. Individual taxing bodies (e.g., the city of Chicago, Chicago Public Schools, or CPS, Metropolitan Water Reclamation District, Chicago Park District, Chicago Public Library, Chicago Community College District, Cook County, Forest Preserve District, Cook County Health System, etc.) get their usual share of the money at the frozen rate.

If it seems complicated, that’s because it is. TIF is intentionally complicated to distract from an elaborate budgetary shell game municipal governments play to shirk honest debate about spending priorities and taxes, and to avoid transparency and accountability for the use of tax dollars.

What is a TIF?

A TIF district is a designated area within a city that officials have determined is “blighted” and unlikely to see private development without government incentives. The city, in accordance with state law, ensures several criteria, such as obsolescence, deterioration or declining property valuations, are met in order to place the TIF designation on the area. Luckily for city planners, the definitions of “blight” are vague. That’s what allows Chicago to implement TIF districts in the Loop and River North.

Once city planners decide to implement a TIF, and the city council approves of the designation, the existing tax rate is frozen for a period of 23 years. This means that all taxing bodies (the city of Chicago, CPS, Metropolitan Water Reclamation District, etc.) will get their share of property taxes. As property valuations increase due to redevelopment, the increased revenue is deposited into the TIF account to be used for future development or to reimburse development costs.

The Cook County Clerk has provided the following example to illustrate how a TIF district works. The Chicago City Council has created TIF district A. It has a base equalized valuation, or the total value of all property in the TIF just before the TIF district was established, of $10 million for the entire area. In year one, the equalized valuation for the area increased to $11 million, and each subsequent year has brought additional growth of $1 million which will equate to about a $100,000 deposit to the TIF. In this example, taxing bodies such as the city of Chicago, CPS, Metropolitan Water Reclamation District, etc., would each get their proportional share of the $10 million in taxes, as that represents the frozen rate. The $100,000 in annual growth is deposited into the TIF account to be used by the city as it sees fit for the area’s development. Assuming the rate maintains for the life of the TIF, a district can expect over $2 million dollars in revenue to be spent toward development.

History of TIF

TIFs are not unique to Chicago. In fact, since the creation of the Illinois Tax Increment Allocation Redevelopment Act in 1977, more than 250 municipalities across the state have created over a thousand TIF districts. TIF is used in nearly every state with 49 states and the District of Columbia choosing to participate.

TIF began in California in the early 1950’s as a means to slow the post-World War II exodus of the middle class from city centers. Lawmakers envisioned paying for redevelopment projects with the property taxes from future owners. Slowly but surely, TIF began to spread across the country as a way to funnel money toward projects without raising taxes.

TIF took hold in Chicago in 1984, after the City Council unanimously approved a governing ordinance creating the North Loop TIF. Since then, Chicago has expanded to nearly 150 TIF districts (as of the close of 2014) and has diverted over $5 billion in property taxes.

Past analysis of TIF spending showed TIF money was spent equally between public and private projects. However, regardless of how much money goes to public projects in general, a more recent analysis shows only 8 percent of total TIF spending under Mayor Rahm Emanuel has been allocated toward school projects, notwithstanding the mayor’s declared focus on schools. And the city spent nearly $50 million in 2015 from TIF to pay for the financing costs associated with running the TIF districts.

TIF has been a constant windfall for Chicago government. Cook County Clerk David Orr recently announced that Chicago has seen an increase in TIF collections in 2015 of approximately 24 percent, or nearly $90 million. With large annual revenues, proponents of TIF view the program as “free money,” but that couldn’t be farther from the truth. TIF funds redevelopment by taking money from other taxing bodies. That has allowed Emanuel to cry poor and impose on taxpayers the burdens TIF tax revenue diversions exacerbate.

A common belief is TIF districts are intended to increase economic development, including bringing more jobs to TIF areas. But TIFs may not actually do much to improve the economic environment of those districts. A study from Ball State University found TIF districts “have little impact on economic development other than increasing [the] assessed value of property within the district.” In sum, TIF districts only serve to keep more tax money within those districts, and do not necessarily bring in more jobs or a better standard of living for residents within the districts.

Ultimately, the public’s limited knowledge of the TIF program allows it to thrive in Chicago. Though there have been changes to the system over the past decade, TIF remains opaque. Aldermen have called for a forensic audit of the program, but such examinations have yet to materialize. The mayor and his staffers who handle the TIF program fight requests to release information clarifying the way TIF funds have been expended.

Two examples illustrate the unfairness of Chicago’s TIF system.

TIFs as slush funds

The corruption and unfairness associated with TIFs in Chicago is well documented. TIFs have served as political slush funds, into which the mayor diverts millions of tax dollars to reward his political donors. While there are many examples of TIF dollars being used to benefit the well connected, two are particularly egregious: Lathrop Homes and the South Loop.

Lathrop Homes

Lathrop Homes, located on 32 acres on city’s North Side at Diversey Avenue and the Chicago River, was once considered the gold standard in public housing. It spurned the typical high-rise model of public housing in favor of brick row houses and smaller apartment buildings. The National Register of Historic Places added the homes in 2012 in part due to the open space designs of noted landscape architect Jens Jensen.

It has since fallen into disrepair and needs to be overhauled. The Plan Commission approved a new development for the area to keep public housing while adding new market-rate units. In order to achieve this development, the city is in the process of creating a brand new TIF district on that site, which is expected to be presented to the City Council in September.

The land in the proposed TIF district is owned by the Chicago Housing Authority and is currently tax-exempt. That is, no property tax is collected for any property on the Lathrop Homes site. If the city approves the new TIF, the current property-tax rate of 0 percent will be frozen and all taxes collected will go to the TIF. In other words, all property taxes collected on the redeveloped Lathrop Homes site – which will house not just people with affordable housing vouchers, but also people paying full rent – will be deposited into a TIF account to be spent as the mayor sees fit after the site redevelopment costs have been paid.

CPS will get nothing. The Chicago Public Library gets nothing. The Chicago Park District gets nothing. The only entity to receive property-tax dollars from the site over the next 23 years would be the city-run TIF fund.

The Lathrop Homes site isn’t a little-known swath of property. This is prime real estate likely to bring in tens of millions of dollars annually to the TIF. For reference, three nearby TIF districts had 2014 closing balances in excess of $10 million. Those TIF districts are Addison South ($11.2 million), Fullerton/Milwaukee ($14.9 million) and Western Avenue South ($16.5 million).

South Loop

Meanwhile, in the South Loop, a half-mile long vacant property – the largest undeveloped swath in the city – has sat vacant since developer Tony Rezko sold it in 2005. It should be a big tax boon for the city, but in reality, a large chunk of the funds from this new development won’t go directly to the debt-saddled city, but instead will go straight to a slush fund Emanuel controls.

That’s because the land sits in the River South TIF, a district with a 2014 closing balance of $50,371,935.

Just as with the Lathrop Homes site, this isn’t a little-known swath of property in an impoverished area. The 62-acre site is prime real estate likely to bring in tens of millions of dollars annually to the TIF. Unlike the example with the Lathrop Homes site, the South Loop site already sits in an existing TIF.

Tax year 2014 brought in nearly $1.1 million in property taxes from the South Loop site. This may seem like a large amount, but this property is nearly 62 acres of undeveloped, vacant land. Once it is developed, the value of the property will increase dramatically, property taxes deposited into the TIF will skyrocket and those newly generated taxes will be spent as the mayor sees fit.

These examples circle back to a greater discussion surrounding the budget crises of the city and CPS. The mayor often decries CPS’ lack of funds and the city’s need for more revenue while handing out millions of TIF dollars to connected companies through TIF deals. Both the Lathrop Homes and the South Loop development include Related Midwest, a friend of Mayor Rahm Emanuel. Related Midwest employees gave over $13,000 to Emanuel’s campaign fund in 2014, according to the Illinois State Board of Elections.

Solving the TIF problem

The Lathrop Homes and South Loop developments are prime examples of government mismanagement and the pressing need for TIF reforms. Once both pieces of land are developed, inhabited and profitable, the benefits and increase in tax revenue get tucked away in a fund over which the mayor has complete discretion, rather than going to keep city parks clean, libraries open, art programs in public elementary schools, etc. TIF is supposed to benefit local neighborhoods, but the ones truly benefiting are the mayor, who gets to dole out public money to favored developers, and the insider developers themselves, who reap the rewards from profitable business opportunities.

Residents across the city ultimately have to shoulder the burden of mismanagement and backroom deals. Taxpayers in Chicago’s struggling neighborhoods should not have to absorb losses caused by the diversion of tax dollars for TIF developments on prime real estate. As long as the mayor has total discretion over TIF tax dollars, Chicagoans will continue to lose.

TIF is not, and never has been, free money. It funds redevelopment at the expense of the other taxing bodies. Given that the Illinois General Assembly continues to pass laws favorable to TIFs, getting rid of TIFs may be a tough task, but it should be the ultimate goal. In the meantime, a good first step would be for the city to allow existing TIFs to expire or close districts until none are left. This will force the mayor and city council to spend taxpayer money in a responsible and transparent manner. Until then, the mayor and his connected friends will benefit while Chicago taxpayers suffer.


Correction: A previous version of this article overstated incremental revenue for a Cook County TIF example. 

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