Friday, April 15, 2011

TIF Districts - The Good, The Bad, & The Ugly - Part 1

I'm going to wade into the topic of TIF Districts. I want to be clear and move through the muck and mire deliberately so that those with limited knowledge are brought up to speed and can follow along and add their thoughts on this vital and omnipresent economic development tool. So, I don't know how many parts there will be to this multi-entry post. I will cover the following aspects, though -- what is a TIF district, what promises are made when they are created, what promises are kept, how TIF districts are being (mis)used currently, and which changes could make TIF district public policy more valuable to the public interest.

So, here we go -- Part 1 -- What is a TIF District? And why should you care?

TIF stands for "tax increment financing". You should care because all TIF districts in Marion County cause YOUR taxes to rise. How that happens should become evident as this series goes on. But, trust me, its true.

The simplest way to explain a TIF and how it works is to create a fictitious example of one getting set up.

So, lets say that you live right next door to a 10 acre farm field. The property is assessed at about $800 an acre, for a total assessed value of $8000. The farmer currently pays property taxes on that value with a tax cap of 3% -- so up to $240 a year in property taxes.

The Mayor of your City decides that your area is in need of an economic development push. Something to get the ball rolling so that other businesses will want to locate in your area as well. An example in the private sector would be, if a McDonald's locates on a block, other fast food chains likely will follow. Another example is when a WalMart builds, other retailers will tend to build near it, simply because WalMart attracts so many shoppers the other retailers could benefit from all the traffic passing by.

So the Mayor has his economic development staff go out and scout for a good location and also search for a good project to build. They decide that that 10 acre farm is perfect, and the farmer is willing to sell it. They also decide that solar panel manufacturer they have been trying to lure to town would be a perfect business for that location. They reason that green jobs are the wave of the future and that suppliers of solar panel parts would want to locate near this manufacturer. The solar panel parts businesses would, of course, be expected to build their own buildings with their own money.

The solar panel manufacturer, though, would have his building built from money raised by the City. The City would get the money by selling a bond, to be repaid over 25 years. To get the money to make the bond payments, the Mayor, through his Redevelopment Commission, establishes a TIF district on the 10 acre parcel. While the assessed value of the current farm field is $8000, that value will rise to $50 million once the solar panel manufacturing plant is built. Likewise, the property taxes collected will rise from the current $240 to $1.5 million per year.

The way a TIF district works, the taxes collected from the plant will be distributed as follows. $240 will be spread among all of the units of government that have always received that money - so, the schools, township fire department, city, county, library, and public transportation will split the $240. $1.5 million minus $240, will go to the TIF district fund. The money in the TIF district fund will be used to make the bond payment. Sometimes there will be more money in the TIF district fund than will be required for the minimum payment on the bond. This will be discussed in future posts in this series. Just note, it can and does happen that money accumulates in a TIF district fund.

So, that is basically it. The Tax Increment Financing District takes the increased property taxes due to the new, publicly financed, development (the 'increment') and uses it to pay off the bonds the City floated to finance the development in the first place.  The hope is that the development will attract private investment in new buildings nearby and bring new jobs to the area.  With new jobs, new housing will be necessary and more amenities for the new neighbors will be attracted to the growing community.  This is the hope, anyway.


JoshBowling said...

Pat, I have a question for you on this. In your scenario you say that the TIF increment is used to build the Solar Panel Factory. I always thought the TIF dollars could only be used for infrastructure projects (i.e. streets, streetscape, sewers, curbs, sidewalks, etc...) I had no idea that it could be used to actually build a private companies factory. Do you have examples of where this has been done in Indy?

Had Enough Indy? said...

Josh, I'd point to the United maintenance facility at the Airport and the Circle Centre Mall to name two big projects.

Anonymous said...

Also the recent development of Glendale Mall

Citizen Kane said...

Money that can not be used to provide government services consumed by the new entity. Of course, no one admits that the entity would have built there anyway and the taxpayers would have indeed benefited from an increased tax base, etc.

Instead it is never-ending series of abatements and TIFS and abated TIFS (yes there have been abatements in TIFS), with the promise of lower overall taxpayer burdens becoming ever more elusive.