Adopt TIF Reform in New York State

It’s time for TIF reform in New York State. TIF stands for “tax increment financing,” a community development vehicle that is widely used in states other than New York. While we’re one of the 49 states with a TIF law, ours is hardly ever used.

But most of you still don’t know how this works. The idea behind a TIF makes a lot of sense. Let’s take Midtown Plaza as an example. Here’s a prime piece of real estate in the middle of Rochester that is just waiting to be developed. Oh, there’s an asbestos-laden, largely empty, decaying shell in the way? Well, in the tradition of economists everywhere, let’s just assume that the building is gone. THEN we’ll have a nicely located, developable parcel. And that parcel, being developed, will generate tax revenue. And the land around it will generate more tax revenue, as it no longer sits next to a nearly-empty eyesore.

ASSUMING we could get rid of the building.

Here’s how a TIF district would solve the problem: The City of Rochester declares the Midtown parcel plus the adjacent blocks as a tax increment financing district. Rochester then issues bonds to address the problem (taking down the building, in this instance). The bonds are paid back not from general tax revenue but from the increase in property tax revenue earned from properties within the district. The bonds don’t affect the city’s bond rating as they aren’t backed by the “full faith and credit” of the city but, instead, the dedicated increase in tax revenue within the district.

There is a discipline about a TIF district that is appealing. The ability of the municipality to sell the bonds depends on the private market’s assessment of the wisdom of the project. Suppose it costs $65 million to take down Midtown. The bonds will be impossible to sell if potential buyers estimate that the increase in tax revenue will be insufficient to pay debt service on the bonds. Like conventional private market financing deals, there is a direct connection between the project and the payback.

The reason that New York’s law is rarely used is that it excludes school districts. As schools are typically responsible for the largest share of the property tax, the increase in property tax revenue from a development—the tax increment—is too small to pay back the bonds for any substantial project. So hardly any New Yorkers use TIF financing.

Assemblyman Robin Schimminger and Senator Catherine Young have sponsored a bill that would address this problem. While I don’t necessarily support the specific language in this bill, their goal is to add school districts to the TIF legislation and make other changes to the legislation to enable communities and developers to take advantage of this flexible, popular financing vehicle.
TIF districts are not universally applauded. There are problems with TIF that should be avoided by whatever legislation gets considered in New York.

First, let’s consider the effect of inflation on the “base” level of property taxation. Remember that the tax increment—the additional tax revenue—is dedicated to TIF debt service. Local governments (including school districts) continue to collect property tax revenue from TIF district property according to the value of property before the TIF-financed improvement. If this base value is fixed in nominal terms—without considering inflation—then these governments are disadvantaged relative to the TIF bond holders.

Suppose the value of property in a TIF district were $1 million when the district is created in 2007. Without an adjustment clause it would still be assessed at $1 million in 2027, the last payback year of a 20 year bond. The Federal Reserve may have tamed inflation, but it hasn’t killed it—it is a sure bet that $1 million won’t buy as much in 2027 as it buys today. The TIF district will be collecting both the increase in value due to the investment AND the increase in value due to inflation. A study recently completed in Chicago—a heavy user of TIF financing—illustrates the problem. Between 1986 and 2005, Chicago’s TIF districts received about $4.5 billion in revenue. Had the base been adjusted to inflation (as occurs in Massachusetts and California, for example), the TIF districts would have received $3.8 billion and local governments would have received $700 million.

Second, there is a temptation to change the TIF law to allow the dedication of additional revenues—not simply the incremental property taxes—to service the debt. This has the effect of shifting the risk from the bond holders to general taxpayers. The beauty of TIF is the disciplined connection between the initial investment and the investment outcome, a level of accountability that can be lacking in economic development incentive programs.

Those caveats aside, a reformed TIF law, particularly one targeted at urban redevelopment and brownfield remediation, can harness a new source of financing to the task of redevelopment our cities. They need the boost.