Would you like to be able to unilaterally take some of your neighbor’s money and spend it in ways that benefit you, but not him? As ludicrous as that sounds, we allow local governments in Missouri to do it all the time. The subsidy at fault is Tax Increment Financing (TIF), which allows cities to capture money that would have gone to other taxing entities, such as school districts, and use it how the city desires – in some cases simply to subsidize a new Walmart that will replace an existing Walmart. It works the same in Sugar Creek, Liberty, or anywhere in Missouri: those cities pass TIF laws but the money for the TIF mostly comes from the school, fire, and library districts.
TIF allows local government to reimburse developers for some of the project’s costs. With TIF, if a property generates $50,000 in property taxes before it is developed but generates $75,000 after being constructed, the developer gets to keep the $25,000 difference to pay for development costs.
In theory, TIF encourages developers to undertake projects in areas in dire need of economic growth. In reality, TIF is used to subsidize politically-connected developers, to help cities lure chosen businesses from other cities, and to fund an entire cottage industry of urban planners, lawyers, and bankers. TIF projects have to pass a “but-for” test (demonstrating they would not happen without the assistance) and meet a series of eligibility tests. But those tests are a sick joke and a rigged game, as I can’t find one TIF proposal (out of several hundred) in the entire state over the past two decades that has failed to pass them.
The Briarcliff development in the Northland received a Super-TIF (a rare plan where the developer keeps all the incremental sales taxes as well as all the property taxes) on top of an existing TIF plan, even though the area is thriving and has no legitimate need for public subsidies.
A Chicago-area study of TIF use found that cities that use TIF grow at a slower rate economically than cities that do not use it. The reason is that, with TIF, developers make business decisions based on the subsidy; not economic best uses. That is exactly what has happened in Independence, where the city has had to step in and help make debt payments for the giant Bass Pro Shop development done with a TIF. That is an example of a TIF where the taxpayers are both directly and indirectly on the hook for the developers.
A recent study by Washburn University Professor Paul Byrne for the Show-Me Institute documents how TIF is used in Missouri. Byrne shows that the ability of cities to implement a TIF unilaterally leads to cities making decisions that benefit the city, at the expense of other public agencies. Cities that are authorized to enact sales taxes might push for TIF projects that will generate new sales tax dollars without caring about the property tax dollars that the local school district will have to do without. As a result, public tax dollars can end up funding economically-inefficient projects.
This, of course, is exactly how TIF has played out in Missouri, particularly in Saint Louis County, over the past two decades. The East-West Gateway Council of Governments found that the Saint Louis region has subsidized retail development at a cost of approximately $370,000 for each job created — and these are mostly low-paid retail sales jobs. TIF leads not to economic development but to regional bankruptcy. A similar study of TIF in Kansas City would likely find the same results.
Missouri should dramatically tighten its TIF laws. Jackson County Executive Mike Sanders deserves credit for successfully fighting for a more equitable Kansas City TIF Commission. However, he should go further and work both to implement a countywide TIF commission with jurisdiction over all TIFs in Jackson County (including within Kansas City) and removal of the state law giving cities the right to override TIF commission denials. If those two changes were accomplished, perhaps Missouri could finally have a reasonable TIF policy.
David Stokes is a policy analyst at the Show-Me Institute, which promotes market solutions for Missouri public policy.