A Policy Scare Story: TIF
Ghosts and chainsaws can be scary, but is there anything scarier than the misuse of tax dollars? Okay, maybe that’s over the top. But there is something scary about governments giving away millions of public tax dollars to private developers—tax dollars that are supposed to fund schools, police, roads, and critical public services. So yes, tax-increment financing (TIF) should scare taxpayers.
TIF is an economic development incentive tool used to try and spur development. When a TIF project is approved, governments return a portion of a developer’s tax payment back to the developer to help fund the development. It’s a classic case of the government picking winners and losers by choosing which developers receive handouts. This practice is almost always a misuse and waste of taxpayer dollars. Independence, MO, had a particularly frightening experience with TIF.
TIF is often financed through debt bonds. Normally, the increment (the extra taxes generated by a development) is returned to the developer. When TIF is financed via debt bonds, that money is returned to the developer, but the developer then uses those funds to make bond payments. A TIF district in Independence anchored by a Bass Pro Shop was funded with bonds issued by the city. However, when the project failed to meet sales tax revenues projections, the developers couldn’t make the bond payments. Independence lawmakers decided to use $3.5 million from the general fund to cover the shortfall in the bond payment. The city wasn’t required to do this because the bonds weren’t guaranteed, but it did so to “ensure the city’s strong financial credit rating.”
Independence’s bad bet cost taxpayers. Paying the $3.5 million to cover the shortfall and protect the city’s credit rating may or may not have been the right move, but the point is that the decision could have been avoided altogether. Taking money from the general fund to bail out a development that already received tax dollars means even less funding for other critical city services. TIF cases such as these, and other taxing district failures, are policy scare stories. Cities such as Webster Groves that are currently considering large TIF projects need to consider the considerable risks with tax subsidies. Maybe it’s time for lawmakers to end this nightmare for good and stop using TIF to fund private developments.