Do the Ends Justify the Means?

I am in generally opposed to the use of tax increment financing (TIF), because I don’t believe the government should be in the business of picking economic winners and losers. But I felt it was only fair to point out that the use of TIF does not always result in disaster, as is exemplified by the case of Brentwood Promenade. A recent St. Louis Business Journal article describes the success of the project, for which the city of Brentwood issued a $21.5 million bond backed by TIF financing in 1997. On March 1, the city of Brentwood made its final payment and dissolved the TIF district two years ahead of schedule. The city now stands to collect about $2 million in annual sales taxes from the shopping center’s tenants, which include Target, Trader Joe’s, and Bed Bath & Beyond. This will provide the city with a projected 33-percent increase in sales tax revenue. Property taxes from the 25-acre area have grown from approximately $60,000 a year to about $900,000 a year today. This success of this retail center (success that is obvious to shoppers trying to find a parking space on a weekend) is also credited with increasing additional investment in the city, as exemplified by the increase in the amount of new home construction in the city.

But, as anyone who has lived in the St. Louis area for a long time knows, tax increment financing is not always so successful.  The St. Louis Business Journal article reminds us of the year 1991, when the city of St. Louis backed the bonds for Midland Group’s $53 million St. Louis Marketplace. When the retail center didn’t meet revenue projections, the city was on the hook for $3 million. Also instructive is a January 2009 report by the East-West Gateway Council of Governments, which found that 80 percent of TIF money during the previous 15 years was devoted to retail projects, and that instead of creating growth, the process has simply moved temporary growth around.

Even when TIFs are successful, such as in the case of Brentwood Promenade, there are numerous other concerns with using this financing method. Although TIFs are intended to be used to develop “blighted” areas, they are often utilized in areas where development would have happened anyway, which deprives municipalities of revenues in the short term that are instead being used to pay for the project. Even worse, the designation of “blight” can allow the government to condemn property through the use of eminent domain.

But perhaps the most insidious trait of tax increment financing is that it gives government the power to decide exactly which developments will take place, and where, rather than allowing development to happen as it naturally would under market conditions. The economic advantages afforded to those who receive the TIF open the door for political favoritism, which should have no place in development. Equally important, it is not the government’s responsibility to oversee retail development — which, as the East-West Gateway report shows, characterizes the overwhelming majority of these projects in the St. Louis area. So, even when these retail projects are successful and the city benefits, do the ends justify the means?