Necessity is the mother of invention. Back in the 1950s, California policymakers were faced with the challenge of coming up with matching funds for federal redevelopment grants. They concocted a revolutionary idea: They would set the pre-development property tax revenue from the subject site as a baseline, then use the new incremental revenue generated as a result of the redevelopment as a means of financing the local match.
Local taxpayers wouldn’t be asked to pay more in taxes. Instead, the revenue would come from the turnaround of the blighted area itself – revenue that otherwise wouldn’t exist.
Six decades later, tax increment financing, or TIF, is among the primary means local governments around the nation use to incentivize economic development and level the playing field where a location has competitive disadvantages. While the basic concept remains the same, its application has broadened significantly. And there is constant tinkering. Here in Utah, the current legislative session is seeing a handful of bills addressing TIF arrangements, with a few other bills at least tangentially related.
The appeal of tax increment financing is clear. Public sector investments can be made off the balance sheet, meaning citizens don’t feel the pain. And, when executed properly, the new revenue would not have otherwise existed anyway and brings ancillary revenue benefits that results in a net gain for the public.
But there’s the trick. Getting TIFs right depends heavily on getting the analysis right. In jurisdictions around the country, there are concerns that the incentives can become unnecessary giveaways, primarily due to inadequate policies, procedures and analysis. There are also concerns about withering competition among local jurisdictions and about whether TIFs are being used strategically.
Because some of these concerns have arisen in Utah, Utah Foundation has launched a series of reports on economic development incentives at the state and local levels. And because local-level incentives are being addressed in the current legislative session, Utah Foundation has just released a primer on local incentives called Public Funds, Private Endeavors – a neutral report on how the incentives work and the debates surrounding them. It’s critical for the public to understand these incentives because TIFs typically represent a unique use of public funds to support private endeavors.
But again: If done right, those tax revenues would not have existed but for the new development. If done right, the development ought to generate net new revenues that the public would not otherwise have enjoyed.
It should be noted that there are certain built-in protections for Utahns. To begin with, local governments often provide the TIF revenues to the developer only on a post-performance basis. In these cases, incremental revenues are held to one side until the development achieves certain benchmarks under the TIF agreement. Furthermore, some local governments have begun improving their reporting on TIF-based incentives, allowing for greater transparency.
But there’s more that many of them can do. In 2015, the Governmental Accounting Standard Board or GASB (an independent national group that develops accounting standards for state and local governments) adopted Statement 77, calling on state and local governments to report the dollar value of their tax abatements. GASB determined that such reporting was necessary because a significant portion of many local governments’ revenues are committed through tax abatements. While some local governments have begun to embrace Statement 77, most cities and school districts in the U.S. – and Utah – did not report accordingly in 2017. Of the 150 financial reports from Utah in 2017 analyzed by the national nonprofit policy group Good Jobs First, only 11 reported the dollar value of tax abatements. Utah Foundation’s own survey of local governments found similarly low levels of reporting.
Transparency is crucial to promoting accountability and public confidence in economic development incentives. More thorough reporting on incentives – making key information readily available to the public and policymakers – would be a significant step forward.
Taking a closer look at economic development incentives
Written by: Peter Reichard
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