Tax Increment Financing – a model in motion

Kevin Ward, Geography, University of Manchester

A definition

The irony!  Since the late 1990s a number of academics, consultants, professional associations and think tanks have been making the case for the introduction of Tax Increment Financing (TIF) into the UK.  This is a model based on debt-creation whereby a political entity – such as a local government – establishes a project area, sometimes on its own, sometimes through consultation with business, community and neighbourhood groups.  The property taxes (business rates in the UK) in the project area are then frozen.  The local government then borrows money against the project ‘uplift’ or ‘increment’, on the basis that if they spend the borrowed money on clean up, infrastructure, and other upfront activities then developers will come in and, well, develop!  The belief is that this will lead to an increase in property values (business rates in the UK) and this ‘increment’ will go to the political entity to pay off the debt and to reinvest in the project area.  After a period of time – normally around twenty five years – the debt will have been paid off, the project area gets dissolved and the property tax returns to going to the normal taxing authorities.

 

Referencing elsewhere

Beginning with the garishly yellow Towards an Urban Renaissance published in 1999 but assembled through meetings and overseas study tours in the preceding two to three years, a concerted if slightly incoherent effort has been made to get the central government of the day interested in TIF.  This publication was followed up by Paying for an Urban Renaissance and Towards a Strong Urban Renaissance.  So, first Labour and then, more recently, the Coalition have been lobbied.  This has not been easy.  Tax-talk does not always get the political pulse going.  Even those whose business it is to be interested in financing economic development have been known to roll their eyes when the conversation has turned to TIF.  The public, well they are even harder to get switched on!  There has not been much mobilization either for or against TIF in the UK – yet.

 

An important aspect of the grey literature produced in the UK on TIF has been the referencing of a number of other places.

 

 

These places have been pointed to as locations in which the TIF ‘model’ has worked, and from which the UK might – should? – learn.  One such place is Chicago, where the city government has since the mid-1980s established over one hundred and seven TIF areas.  It was the economic development model of choice of the former Mayor, Richard M Daley.  TIF was a significant issue in the 2011 mayoral election in the city, and new Mayor, Rahm Emmanuel has set about making the model more democratic and transparent.  That though is a blog in itself.  No, here my focus is going to be on California.  The ‘Golden State’ was where TIF began, at the end of the Second World War.

California dreaming/scheming

The 1945 California Community Redevelopment Law allowed cities and counties in the state of California to establish redevelopment agencies.   In 1952 voters approved a constitutional amendment to allow redevelopment agencies to use the property tax as a funding source, and hence, Tax Increment Financing (TIF) was established.   This essentially ‘redirected’ local property taxes away from other tax collection jurisdictions, which in some areas of California numbered over ten.  Redevelopment agencies could use TIF when they were able to demonstrate ‘blight’.  While some cities and counties established redevelopment agencies over the proceeding decades, the use of TIF did not become widespread until the late 1970s and the passing of Proposition 13.  This Proposition limited the local tax raising powers of cities and counties and required that any change in taxation rates be passed by a two-thirds majority.  Not a politically attractive option as you can imagine.   Rather like turkeys voting for Christmas!  Redevelopment agencies were separate legal entities and were not governed by this proposition, however.  So, from the 1980s onwards more and more use of TIF was made in the state of California.  Notions of ‘blight’ were stretched to almost breaking point.  Stories circulated about how some cities and counties were using their redevelopment agencies, which a generous reading would suggest went against the spirit if not the letter of the law.  Those tax collecting jurisdictions whose revenue dropped as it was ‘redirected’ to redevelopment sued, and cities and counties responded with their own legal proceedings.  Eminem domain cases, as redevelopment agencies sought to assemble parcels of land that would be attractive to developers, generated pockets of bad feeling amongst different groups.   Court case followed court case.  Proposition 98, introduced in 1988, meant the State made up for the loss in revenues experienced by the colleges and schools, which kept them happy.  And over the decades the amount sitting in the bank accounts of the four hundred plus redevelopment agencies around the state grew and grew.  By early 2011 redevelopment agencies were receiving about 12% of state wide property tax revenues.  This was compared to the 4% they were receiving in the early 1980s.

At various times State Governors, such as Arnold Schwarzenegger, ‘raided’ these bank accounts, moving money into the State’s general fund, the balancing of which continued to be a significant problem.  In 2010 the California Redevelopment Association, the trade association for redevelopment in the State, had had enough.  Together with the California League of Cities, it successfully introduced Proposition 22.  This made it illegal for the State to ‘raid’ the bank accounts of the redevelopment agencies.   And this was the situation at the beginning of 2011, when the former Mayor of Oakland and a user of redevelopment funds, Jerry Brown, was elected the 39^th Governor of California (he was also the 34^th between 1975 and 1983).   Almost the first thing he did was to declare a ‘financial emergency’ and to eye the $5 billion reserves of the redevelopment agencies.

It gets ‘toxic’

Those of you who are still paying attention will realize that the past tense has been used throughout this blog.   And, so we come to the irony, at last!   Six weeks before George Osborn, the UK’s Chancellor of the Exchequer, mentioned TIF in his 2012 Budget Statement, the model was abolished in the State of California!  Two thousand and eleven was a year of claims and counter claims over the value-added of redevelopment agencies, debates that were often played out in both the law courts and in the media.  It got ugly – ‘toxic’ according to some – and ended up in the California Supreme Court on 29 December.  This ruled that AB27 – which would have meant the redevelopment agencies handing over large amounts of their reserves to the State – was illegal.   The Court basically reinforced Proposition 22.   So far so good for redevelopment agencies, and the California Redevelopment Association that represented them.  However, the Supreme Court upheld AB26 – which meant that as the State had created redevelopment agencies and TIF, through the 1945 Act and its 1952 addition, it could also end them.  Redevelopment agencies would be dissolved.  Panic in the California redevelopment community set in.  Attempts were made to build bridges with the Governor’s office and the State legislator, but to no avail.  TIF, and the 400 plus redevelopment agencies that used the model to fund a range of projects around the State, ceased to exist on 1 February 2012.  The result remains an absolute mess.  One sort of bureaucracy is being replaced with another.  Successor agencies around California are trying to manage the winding down of a highly complex and locally specific ‘model’.  Meanwhile, at the State level, Jerry Brown is pulling in staff from different department to oversee the processes through which it gets to give the okay to some TIF projects to continue and to end others.  Watch out for wave after wave of court cases, as all involved seek to establish landmark rulings.

 

Endings and beginnings

So, one of the UK’s main reference points for Tax Increment Financing (TIF) no longer exists.  The state where TIF began sixty years ago shut down the model and is now dealing the economic and political fallout.  What lessons can be learnt from what happened in California in 2011?  A few I would suggest.  First, a model never really ‘exists’ in its purest sense.  There are lots of different ‘models’ in California and they have all morphed and mutated over the years.  It is not easy to identify from which version those in the UK have looked to learn.  However, great care does need to be taken when generalizing from a model that was established at a particular time in a particular place.   Second, as models change over the years, so it is worth reflecting on the impetus for their initial establishment.  A number of the Californian redevelopment agencies of 2011, and their use of TIF, were a long way from the initial thinking of the 1950s.  A model with a quite ‘progressive’ policy DNA had in many ways become far less progressive, almost regressive in places, by the time of its cessation.  So, it is important to put in place checks and balances.  This was not the case in California.  Third, the law of unintended consequences is prone to makes its presence felt. A number of changes in the legislative and financial system, of which redevelopment agencies were one element, led inadvertently to the incentivising of certain forms of behaviour.  Proposition 13 squeezed city government and made it very attractive to establish redevelopment agencies.  Redevelopment agencies often competed with one another for capital investment.  Other changes made the system more and more complex.  This required the involvement of a growing amount of expertise – economic, environmental, financial, legal, planning, and redevelopment consultants all saw their businesses grow on the back of the increased amount of activity undertaken by redevelopment agencies.  They also then had a stake in a particular version of ‘redevelopment’ and in its continued existence.  So, try and keep it simple!

Whether TIF ever actually gets introduced into England remains unclear.  Other models are also being discussed.  Edinburgh in Scotland got its TIF business plan agreed in late 2010 but has not made as much progress as it would have liked.  What is clear however is that in all areas of policy there will continue to be models that catch the attention of consultants, policymakers and politicians.  These models will find themselves being moved from one place to another, raising issues for those places they pass through as well as for the models themselves as the places they encounter lead to changes in their very constitution.