Friday, April 29, 2011

TIF for Tat

In 1982, James Q. Wilson and George Kelling wrote an influential article about the importance of fixing "broken windows" in order to maintain social order in a neighborhood.

With the continued trend of suburbanization since the mid-20th century and the loss of federal funds for renewal projects, bigger cities have struggled to fix broken windows, let alone rejuvenate entire areas of blight. Tax increment financing districts have become popular strategy for local governments to induced economic development in downtowns. Generally, in a TIF district a city will make public improvements in order to incentivize private developers to locate a project in that area. The government freezes the initial assessed value and then pays for the cost of the improvements by capturing the incremental tax increases that result from the development.

Currently, all fifty states have allowances for local governing bodies to designate a TIF district. The mechanism has been around since the 1950s, however it was used sparingly, and with skepticism, until the 1970s. By the end of the 1980s, over one thousand cities had established TIF districts.

Zhao et al. (2010) found that areas with more fragmented local governments tend to establish TIF districts more often, and this is especially true in Minnesota cities since the TIF enabling Act in 1979. Minneapolis states that it only uses TIF for the purposes outlined under State Law. The city also analyzes a proposed TIF to see if the needs and risks associated with the project are appropriate for public assistance.

Minneapolis has credited TIF for the redevelopment and revitalization of the Mill District and Mississippi riverfront. The area had been blighted and under-utilized in the 1960s. The City performed pollution clean up and made transportation infrastructure improvements to attract commercial developers. The riverfront is now one of the biggest attractions of the city.$FILE/Mpls%20TIF%20Case%20Study%20Rev.pdf

On the other side of the river, St. Paul has mostly used TIF for residential development. Private developers tend to favor Minneapolis over St. Paul for residential development because they can get a higher return on investment. Essentially, the City often uses TIF as a lure for developers to choose St. Paul over a neighbor, rather than a last resort for community revitalization. Some developers who have not benefited from TIF are bitter with St. Paul's method. "With proper density, property design, and great communications" any project can be done with TIF, says TJ Hammerstrom of SpringPointe Development in Burnsville. On the other hand, Susan Kimberly of the St. Paul planning department argues that they are using TIF for the intended purposes, because redevelopment would hardly ever occur in the city without it. TIF, Kimberly argues, has helped "level the playing field" for cities to attract developers who would normally scout the suburbs.

TIF was originally intended for the revitalization of urban areas that would not be rehabilitated without public assistance. When local governments use TIF for a competitive edge, it is quite similar to the "race-to-the-bottom" of attracting big-box retailers into the jurisdiction. There may be some short term benefits, but it may deplete the government of resources in the long run. Similar to the arguments for regional transportation planning, the power to establish TIF districts should be put into the hands of a regional governing authority. This would help local governments keep more property tax revenues and fund future needs. Local governments should avoid using TIFs for baiting developers, and instead use it to fix truly "broken windows".

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