Tax Increment Financing/Districts (TIF/D) have been in the news quite a bit recently. A couple weeks ago, the so-called “Meijer TID” was making waves. (See our analysis here.) Then last week another article involving TIF was in the news:
This topic can seem dry, complicated, or deep in the woods, so I don’t blame you if you didn’t read the article. However, the implications of what the City did here are pretty profound, and once again shine a light on what I believe to be a rather careless use of TIF by the City of Manitowoc.
As background, here’s an example of how TIDs work. If you live in the City of Manitowoc (for example), when you pay your property taxes, a portion goes to the City, but portions also go to Manitowoc County, the Manitowoc Public School District, and the Technical College District (LTC) in prescribed percentages. In a TID, the municipality spends money to make public improvements—roads, sewers, etc.—to spur development. If development does happen, the additional tax monies that are generated by the increased value of the parcel (the value “increment”) go solely to the City until the costs of the public improvements are paid off—which is often in excess of 15 years. The terms “TIF” and “TID” tend to be used interchangeably. TIF (Tax Increment Financing) is the financial mechanism, while a TID (Tax Increment District) is the geographic area involved.
The State of Wisconsin not only allows municipalities like Manitowoc to establish TIDs, but it also allows them, within certain guidelines, to establish “donor” and “recipient” TIDs. What happens here is, TIDs that are failing (i.e. are not bringing in enough incremental property tax revenue to pay off the loan at the prescribed rate) can be bailed out by overperforming TIDs, which are bringing in tax revenue in excess of the rate needed to pay off their loans in the prescribed timeline.
At face value, this may sound like a smart play—If one TID is really successful, why not use the extra revenue to help bail out a failing TID? For one thing, when this is done, the other taxing bodies (Manitowoc County, Manitowoc School District, Lakeshore Technical College District) get “cheated” out of money that they would have coming to them. The reason is that the donor TID stays open longer than it would have otherwise would have, meaning that all of the tax money is channeled to the City rather than spread out over the other taxing mechanisms.
Manitowoc’s Mayor is saying that this arrangement is good for Manitowoc taxpayers, because if the underperforming TID had been allowed to fail, taxpayers would have been on the hook. Um, yes! That’s kind of my point. The City has entered into several TID arrangements that had a very low chance of succeeding. They are playing real estate speculation games with these TIDs, and if they’re not successful, they just bail them out with a more successful TID and continue the shell game. The normal risk that should be associated with any type of TID arrangement is largely absent. As I argued in my article about the Meijer TID, the City should be using TIF as a tool to enable legitimate, tangible development that has a high chance of being successful—It should not be used for real estate speculation.
While I believe that the City is being careless in the way that it uses TIF, to be fair, a lot of blame goes to the State for allowing municipalities to even do this in the first place. The State should tighten up whether donor and recipient TIDs should be allowed, and if they are, they should only be allowed in the most dire of circumstances.
Questions: Under what circumstances should municipalities create TIDs?
Are “donor” and “recipient” TIDs a good financing mechanism?
What role should the government play in promoting development?