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John Hood's Syndicated Weekly Column

We Need a Tiff about TIFs

May. 30th, 2003
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RALEIGH – North Carolina policymakers desperately need to have a tiff about TIFs.

That’s tax-increment financing, by the way. It’s a device regularly used by local governments in other states to issue government debt without a vote of the people. It involves designating a zone and allowing rising property values within that zone to pay off bonds with higher property-tax collections.

For decades now, local officials in North Carolina have been trying to get state lawmakers in Raleigh, and then statewide voters in a referendum, to amend the constitution to allow cities and counties to use TIFs to finance “economic development” projects such as parking decks, sports arenas, and convention centers. For decades now, they’ve failed. Most recently, the General Assembly agreed to submit the question to voters in a 1993 referendum. It was defeated.

On May 29, the N.C. Senate voted 43-2 for another referendum. Mayors from most of North Carolina’s largest cities have lobbied furiously for the new borrowing authority, which would free up their city councils to build facilities that, they fear, would never get approval from skeptical local taxpayers.

Legislators should not assist their local counterparts in evading such responsibility to taxpayers. TIFs are a bad idea for several reasons, but the key one is that they would likely enable local politicians to insert their power – and their tax-free bonding ability – into risky economic endeavors far outside the proper scope of government.

TIF proponents deny that there is a risk to taxpayers. Since property owners surrounding a project would be paying off the bonds, through higher tax collections from their presumably more-valuable real estate, the general taxpayers are said not to be on the hook. This argument is at least naïve if not disingenuous. For one thing, the process of drawing TIF districts is hardly amicable in other states, and is never voluntary. That is, some taxpayers do indeed get roped into having their taxes pay off bonds for projects they may well oppose. Property values rise for a variety of reasons. It is by no means a straightforward math problem to “prove” that yet another new parking deck, or a money-losing civic center, is the reason why properties rise in value.

More generally, TIFs are supposed to be worth the trouble because they enhance local economies in some way. But careful research in states with a long history of using TIFs has failed to show this. For example, two researchers at Iowa State University examined their state’s growing use of TIFs. From 1989 to 1999, the number of TIFs localities more than doubled, and the total value of property within TIF districts rose from $650 million to $4.2 billion. But property values rose outside the districts, too.

“The TIF ultimately is supposed to increase and enrich the tax base through job growth, population retention or growth, earnings gains and trade enhancement,” the researchers concluded. “But between 1989 and 1999, our analysis shows TIF-increment spending at the county level has not yielded measurable and distinct fiscal, economic or social outcomes.” They also found that the system was, in effect, forcing taxpayers outside of TIF districts to shoulder a disproportionate cost of providing regular government services to a growing population.

A similar study by Heartland Institute scholars of TIFs in the Chicago area found that their use was, at best, simply shifting development and job creation around within the city, not creating net new jobs. Statewide, a separate study by Lake Forest College and University of Illinois researchers found that Illinois cities without TIFs grew faster than cities with them.

The issue of TIF bonds for “public” development is intertwined with a larger one about government assistance for business. The main reasons why politicians want more ways to issue debt without a public vote are 1) it’s a way for private companies to gain access to tax-free bonds and 2) there are money-losing projects, such as sports arenas, that companies want to exploit but not have to pay for.

In both cases, to provide corporate welfare is to warp the market. Why should projects with political connections be able to attract investment capital from deserving private-sector projects simply on the basis of a tax break? And why should any taxpayers be compelled to finance the activities of multi-million-dollar sports teams or tourism industries?

TIFs don’t represent the potential downfall of North Carolina, but they will set a bad precedent and, like so many other dubious government schemes, they will raise public expectations of economic growth that in all likelihood will not be met. Here’s hoping the N.C. House debates the issue more thoroughly.

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Hood is president of the John Locke Foundation and publisher of Carolina Journal, in print and on the web at www.CarolinaJournal.com.