When North Carolina voters head to the polls Nov. 2, they will be asked to approve a change in the state constitution that would radically alter how localities approach economic development. The proposed amendment, labeled Amendment One on the ballot, would allow for the use of tax increment financing to help pay for certain improvements. While popular with local governments in the 48 states that allow them, TIFs remain highly controversial.

To many local government officials and economic developers, TIFs represent a valuable method in helping to attract business to specific locations.

“After rampant job losses and an economy that remains unstable, there is no better time for North Carolina to have this tool,” said Leslie Bevacqua Coman, Steering Committee chairman of North Carolinians for Jobs and Progress, the main group lobbying for the measure.

Others see it differently. The National Federation of Independent Businesses, which represents small-business owners, is noticeably less-inspired by the proposed amendment, and will be among the groups represented at a press conference scheduled for Monday to announce a campaign against the TIF amendment.

“Amendment One is simply another way to raise government debt without specific voter approval, and your property taxes will be the tool” it stated recently in a press release urging its members to vote against the measure.

Redevelopment efforts in distressed areas — or for that matter, improvements that might generate development in general — will typically increase property values, producing higher property-tax collections even if the tax rate remains constant over time.

TIFs are a method of paying for such improvements. A local government comes up with a development plan for a specifically defined area, which usually involves making capital expenditures to improve the area. Tax collections from the TIF district are split into two income streams, one that reflects tax collections at the current property valuations, and a second stream that will capture tax revenue from future increases in property values.

Tax revenues based upon the current valuations are allocated as before to municipal and county governments. The extra tax revenues — the “tax increment” — that comes from higher property values go to a special fund that pays for the improvements in the district. Projected TIF property tax revenues also represent a future income stream against which a local government can borrow, hence the name “tax increment financing.” This approach allows for the improvements to be built immediately and paid for over time. Such TIF-backed bonds do not require voter approval. Property tax rates would remain the same in the TIF district as in the rest of the community.

TIF districts have limited life spans, with somewhere between seven and 30 years, depending upon the state, being typical. When the TIF district ends, the tax increment is distributed like the base amount in the usual fashion to the municipal and county government.

TIFs were originally conceived as a way to help finance improvements in areas determined to be “blighted” or “distressed.” This approach allowed for a narrower focus than an enterprise zone. TIFs have been used to fund a wide range of activities, including infrastructure improvements such as streets and sewers, land acquisition, demolition of abandoned buildings, cleaning up brownfields, and job training for those living in the TIF zone.

In recent years, however, the focus of TIFs has shifted away from blight elimination toward more general economic development usage. Many cities across the country are using TIFs to fund incentives to help bring specific private businesses to specific parcels of land.

While all states but North Carolina and Arizona allow TIFs, it does not follow that a given project could be financed through a TIF in all of these 48 states. Each state has its own set of requirements that must be met before a TIF zone can be created. Many states focus on factors associated with economic distress, such as the age of housing or property abandonment. Other states, however, are more lenient in allowing TIFs — with some, including Vermont, only requiring that the zone would encourage development, create jobs, or increase tax revenues.

While Amendment One would change the state constitution to allow TIFs, the actual rules on establishing and operating a “project financing district” (as TIF districts would be called in North Carolina) are set by statute. The already-enacted North Carolina Project Development Financing Act spends more than 11,000 words laying out these regulations, which generally allow for the liberal use of TIFs. The General Assembly, of course, remains free to change these rules in the future.

This year’s referendum marks the third time North Carolina voters have been asked to approve tax increment financing. Voters rejected similar constitutional amendments to allow TIFs in 1982 and 1993.

Proponents of Amendment One highlight the importance of the funding method for economic development purposes.

“This amendment will help create jobs,” stated Brenden Blackwell, first vice president of the N.C. Association of County Commissioners, on the group’s website. “We do have a lot of depressed communities, and this will be a way that could help us. Amendment One will give communities and counties a proven tool that has helped reinvigorate local economies across the country.”

In an effort to enhance the odds of passage, proponents are not referring to the financing scheme by its common name of “tax increment financing,” but instead are using the moniker of “self-financing bonds.” They also imply that these bonds would essentially be free money, that using TIFs has no effect on local taxes, and that issuing the bonds carries only trivial, if any, risk.

Roy Cordato, vice president for research and resident scholar at the John Locke Foundation, questions these categorizations.

“The fact is that the assessed valuation of properties is likely to go up not only on the newly developed parcels, but also for previously existing businesses and homeowners,” Cordato said. “This means that the existing residents of the area will have to pay additional property taxes while not really receiving the benefits of the program. These higher tax payments are not going to improve schools in the area or provide better services, but to pay back the bondholders.”

City and counties can already issue bonds for economic development purposes; it’s just that they require voter approval. This fact is not lost on opponents of Amendment One, such as the NFIB.

“Make no mistake about it, however; this is the same old program, which would give local governments the authority to spend taxpayer dollars without voter approval to subsidize large businesses under the guise of ‘economic development,’” the group’s North Carolina chapter wrote in an August statement.

“Clearly, local governments know that they can’t sell these projects to voters on their merits, so they want to bypass taxpayer consideration altogether,” the state chapter of NFIB stated.

For their part, Amendment One proponents are taking no chances. Aside from a website urging adoption of the measure (www.amend mentone.org), they also have set up the sites www.noamendment one.com, www.noamendmentone.net and www.noamendmentone.info, which presents identical information as that on their main site.

The primary site for opponents of the amendment is www.noamendmentone.org

“It’s just preventive medicine,” aid Ken Eudy to The Charlotte Observer. Eudy is a political strategist working to get Amendment One adopted and whose firm registered the sites.

Michael Lowrey is associate editor of Carolina Journal.