Tax-Increment Financing Done With Smoke, Mirrors
Many years ago, certain people wanted to revitalize dilapidated inner cities. They created, with tax money, a redevelopment agency, known locally as the Urban Renewal Agency.
Its most debatable function is the issuance of municipal bonds by appointed members. Creating this agency freed elected officials from the nasty task of struggling for tax money for unpopular causes and at the same time removed them from direct involvement and responsibility.
In order to attract private funds, they devised a scheme called “tax-increment financing.” It is one of the slickest financial deceptions of the public ever invented. Regrettably, it often merely is a clever plan of increasing taxes of ordinary citizens. Here are some of the reasons.
Can lending of private money to a good cause (municipal bond) generate higher taxes? Any tax-avoiding action necessitates tax increases somewhere else. Each million-dollar investment in municipal bonds saves the lender $20,000 in income tax, which has to be paid by someone less influential. Also, a $60,000 yearly interest payment for the same million dollars requires tax money.
At the end of the bond time, the public has to come up with a balloon payment the size of the bond. If the bond was directly to the public (city or county), the only tax loss at this time is $20,000 of income tax each year. But what happens when a developer, using tax-increment financing, uses the million dollars to improve his own assets? He is not using his own money for the payment, but instead, per definition, tax money, namely the amount of tax money that is above previous tax payments.
Can you see the illusion? The public pays the income loss, the interest loss and it pays the bond off, also with tax money. The developer receives a million dollars absolutely free, completely paid with tax money, and if he happens to be the original buyer of the bond, $20,000 per year as a bonus. And there are some who have the audacity to say there is no tax money involved here and these operations must remain secret. But there is more.
Taxes are not only financing the URA itself, but all of the following materials for the tax-increment financed (TIF) area: initial planning, community provided infrastructure, the long list of city routine services including police, fire, schools, etc. The TIF area will not pay a penny of these expenses for the duration of the bonds. Additionally, the tax assessor will demand from all property owners outside the TIF area, higher taxes, based on TIF area increases.
It should be checked whether reasonably accurate accounting methods exist to determine the initial and yearly tax load for the non-TIF community because of the TIF zone. For this is the linchpin of benefit evaluation. Complimentary presentation with generalities and vague forecasts are no substitute for facts. Show these accounting documents now and how they demonstrate benefit for the citizens.
Million-dollar revenues mean nothing when outlays are larger. More and taller buildings do not erase the misery of many larger cities. The yearly payment for a 6 percent, six-year, $1.5 million loan, including above non-TIF expenses are around half a million dollars. The public is entitled to see the legal documents that - in principle - show a believable payback of this sum.
The assertions and projections of outside experts should be treated with extreme caution and not be usable for excuses. No contracts should be signed without a clause holding the public harmless should the developer or his successors go bankrupt. URA and city accounting should be kept strictly separate. Intermingling leads to mushy, faulty reporting, handicapping appraisals.
Many people assume they are not affected by these somewhat hidden taxes, but not seeing them through lack of information or unwillingness does unfortunately not make them nonexistent, and while it is basically up to elected officials to uncover and remedy imperfections, all of us must help. Economic activity should be greeted with open arms, not with empty heads.