Disadvantages of tax increment financing: Who’s keeping score?

By Maurice Washington

Tax increment financing (TIF) is a public financing method used as a subsidy for redevelopment, infrastructure and other community-improvement projects in many countries, including the United States. The original intent of a TIF program is to stimulate private investment in a blighted area that has been designated to be in need of economic revitalization. Similar or related capture strategies are used around the world.

Through the use of TIF, municipalities typically divert future property tax revenue increases from a defined area or district toward an economic development project or public improvement project in the community. TIF subsidies are not appropriated directly from a city's budget, but the city incurs loss through forgone tax revenue. The first TIF was used in California in 1952. By 2004, all 50 American states had authorized the use of TIF, except Arizona.

California discontinued the use of TIF financing due to lawsuits in 2011 and enacted the California Fiscal Emergency Proclamation 2010, thereby ending the diversion of property tax revenues from public funding, including the use of TIFs for the funding of the nearly 400 redevelopment agencies in the state. However, there are currently thousands of TIF districts operating in the U.S., from small and midsized cities (like Charleston) to large urban areas.

TIF seems to be becoming more and more popular, and more and more abused in the Charleston area. Like any other economic development technique, it can be a gift or a burden to the citizens of any given municipality.

The benefit is that the municipality does not have to go begging to the state or federal government to request a grant to allow it to afford the public improvements that a private investment will need to be viable.

The problem then becomes that tax increment financing districts are subject to local politics and maybe political favoritism. As investment in an area increases, it is not uncommon for real estate values to rise both in and outside the redeveloped area driving out lower- and moderate-income people and results in what is call gentrification (displacement of lower- and moderate-income residents by higher-income ones) and significant affordable housing problems.

It is a fact that Charleston County lost a larger number of black residents during the past decade than any other county in South Carolina, despite an overall jump in population growth. And no S.C. city lost more black residents than Charleston, the largest city in the state. On the Charleston Peninsula, the population went from being almost two-thirds black in 1980 to nearly two-thirds white in 2010. The reasons given are countless: Decades of racist housing policy, redlining and interstate highway constructions through black neighborhoods. Noticeably absent from the list: TIF.

Consider this, Charleston County’s black population dropped by 11,700 from 2010 to 2020, and the city of Charleston (where TIF are often used) accounted for a large part of that, with the city’s black population falling by nearly 5,000. That said, it is important to link affordable housing with the needs of our police officers and firefighters, schoolteachers, auto mechanics, mail carriers, nurses, secretaries, dental assistants, custodians and sales clerks — in short, those who make up the backbone of America’s economy. These are the people who are also being squeezed out.

Additionally, local governments are under no obligation to recognize when TIF designation would adversely affect a school district’s financial condition, and consequently the quality of some schools can be compromised.

Further, capturing the full tax increment and directing it to repay the redevelopment bonds ignores the fact that the incremental increase in property value likely requires an increase in the provision of public services, which will now have to be funded from elsewhere (often from subsidies from less-economically-thriving areas). For example, the use of tax increment financing to create a large residential development means that public services from schools to public safety will need to be expanded, yet if the full tax increment is captured to repay the development bonds, other money will have to be used.

Even more dramatically, as I mentioned above, most states require a legislative finding by the city council that the TIF district is “blighted.” Sometimes it requires quite a stretch of the imagination to see a well-maintained and fully occupied 25-year-old office building in a posh suburb as “blighted.”

As time goes on, we’re seeing more and more permissive definitions of areas that qualify for TIF. Now, in addition to blighted areas, you might hear that states allow TIF in what they might call a conservation area, essentially an area in danger of becoming blighted, or in an economic development target area designated by the local government. The latter could be almost anywhere.

Another big problem is that taxing districts other than the city government are foregoing tax revenues, but usually they don’t have much input in the TIF decision. Lately some local governments have been allowing the TIF deal to make it possible for schools to receive some additional revenues, since usually the school district relies on the property tax base extensively.

The municipality makes the decision to forego future revenue growth, but the school district, library, community college and other such districts suffer if the municipality is wrong. These districts only receive the promise of a higher future tax base. That prediction of a higher future tax base may vanish in 20 or 30 years as the new development itself becomes obsolete.

By the expiration of the TIF district, the developer may have decided that they have made their profit and are not going to reinvest in the maintenance, management and refreshing that all developments need by that time.

One other substantial disadvantage should be mentioned. The entire premise of tax increment financing is that the assessed valuation of the property will rise after development or redevelopment.

The government, however, is left “holding the bag” if there is no increased assessed valuation, or if it falls back down to its previous level toward the end of the TIF period. Since we’ve just lived through a couple of bubbles, local governments should consider this possibility.

It may require the TIF-granting municipality to dig a little deeper into development finance than may be customary, but the fact that the entire scheme depends on this increased assessment during the entire period of tax abatement merits that extra look.

This latter factor is an argument for keeping the tax increment financing term as short as possible also. Seven years may seem less risky than 30 from this perspective.

I personally believe TIF districts are inherently unfair, as they pick winners and losers in the local economy. By exempting certain businesses for taxes, the burden to pay for essential services instead falls to other businesses and to citizens. These additional tax burdens slow the growth of other businesses and reduce spending from citizens.

Many cities conduct regular cost-benefit analysis on the effects of TIF districts on traditional measures of economic development such as employment, the number of business establishments and sales tax revenue to assess if TIF is truly a viable economic development tool for their city.

Local citizens and business owners should demand the same of its local governments, and that they establish transparent and clear policy guidelines for eligible projects as well as criteria to evaluate the projects, monitor performance and have independent assessment of the result of the TIF district for public review.

Maurice Washington is chairman of the Charleston County Republican Party and former Charleston City Council member. He is president CEO of Trust Management, LLC, and is committed to a life of public service.