Giving Away the Store to Get a Store

Tax increment financing is no bargain for taxpayers.

Daniel McGraw from the January 2006 issue

(Page 2 of 3)

The upshot is that TIFs are diverting tax money that otherwise would have been used for government services. The NCBG study found, for instance, that the 36 TIF districts would cost Chicago public schools $632 million (based on development that would have occurred anyway) in property tax revenue, because the property tax rates are frozen for schools as well. This doesn't merely mean that the schools get more money. If the economic growth occurs with TIFs, that attracts people to the area and thereby raises enrollments. In that case, the cost of teaching the new students will be borne by property owners outside the TIF districts.

Such concerns have had little impact so far, in part because almost no one has examined how TIFs succeed or fail over the long term. Local politicians are touting TIFs as a way to promote development, promising no new taxes, and then setting them up without looking at potential side effects. It's hard to discern exactly how many TIFs operate in this country, since not every state requires their registration. But the number has expanded exponentially, especially over the past decade. Illinois, which had one TIF district in 1970, now has 874 (including one in the town of Wilmington, population 129). A moderate-sized city like Janesville, Wisconsin--a town of 60,000 about an hour from Madison--has accumulated 26 TIFs. Delaware and Arizona are the only states without TIF laws, and most observers expect they will get on board soon.

First used in California in the 1950s, TIFs were supposed to be another tool, like tax abatement and enterprise zones, that could be used to promote urban renewal. But cities found they were not very effective at drawing development into depressed areas. "They had this tool, but didn't know what the tool was good for," says Art Lyons, an analyst for the Chicago-based Center for Economic Policy Analysis, an economic think tank that works with community groups. The cities realized, Lyons theorizes, that if they wanted to use TIFs more, they had to get out of depressed neighborhoods and into areas with higher property values, which generate more tax revenue to pay off development bonds.

The Entire Western World Could Be Blighted

Until the 1990s, most states reserved TIFs for areas that could be described as "blighted," based on criteria set forth by statute. But as with eminent domain, the definition of blight for TIF purposes has been dramatically expanded. In 1999, for example, Baraboo, Wisconsin, created a TIF for an industrial park and a Wal-Mart supercenter that were built on farmland; the blight label was based on a single house in the district that was uninhabited. In recent years 16 states have relaxed their TIF criteria to cover affluent areas, "conservation areas" where blight might occur someday, or "economic development areas," loosely defined as commercial or industrial properties.

The result is that a TIF can be put almost anywhere these days. Based on current criteria, says Jake Haulk, director of the Pittsburgh-based Allegheny Institute for Public Policy, you could "declare the entire Western world blighted."

In the late 1990s, Pittsburgh decided to declare a commercial section of its downtown blighted so it could create a TIF district for the Lazarus Department Store. The construction of the new store and a nearby parking garage cost the city more than $70 million. But the property taxes on the new store were lower than expected, as the downtown area surrounding Lazarus never took off the way the city thought it would. Sales tax receipts were also unexpectedly low. Lazarus decided to close the store last year, and the property is still on the block. Because other businesses were included in the TIF, it is impossible to predict whether the city will be on the hook for the entire $70 million. But given that the Lazarus store was the centerpiece of the development, it is safe to say this TIF is not working very well, and Pittsburgh's taxpayers may have to pick up the tab.

If businesses like Lazarus cannot reliably predict their own success, urban planners can hardly be expected to do a better job. Typically, big corporations come to small cities towing consultants who trot out rosy numbers, and the politicians see a future that may not materialize in five or 10 years. "The big buzzwords are economic development," says Chris Slowik, organizational director for the South Cooperative Organization for Public Education (SCOPE), which represents about 45 school districts in the southern suburbs of Chicago, each of which includes at least one TIF. "The local governments see a vacant space and see something they like that some company might bring in. But no one thinks about what the costs might be....They are giving away the store to get a store." Big-box retail chains such as Target and Wal-Mart seem to be the most frequent beneficiaries of TIFs. (Neither company would comment for this story, and local politicians generally shied away as well.)

Given the competition between cities eager to attract new businesses, TIFs are not likely to disappear anytime soon. "Has it gone overboard?" asks University of North Texas economist Terry Clower. "Sure....But the problem is that if a city doesn't offer some tax incentives, the company will just move down the road." According to Clower, "In a utopian world, there would be no government handouts, and every business would pay the same tax rate. But if a city stands up and says they aren't doing [TIFs] anymore, they will lose out."

Instead, it's the competitors of TIF-favored businesses that lose out. Academy Sports & Outdoors, which employs 6,500 people, has about 80 sporting goods stores in eight Southern states, including a store in Fort Worth. When the Fort Worth City Council was considering the TIF for Cabela's, Academy Sports Chairman David Gochman spoke out against the tax incentives, realizing that his company is a big business, but not big enough. "This is not a nonprofit, not a library, not a school," he said. "They are a for-profit business, a competitor of ours, along with Oshman's and Wal-Mart and others."

TIFs Have Become the Standard Handout

Al Dalton, owner of Texas Outdoors, a 10,000-square-foot hunting and fishing shop in Fort Worth, echoed the sentiment that the city was favoring one business over another. "We don't have the buying power, and we don't have the advertising dollars," Dalton said. "It doesn't make any difference even if we've got the best price in town if nobody knows about it. The deep pockets, in every way, [make] a lot of difference."

And that may be the key to understanding how TIFs are now applied: The companies with the deep pockets are able to fill them with subsidies.

The Cabela's location in Fort Worth does not fit any of the blight criteria people had in mind when TIFs were first created. The 225,000-square-foot store, with its waterfalls, multitude of stuffed animals, and wild game caf�, sits on prime property just off Interstate 35. It is a few miles down the road from the Texas Motor Speedway (which has its own TIF), and the 200,000 NASCAR and IRL fans who attend races there three times a year--not to mention the fans who come to the speedway's concerts and other special events--might want to shop at Cabela's.

The area around Cabela's is affluent and has been growing for years. A half-dozen shopping centers nearby were on the drawing board well before the TIF was considered. Within a five-mile radius of the hunting/fishing megastore, 10,000 new homes have been built since 2000. That same area is expected to grow by 20,000 people in the next two years.