Thursday, August 29, 2013

A Legislator Demystifies Tax Increment Financing


For decades, Indiana has utilized tax increment financing (TIF), an instrument by which future property-tax revenue is captured to pledge for borrowed funds for capital investment. It nonetheless remains controversial. We need to ask why.

Debt, or leverage, is a simple idea, and businesses employ this decision model routinely to weigh the risk and reward of borrowing money to make capital investments with the expectation that increased utility or efficiency will generate incremental (marginal) revenue. Businesses employ various forecasts to determine the probability of hitting projected growth targets, and decide to borrow or not borrow based on the cost of money.

Easy, right? The problem, some point out, is that TIF doesn’t work like this business model.

It is true that, generally speaking, civic leaders listen to proposals from community members who seek public money to partially or fully finance public works that will create incremental value for the community in total. That value is reflected in increased value of land and property, sufficient to pay back the tax bonds and ultimately grow the assessed valuation base for the entire community. The taxpayer wins with enhanced business opportunity, and the taxing authority wins with new marginal revenue down the road.

The controversy, however, lies in the risk-reward analysis. In the business model, the investment risk is borne by stockholders or business owners, as is the potential for higher returns. This is not so for public investment in TIF projects, or at least (the risk-reward analysis) is not so easily quantified.
How much new business could a downtown barber expect if the major employer hires a third shift based on a project financed 50/50 with TIF money? Will the barber ever know if the pickup in haircuts was due to his or her property taxes being diverted from paying for school buses or police cruisers and spent on a new public aquatic center?

This is the point: Quality of life cannot be measured strictly in dollars and cents. We should therefore avoid business analogies when discussing priorities in public finance and the role of government.
California introduced TIF and redevelopment commissions to the free world and, in 2012, came full circle to eliminate them. The state of California is bleeding revenue and, even worse, its businesses and human capital. Would it not be worth our huge investment in time to analyze each TIF project, and decide in hindsight whether each one in total contributed to California’s growth or its decline?


See the full article here:

Greg Walker, Columbus, has represented District 41 in the Indiana Senate since 2006. He holds an MBA from Wesleyan University with an undergraduate degree from Indiana University in business finance. Walker, who sits on three committees pertinent to this subject (Commerce, Economic Development & Technology; Financial Institutions; and Tax & Fiscal Policy), is a senior consultant with Proffer Brainchild Analytics Innovation. He wrote this article for the foundation.