Monday, January 16, 2006

Getting into a TIF

I was meaning to leave a long comment at the Angry Drunk Bureaucrat to continue the conversation that he is having with Jonathan Potts that started by riffing off of this post about a Reason magazine article on Tax Increment Financing (TIFS). However I realized that I would be running a bit long, so I am leaving the comment here:

One of the major, and extremely legitimate complaints about TIFS and other government location decision subsidies is that they encourage decisions that would have been made anyways, and therefore they are fundamentally a transfer payment between current and future taxpayers to private businesses without the taxpayers getting a desired change in behavior. Another is that TIFs are used to encourage either stupid, counterproductive, or pie in the sky development plans that eventually do not pay off in the end. The third argument against TIFs is that the 'blight' requirement creates significant uncertainity and therefore drives down property values for the owners of land that could conceivably be designated blighted (although in PA, that is a bit tough see here) for most projects. The final argument against TIFs is the economic race to the bottom and the non-Pareto optimality conditions that are created by everyone and their brother being able to TIF stupidly, thus allowing large projects to play local taxing bodies off of each other and politicians willing to engage in bidding wars with each other to grab some share of new construction and revenue from an indivisible project.

Most of these objections are very real, and there is TIF abuse, but there are institutional solutions available to some of these objections.

If I am understanding the Kelo opinion correctly, the Supreme Court holds that as long as the rules as set by the relevant governing body are followed and just compensation is paid, then the question at hand is a political question that should be determined locally to fit the circumstances and preferences of the population. The majority opinion asserts that many states pre-Kelo have held much stricter standards towards the use of emininent domain than the bare minimum required by the Constitution and the federal government. Since the Kelo opinion has been issued, numerous states, including Pennsylvania have made the political act of more strictly defining the rules for the use of eminent domain.

TIFs are almost always local and poltical in nature. "O" has made a sufficient case for both bounded rationality and the not entirely economic outcome analysis perspective of the decision makers, so if one is opposed to either TIFs in general, or to particularly dumb TIFs then the question is a political quesiton of how to either apply direct pressure or to change the institutional rule and decision making ability of the TIF granters.

If one is concerned about TIFS in Southwestern Pennsylvania, then the first spot to start talking to is to have the all of the county executives or commissioners agree to talk (perhaps through the SPC) and create a ceasefire on big-box retail and greenfield development TIFs. This removes some of the race to the bottom aspects of the game as retail development will flow to a region (if defined sufficiently large) no matter what the micro-incentives are, and then the TIFs are just a location decision tool of buggar thy neighbor.

The next spot for the more locally focused is to look at the County Council as a pressure point. In Allegheny County, before a typical TIF is approved, three taxing bodies have to approve the bond issue and revenue pledges before the entire project is approved; these three bodies are the municipality, the school district and the county. The municipality and school district neccessarily have a smaller perspective on their zone of self interest; if a project goes into Homestead and not Swissvale, Woodland Hills School District is left out in the cold. However the County has a somewhat larger perspective of their self-interest because the county will be getting tax revenue from either location decision.

If you can get the county to either set very clear and explicit rules as to what is a permissible County TIF or to create an informal coalition against very dumb TIFs, then one of two things will occur; either far fewer TIFS will be proposed even as the percentage of good projects goes up, OR the school and municipality portion of the TIF goes up.

Currently most TIFs in Allegheny County are not 100% TIFS; instead these TIFs are partial TIFs where all three taxing bodies will hold 50-60% of the marginal revenue as the pledge to the newly created bonds, and the remaining incremental revenue goes into the general fund. This policy was put into place as a means to guard against bad projections of future tax streams and also to pay for the increased demand in services generated by a new project. There are a few exceptions to this rule, but they are rare in the past seven years in Allegheny County. If the County does not approve their portion of a TIF plan for a project, then either the subsidy decreases, or the other two, locally based taxing authorities will greatly increase their downside risk and direct costs by going from a 50% TIF to a 75% TIF on their revenue streams. That should discourage local TIFing.

The final conclusion is that I should not make bad puns in the title of my posts.

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