TIFs: A mythical pot of gold for local governments

Tax increment financing creates elusive troves of property tax “gold” – by depleting funds from local governments the mechanism intends to serve.

At the end of the rainbow, there’s a pot of gold waiting to be found – this familiar myth is a popular centerpiece of Irish folklore. But promises associated with tax increment financing, or TIF, districts suggest too sincere a belief in that fantasy.

With the stated purpose of alleviating neighborhood blight and revitalizing depressed communities, some lawmakers promote TIFs as an economic incentive program aimed at spurring redevelopment.

But outcomes don’t always boast revitalization, nor are neighborhoods selected as subjects of the subsidy always blighted. In fact, as has frequently been the case in Chicago, TIF funds too often serve as political slush funds, diverting essential revenues toward the coffers of private developers with comfortable political connections.

The haziness of TIFs

A TIF fund is created when a “TIF district” is delineated by a municipal government. Such districts are identified by local governments as economically blighted. The state requires these proposed districts be subject to public hearings and approved by the city council.

Once a TIF district is approved, the county clerk – or, in the singular case of Cook County, the Cook County assessor – freezes the total Equalized Assessed Value, or EAV, of each property parcel within the boundaries of the established TIF district for a period of 23 years. This frozen EAV sets the fixed “base” tax rate at which taxing bodies – school districts, townships, public libraries, et cetera – continue to receive property tax revenues.

Any increased, or “incremental,” property tax revenue generated beyond the base rate as a result of rising property values is rerouted from its original destinations and into a TIF fund, which is overseen by city officials. These funds are then typically appropriated to private developers in exchange for the promise of investment.

As a result, however, the stream of property tax revenue available to local governments to fund core services is capped. And all revenue generated above the cap is funneled into a TIF fund.

The Chicago example

In theory, TIF districts function as economic development zones. But in practice, the results have been checkered at best. The city of Chicago offers a lucid example of how TIF districts hinder essential services – such as public schools – while enriching large political players, courtesy of the taxpayer.

Although Chicago Public Schools’ financial situation has worsened in recent years, revenue ceilings imposed on school districts located in TIF districts inhibit schools from collecting property tax revenues that reflect actual property values within the district. Even during periods in which Chicago TIF districts have raked in record revenues, CPS sought and received a state-backed bailout.

TIFs have amounted to a taxpayer-backed shell game in which funds are scraped from local taxing bodies and delivered to private developers in exchange for an ambiguous promise of community rehabilitation.

Moreover, the vagueness with which economic “blight” is defined by state law allows too frequently for TIFs in some of the most property-rich areas of the state, including River North and the Loop in Chicago.

But TIFs are hardly unique to Chicago. The Land of Lincoln is draped in a tapestry of more than 1,300 TIF districts scattered across the state. However, a number of taxing bodies have started to realize the pitfalls of TIFs – some have even opted to sue municipal governments for implementing them.

Thankfully, TIF reform has earned bipartisan support in Springfield, with two bills currently in the General Assembly that would amend the state’s loose definition of “blighted area.” Senate Bill 2880, filed by state Sen. John Curran, R-Downers Grove, and House Bill 5230, filed by filed by state Rep. Will Davis, D-East Hazel Crest, would both go a long way toward preventing TIF abuse.

Lawmakers would be wise to take this commonsense step toward reducing the role of TIFs in local government.