“City Council Approves Multi-million Dollar Financing for New Development Project,” is a common headline in many communities throughout Wisconsin. Generally, the headline is referring to the approval of a large commercial building or office park that received tax incremental financing (TIF) with the article containing perspectives both in favor and against the use of TIF for the project. Many times, the information criticizing the use of TIF is inaccurate and fails to recognize the many hours of financial analysis spent by local officials and their consultants in examining the financial benefits and risks associated with the project.
To help better understand how TIF has been used as a successful economic development tool in Wisconsin, this article provides an overview of TIF, the success of TIF in Wisconsin, and common myths and facts surrounding the use of TIF.
What is TIF?
TIF is a method of financing that generates tax revenue to be used toward funding infrastructure and development. TIF is the most effective tool Wisconsin cities and villages have to spur economic development and job creation. Municipalities have been using TIF successfully since 1975. The TIF process allows a municipality to pay for public improvements and other eligible costs within a designated area, called a tax incremental district (TID), using the future taxes collected on the TID’s increased property value to repay the cost of the improvements. The rationale behind TIF is that public investment will promote private development, jobs and tax base growth that would not otherwise occur absent the TID.
Wisconsin TIF success
TIF has been an important economic development catalyst in Wisconsin. In fact, it is one of the only tools Wisconsin communities have to promote job growth and attract new businesses. Unlike Illinois, Wisconsin does not allow local communities to use incentives such as tax abatement to attract companies to locate in the state. Without TIF, local communities would have an even more difficult time competing with communities in other states and countries for economic development. Fortunately, Wisconsin communities have had tremendous success with TIF, generating economic development, creating jobs and increasing the tax base.
- As of August 2015, there were 1,128 active TIDs in Wisconsin. Since inception, these TIDs have generated a combined increment, which is growth in property value, of over $16 billion or $14.4 million per TID, with the average TID age being 11.93 years.
- The average TID active in 2015 added $1.2 million to the tax base per year since its creation. This figure represents a tax base generated within TIDs and does not account for increases in value in neighboring areas occurring because of the TID’s growth.
- Growth occurs at a faster rate in TIDs. From August 2014 to August 2015, the total equalized value of all active TIDs increased by 6.42 percent. In comparison, state equalized value as a whole increased in value by only 2.42 percent.
- The majority of TIDs have sufficient increment to pay off their project costs. Of the 1,128 TIDs in 2015, only 5.5 percent were distressed and less than 1 percent were severely distressed. Only 5.4 percent of TIDs in 2015 were decrement TIDs, which are valued at less than 90 percent of the TID’s base value in 2014 and in 2015.
- In 2015, 30 TIDs were terminated after generating $445 million in incremental value during their lifetimes. The numbers for 2014 are very similar: the 31 TIDs terminated that year created a combined $485 million in increment.
- Since 2000, 447 TIDs have been terminated in Wisconsin, adding nearly $9 billion of new value to the tax base.
TIF: Fact vs. faction
Despite its proven track record, TIF continues to have detractors. Some critics claim that TIF promotes urban sprawl by allowing greenfields to be more easily developed. Following are a few common myths and facts about how TIF can be used as well as TIF impacts on communities and taxpayers.
Myth: TIF is “corporate welfare” for developers.
Fact: TIF is used to fund public infrastructure and other project costs necessary to build capacity for private investment that otherwise would not have occurred. The vast majority of TIF spending goes toward public improvements such as constructing roads and water mains or demolishing abandoned buildings.
Myth: TIF is a tax break for businesses.
Fact: Property owners within a TID pay the same tax rate as everyone else; the only difference is that some of their taxes go toward paying TID project costs.
Myth: TIF harms school and county tax revenues.
Fact: School districts are not adversely impacted by TIDs since they are often compensated for the loss in local tax revenues through increases in state aids. When an area is designated as a TID, the property value within that area is determined and becomes the TID’s base value. Schools and counties continue to receive their standard share of tax revenues on this base value. TIDs receive no tax revenues from this base value. The only tax money that goes toward the TID comes from taxing the growth generated by TIF-funded projects. When a TID’s project costs are paid off, this new tax base is opened up to the schools and county, which are then able to benefit from increased tax revenues that would not exist without TID funding.
Myth: TIF is used to fund speculative, high-risk development projects.
Fact: TIF can only be used for projects approved by a community and only after a local joint review board (JRB) — which consists of members from the local school district, technical college and local officials — determines that the development would not happen “but for” the assistance of TIF. If the development project can proceed without the use of TIF, then the JRB must deny the TIF request. Moreover, even if the proposed development project satisfies the “but for” test, the JRB must determine, after studying the financial risks and benefits, that the proposed project would be beneficial to the community.
Myth: TIF promotes urban sprawl and greenfield development.
Fact: Through land-use planning and regulations, local officials decide how and where a community will grow. TIF is not land use or type of development. TIF is merely a financing tool to fund infrastructure for economic development activity.
Myth: Municipalities try to keep TIDs open as long as possible.
Fact: Municipalities are motivated to close TIDs as soon as the TID project costs are paid off. Municipalities are unable to use tax revenues from the TIF value increment on anything other than TID project costs until after the TID is closed. TIDs can be open for a maximum of 27 years or longer in certain limited circumstances, but the average TID life of all TIDs terminated from 2000 onwards is only 16.3 years.
For more information on TIF, contact Tom Larson at [email protected].
Tom Larson is Senior Vice President of Legal and Public Affairs for the WRA.