Financing Subsidies for Development
When a government body provides a subsidy to a developer, it must finance that payout,
usually through debt. Governments typically rely on three different methods to repay this debt - bonds, TIFs or STAs.
Municipal, County or State Bonds
- With a bond, the government (i.e., all taxpayers) assumes complete liability for non-payment of the debt.
And because bonds must be approved by the electorate, they are seldom used because voters usually vote them down!
Tax Increment Financing (TIF)
- Except for Arizona, every state permits TIFs.
- With a TIF, the developer escapes any liability for the debt when he sells the properties associated with
the TIF.
- Local governments use TIFs to subsidize developers in order avoid statutory requirements that require
voters to evaluate and approve the debt via referendum.
- TIFs use the general homeowners' taxes paid by new residents in the development to pay the debt.
- A typical TIF will impact taxes for 20-40 years.
- With a TIF, property owners in the new development pay taxes at the same rate as property owners in the
rest of the jurisdiction. However, a portion of the property taxes paid by those in the new development go
towards paying off the subsidy and associated financing. Consequently, TIFs are paid by diverting money that
would otherwise go into the general fund.
- TIFs mean that property owners outside the development pay both the cost of public services to themselves
AND a portion of the cost of providing services to the new property owners covered by the TIF. In other words,
current residents carry more than their fair share of the tax burden for public services.
- TIF example:
- Resident Lynn owns an existing house in a community.
- New resident Dave buys a new house in a new development within the community.
The development was partially subsidized by a TIF which diverts 50% of the owners' property
taxes to pay for the subsidy.
- Both properties are assessed for $400K.
With a $0.75/$100 property tax rate, the taxes for each is $3,000.
- Resident Lynn contributes $3,000 to the general fund.
- Resident Dave contributes $1,500 to the general fund and $1,500 to the TIF fund.
- If public safety (police protection), which is paid for out of the general fund, absorbs 40% of the
community's budget, then:
- Lynn pays $1,200 for police protection.
- Dave pays $600 for police protection, even though he receives $1,200 (or more) worth of
police protection.
- Both Lynn's and Dave's property taxes will likely go up in order to provide Lynn with the same level of
police protection that she had before the new development.
- It's not fair, especially to existing residents like Lynn!
- The interest rate on a bond associated with a TIF (or Special Tax Assessment - see below) can be more than
double the rate on a traditional municipal bond, for which holders enjoy income tax benefits and which is
secured by the full faith and credit of the local government. Taxpayers end up indirectly paying the higher
interest rate.
- TIFs should only be used for wise economic development of land that would not otherwise be developed.
Wise economic development means new businesses (not residential housing) that will promise new, high-wage jobs
for existing residents.
- Unfortunately, many governments use TIFs to subsidize development that is primarily residential.
TIFs for residential development are neither good public policy nor fair to current residents.
These TIFs are a form of socialism that benefits corporations and wealthy developers.
- Governments use TIFs to subsidize bad development projects because they know that such subsidies would
otherwise not survive the light of public and voter scrutiny.
- "TIF takes power away from long-time community residents and small businesses and puts it in the hands of
a much smaller group of political and economic interests often located outside the community."1
- If the developer benefiting from a TIF does not build according to schedule, then neither the assessed
value of the property nor the developer's taxes would increase enough to pay the debt incurred by the local
government. To protect itself from this event (that is, the risk of a bad bond rating if it defaults), the government
may arrange for a Special Tax Assessment (STA - see below) that would kick-in if revenues from the TIF are
insufficient. However, the STA must be carefully designed so that a few new homeowners are not burdened with
the bulk of the liability for payment.
- For more information about TIFs:
Special Tax Assessment (STA)
- In an STA, property owners in the new development pay additional taxes which are then used to pay for
debt and associated financing incurred as a consequence of the subsidy provided to the developer.
- A typical STA results in a substantial increase in the property taxes of the new residents over 20-40 years.
If these residents are not informed about the STA when they purchase their new home, they will likely exert strong
political pressure on government officials for tax relief, which would be paid for by increasing the property taxes
of older residents.
- STAs have the same effect as when the new residents assumed the costs up front.
It's not fair or wise for the government to burden its new residents with the costs of the subsidy and
free the developer from any of these costs
- the government should leave the job of apportioning economic costs within the private sector to
the private sector which will do it most efficiently
- With an STA, the liability for nonpayment of the underlying debt lies with the owner of the property.
1.The Right Tool for the Job? An Analysis of Tax Increment Financing, The Heartland Institute (2003)
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