TIFs, Their Consequences, & The Need for a New Mindset, Often an Abused Slushfund

 

https://clevelandbrocks.org/2021/03/tifs-their-consequences-the-need-for-a-new-mindset/

Every decade or so conservative politicians and corporate interests, often the same thing, suddenly discover a new, or newly recycled, way to make money whilst claiming it’s in the best interests of the public. Weaponizing keywords like “market,” “lower taxes,” and “job creation,” they prey on the forlorn hopes of the many living in our country’s urban areas. This is why we’ve seen the emergence of TIF (tax increment financing) projects especially in the political realm.

In fairness, TIFs are not altogether black or white propositions. Their implementation is often complex, and even harder to explain in layman’s terms. However it’s possible they can be employed successfully and ethically, but only under the following conditions: 1.) the development wouldn’t take place “but for” the TIF and 2.) developers’ plans are part of a larger vision for refurbishing the area around the development, and not solely a corporate attempt to line their own pockets. And therein lies the rub, as this is infrequently the way they’ve worked in practice.

Condition #1 above is exactly why the Wolstein development in the East Bank of the Flats, one of the most desirable places to build in the entirety of Cuyahoga County, is so egregious. One can hardly claim the site wouldn’t be further developed, ‘but for,” the issuance of a TIF. TIFs, almost by their nature, create winners and losers, and in Cleveland they’ve led to a windfall for landowners; especially those owning and developing prime real estate. The Wolsteins among them. (For more background on this case specifically see Sam Allard’s piece in Scene, where he captures the moral indignation of many).

How Do TIFs Work?

Tax increment financing has been around since the 1950s when it emerged in California. Today, they’re put to use in nearly every state. Yet, over the last decade they have become something of a lightning rod. In Chicago, where TIF was employed frequently under former Mayor Richard Daley Jr, significant blowback to their usage, especially in well-to-do neighborhoods played a considerable role in Lori Lightfoot’s 2019 mayoral victory there as she harnessed the wave of anti-TIF sentiment. And California itself has passed legislation placing limits on the usages of TIFs to ensure they’re utilized in areas where a need actually exists. Individual states have some differing guidelines for implementing a TIF, but here’s how they work in Cleveland and Cuyahoga County.

• TIF districts are created by the individual city
  • Often situated in “blighted” areas
• The public improvements to be made with future TIF funds are established by a government entity
• Base property value is assessed and compiled
  • The tax revenue can be used to fund public infrastructure, compensate private developers for their investments, or provide collateral for bonds
• TIFs are used to offset the literal costs of building the development. For example, if a project costs $500 million, but its expected value when completed is only $300 mil., the TIF is being used to supply the extra $200 million. If, and when, the value of said development reaches that $500 mil. threshold, the developer would start paying the taxes at that time
• In Cleveland, TIFs are voted on by City Council and the Cleveland Municipal School District, but the final, actionable decision rests with Cleveland City Council
  • There are vagaries involved in this relationship involving CMSD not voting and what that means for the length and exemption amount of the TIF Cleveland City Council can offer
• Property tax amounts collected by jurisdictions won’t go up during the applicable TIF period, they’re frozen; but will after the 30 (or 60!) year period ends without adjustments for inflation
  • Extra revenue collected in property taxes is set aside for the previously designated projects
  • All growth in tax revenue during the TIF period–which is where the term tax increment comes from since it’s the incremental growth in tax revenue–is set aside and used to finance these projects
• Homeowner and resident taxes aren’t directly affected
• Developers use annual payments from TIFs to pay the debt service on the mortgage of the project

Drawbacks

• Inflation
  • Freezing property taxes or values for 30 years will have that money being worth less by the end of the TIF period
• Oversight/Transparency
  • TIF revenues almost inherently have less oversight
    • In Cleveland, as is too often the case, transparency took a backseat again in the Flats East Bank case this past December; the public didn’t know who the developer even was in this case until Councilmember Brian Kazy pressed the city’s Economic Development Director to somewhat sheepishly admit it’s “a collection of various LLCs that ultimately go back to the Wolstein Group”
  • Surely by sheer coincidence, developers make maximum contributions to councilmembers who have TIF zones in their wards. Surprise!