Heller: Indiana’s Favor-Ridden TIF Districts

June 20, 2013

Heller

by Thomas Heller

Tax Increment Financing (TIF), a widely misunderstood economic-development tool in Indiana, operates something like a bank. TIF districts make investments in local public improvements (roads, etc.) hoping to attract follow-on investment from private companies. Often these improvements are financed by borrowing — that is, issuing bonds to be paid off by the growth or increment in the TIF district’s property values and the taxes collected therefrom.

Local governments in Indiana, most specifically redevelopment commissions, have been aggressive in using TIF districts for debt-financed development. In the five years ending in 2010, Indiana’s TIF districts sold $430 million in TIF bonds, placing the state seventh highest in the nation, ahead of Illinois, Ohio and Michigan. Indiana’s TIF districts expect to collect $580 million this year.

But a key assurance behind TIF has not been met here. Instead of protecting the tax bases of local schools, libraries and the city and county general-purpose governments, TIF districts work to drain them, causing higher than necessary property-tax rates — even on property beyond TIF boundaries.

Indiana appears unique in allowing the erosion of the TIF “Base” (one of two calculated parts of the total tax base within a district). The Base is supposed to continue producing revenues for school, libraries, cities and counties. The Base erosion occurs in a series of steps termed “neutralization,” the complexity of which acts to shield the Base erosion — and its adverse effects — from the view of legislators, journalists and the public.

In fact, a TIF district can work against a sound economic-development plan, eroding the Base and imposing tax increases beyond its boundaries. Worse, this erosion can hide a significant write-down of value on existing properties already within the district.

Some years ago I returned to my home state of Indiana —or, my friends say, fled the West Coast after years as a policy analyst there. I was flabbergasted to find two of the above described TIF districts in my Hoosier community. TIF districts in California had been recently banned by action of the state legislature. They were eating away at the Golden State’s budget, consuming $5.7 billion annually. The districts were a major contributor to California’s deficit because state tax dollars were passed back to local school districts to “make up” for their loss of taxable base to TIF districts.

Indiana TIF districts, by eroding the TIF Base and passing higher taxes onto property outside their boundaries, display similarities to those that almost bankrupted California. The similarity traces to a failed attempt at property-tax limits in 2002 now embedded in Indiana’s property-tax laws and known as the “Maximum Levy.”

The Maximum Levy created a tax limitation that adds to the traditional building blocks of any property-tax bill, i.e., assessed valuation and levy rate. Instead, it defines the tax limit of every local taxing district in terms of a six-year moving average growth in personal income.

The practical effect is continued growth in total taxes collected by local bodies even if the school, library, city or county local property-tax base declines. For any decline is simply “made up” by raising tax rates.

That’s what has been happening in Indiana’s TIF districts, which, when charted, display a Niagara Falls-like tendency to fully erode or zero out their Base. This, again, is the very Base TIF that was supposedly protected.

In my community, the Base of our TIF districts has eroded by 43 percent in seven short years. The redevelopment commission, though, is harvesting $6 million annually, an amount that owes more to capturing the eroded Base than to new development within the district.

Thanks to Base erosion and the way the Maximum Levy works, TIF districts can essentially print money by using property values they’ve expropriated from the Base and transmitting or exporting higher property-tax rates beyond the district boundaries. The bottom line is that much of the money TIF districts and redevelopment commissions have harvested isn’t money they have earned.

And there is another troubling aspect: The complexity and complicated math surrounding tax increment financing can allow behind-the-scenes manipulation of property assessments.

This seems to have happened in my Indiana community. The amount of tax base added by new private investments inside the TIF districts was accompanied by an almost equal reduction in tax assessments on previously developed properties. A 30 percent or larger write-down of property values was bestowed upon owners of older property within the TIF district. Those write-downs, however, weren’t extended to property owners elsewhere in the community. Instead, those owners received higher tax bills thanks to the higher tax rates resulting from erosion of the TIF Base.

Indeed, on close examination, TIF districts offer a shell game where assessments on the property of politically favored property owners are lowered while newly developed property in the district enters the tax rolls. These large write-downs and the erosion of TIF Base may not be felt directly by the county, city, library and schools; the maximum levy law immunizes them. Taxpayers who do not receive generous write-downs of their assessments, however, feel higher tax bills.

You should suspect that these workings of TIF could be found in all Indiana cities. Generally, the use of tax increment financing to pursue economic development has produced higher tax rates and higher tax bills on all those who aren’t politically favored.

Did I mention that TIF districts work something like banks? Inside them, some make deposits while others quietly make withdrawals. All the while, the town’s economic-development in-crowd is busy dreaming up yet more debt-financed projects made “affordable” by the magic of TIF, which, sadly, is nothing more than eroding the Base and passing higher taxes onto the unsuspecting.

Thomas A. Heller, of Columbus in Bartholomew County, holds a bachelor’s degree in economics from the Wharton School and a masters in regional science, both from the University of Pennsylvania. He was principal and founder of Regional Analytic Sciences in Seattle, Washington. He has held a wide range of positions dealing with state-level public policy, including those with the Washington State Department of Transportation, the Washington State Senate and Parsons-Brinckerhoff, an international transportation consultancy.



Comments...

  • Pat says:

    Excellent analysis. Thanks for this perspective.

  • Bryan says:

    Mr. Heller,

    Thanks for the analysis. I am a homeowner in Marion Co. but I live in the Washington DC metro area. I don’t have children that attend school in marion county period. In reviewing my property tax bill for 2013-2014 the percentages have changed dramatically. A %96.14 increase. This is a direct reflection to your articles dialogue, TIF.

    I wanted to ask a question that maybe you or anyone else may have not thought about. Is it possible to combat (^army retired) this injustice with a reverse engineering study? Clearly they are using data which to me, is fuzzy math.

    The Senate are looking at taking away the Homestead exemptions to offset this uneven break-even analysis. In fact, they have passed legislation language (HOUSE ENROLLED ACT No. 1072) to this effect.

    If you could expound any recourse of their philandering effects of homeowners outside these townships, much would be appreciated.

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