Why a Constitutional Amendment for Tax Increment Financing?

The Washington State Legislature’s special session will barely be over when their next regular legislative session starts next month. Among the many issues facing the legislature will be whether both chambers will muster the necessary a two-thirds vote to amend the Constitution to allow for Tax Increment Financing (TIF). As the opening of session approaches it’s worth reminding ourselves why TIF is such an important financial tool to support sustainable growth and effective transit.

Tax Increment Financing is a value capture tool that allows local government to borrow money to make infrastructure improvements and make payments on that debt from property taxes assessed on the increase in property value from new development. It’s a tool available to local governments in 48 other states (Arizona also doesn’t have TIF). Local governments can use TIF to invest money today in infrastructure that will pay for itself in the future. More after the jump.

The problem is that TIF doesn’t work in Washington. Washington’s constitution limits the way property tax is collected. We don’t have an ad valorem system of taxation, that is, one that is based solely on the assessed value of a property. Instead, we have a budget-based system that requires local government to develop a budget for operations then raise that amount from taxing all properties uniformly. To fix this peculiarity of Washington State’s tax law requires an amendment to the state’s Constitution where uniform taxation is enshrined.

Such a heavy lift politically (two thirds vote in each house and a vote of the people) needs some good reasoning behind it. Here are three big reasons we need TIF.

First, TIF allows local solutions that create jobs and support sustainable and livable density where we want it most, around light rail and transit. Right now the state is broke. We can’t expect much investment in new capital projects right now from the state. And that probably isn’t the best way to finance TOD projects anyway, at least ones that are intended to promote density around light rail. Successful TIF legislation would allow local communities, planners, and governments to make important infrastructure improvements on their own terms using local tax dollars.

Second, the implementation of the Growth Management Act continues to be about preventing sprawl, but it also needs to become about more than that. The positive side of prevention is health, and healthy growth means growing more dense in cities and around transit. Right now many neighborhoods and cities see new growth as an “impact,” something to fear. It isn’t. Density is good for us all by itself. But one way to combat the idea that density is bad is to do it right, and that means good infrastructure including sidewalks, parks, drainage, lighting, and even transit itself. Using TIF well would mean that all the “impacts” of new development could be offset with amenities built before and during the development of housing and retail.

Lastly, TIF can substantially and positively affect the price of housing. The mantra that dense housing is unaffordable is gradually becoming seen as the canard that it is. While housing price will vary from project to project, overall there are three things policy makers can do to reduce that price: build more housing, reduce the costs of housing, off set the price to consumers with a subsidy. Arguably, affordable transit is a subsidy that offsets the impacts of housing costs. A well-implemented TIF program could do the first two things on this list too, making development around light rail and other transit more feasible and cost effective. That means more housing supply that will have a salutary effect on housing price.

One thing that I can’t fully cover here, but some readers will be wondering about is housing price theory. As for the argument that “increasing supply will lower price,” density advocates should start using it more often in discussions about housing. I’ve written about this already. Lots of interlocutors will often point to a single unit in a dense development, mouth the monthly price, and then argue that density is not affordable based on a poor definition of affordability. We need to have these discussions a broader field than that.

Taken all together, the reasons we need TIF in Washington are local job creation, sustainable development of TOD, and better housing options. The beauty of TIF is that it won’t cost the state a dime. And a well implemented TIF program can help boost the economy, create jobs, and build more and better housing.

Comments

  1. Chris says

    The above article obscures how TIFs work. A TIF allows the city (and the developer) to borrow against the promise of expected tax increases resulting from future property appreciation to finance the initial catalyzing public expenditures. If these expenditures really work then you don’t need a TIF to do any of this. If the creation of a new park or a streetcar or streetscape improvements raises the assessed value of nearby property an entrepreneurial city can borrow the money (at lower interest rates) make the investment and reap the tax windfall. Arguably, Seattle has done just that with the South Lake Union streetcar. Thus, a TIF is not a budgetary tool, but a political one. Rather than convince existing residents that a particular public expenditure is a good investment it is simply assumed. If the TIF fails outright outright then, in theory the bond holders take a loss, but in practice many cities will probably bail them out anyway to prevent financial contagion. But, for most TIFs failure just means it takes a really longtime to pay off the bond. Eventually inflation alone (yes TIFs are often done in NOMINAL dollars) will generate enough increment to pay it off even if the public spending didn’t catalyzing a single house. However, “success” contains it’s own risk. I am a former Seattlite that currently lives in Atlanta. Atlanta now has 10% of its assessed property value under TIF including the largest brown field redevelopment in the country, Atlantic Station and more recently the linear park+transit+TOD redevelopment project called the Beltline. Google ‘em; they’re both quite ambitious. To the degree they succeed, and the jury is still out on Atlantic Station and the Beltline is just getting started, they create whole new neighborhoods that require city services, especially schools, but won’t provide any tax revenue until the bonds are paid off (often many years into the future). This might still be worth it if there’s a halo effect on properties beyond the TIF boundaries or because the city eventually gets the property tax but this discussion is often skipped because the TIF is often sold as free money. There is also a risk that TIFs may be created in anticipation of redevelopment that would have occurred anyway. On the other side of the freeway from Atlantic Station, the property owners in the existing Midtown neighborhood put up a number of privately financed office and residential towers and also volunteer to tax themselves an addition 3 millage points to fund the Business Improvement District which provides additional public safety and cleaning, streetscape improvements and built a number of pocket parks. Arguably, the city just gave money to a developer that would have built anyway. Or, alternatively, diverted growth away from an organic cooperative redevelopment process and handed it a single well connected developer. it may still have been worth it. The abandoned steel mill was a huge blight and its transformation may have revived the entire west side of the city, but this conversation never happened. Instead the TIF was sold as free money and the city surrendered a lot of revenue and control to an unaccountable developer.

  2. Mike H says

    Roger- Pardon my ignorance on the topic, but I was curious about your statement that Arizona does not have the TIF financing. During my time there, I can remember two instances of when (what was sold to the public as TIF) was utilized. This was for the construction of a football stadium in Glendale and for downtown revitalization in Tucson. In both cases, the TIF allowed the local jurisdiction to take 1/2 of the sales tax normally sent to the state and use it for the proposed purpose. Is this a similar type of TIF or a completely different animal? Thanks.

    • says

      Hi Mike,

      Last I checked they didn’t have proper TIF. Often things can be billed as TIF that really aren’t.

      What you are describing is true TIF in that it isn’t value capture based on incremental increases in property tax. There are schemes in Washington that are similar that are based on a combination of local sales tax and what amounts to a refund on state sales tax.

      These things are all efforts to capture a revenue source to pay off bonds in states that won’t or can’t use property taxes for this purpose.

  3. Andrew Smith says

    You’re right about housing prices and density, but I really wish you wouldn’t just blindly equate these things with “heights” because that is an entirely different conversation, as I showed last week. In your post on “housing price theory” you show a picture of a building that’s a significant amount less dense than your typical 85′ Ballard development.

    If density advocates want to be taken seriously, then we need to advocate for density, regardless of how tall the buildings are.

  4. Gary says

    A better idea is a state bank. Then the city can borrow the money from the state bank instead of going to the bond market. The state can set the rate at whatever they think the project will pay off at. ie, no chance, high rates, it will work, low rates. But in all cases the cost of borrowing the money goes back to the state instead of to bond holders and bond salesmen.

    • Bernie says

      A better idea is a state bank.

      But the State doesn’t have any surplus money to lend out. It would have to sell bonds which means the interest goes to bond holders anyway plus paying for a whole new level of bureaucracy. Some areas might get better rates from being in the pool but that means other areas that have managed their finances well and are lower risk are subsidizing them.

      • Gary says

        Wait! You don’t understand how money is created by banks. With fractional lending a bank can lend out $10 for every $1 in capital. Put in $1 of taxes, borrow $10. The state already uses BofA to store it’s money in, all of that is considered an asset by BofA which then can lend it out at 10x.

        Yes a state bank does not have unlimited capacity to lend, but the longer it is in business the more it can lend as the debts are repaid, and the interest paid on those debts becomes asset which enables future lending.

        And currently banks can borrow from the Fed at .01%, so if they lent money at say 3%, that’s a 300x return on investment. Something that goes to the tax payers of WA not executives of BofA, or Goldman Sachs.

      • Bernie says

        It’s true that density doesn’t lower prices. I think there’s some evidence to draw the opposite conclusion. But supply isn’t something that can be easily manipulated. In fact government attempts to create affordable housing via Fannie and Freddie are in large part responsible for the housing bubble and subsequent downturn in the economy. The main driver of housing prices is demand. Houses aren’t a consumable. When demand drops the existing houses don’t go away.

      • Matt the Engineer says

        We’re getting far off track here, but supply is certainly easily manipulated. Every square foot of Seattle has tight rules about exactly what you can build. This is all manipulation of supply – just in the wrong direction.

      • Bernie says

        You can do whatever you want to zoning but unless there’s demand nobody is going to build. There is plenty of highrise zoning in and around DT that have projects already planned (in some cases started) that are on hold because supply exceeds demand. The banking laws manipulated demand by making houses more affordable (lower payments, not lower prices). It backfired and the collapse in housing prices has sent the whole economy into a tailspin. The best way to make housing more affordable is to increase wages not decrease value.

      • Matt the Engineer says

        Increase wages? Why didn’t you say so. I’ll arrange for that to be done next week. Would you like anything else while I’m at it?

      • Bernie says

        A decrease in taxes is an increase in your take home pay. Of course for government to decrease taxes it has to either cut spending or, in the case of the Federal government deficit spend. But at the State level one important thing when trying to attract business is a favorable tax code. Washington has done well in attracting good paying jobs. But we’ve also lost out on things like the second 787 line. Blue collar jobs are hardest hit; like the latest mill closure in Everett. That may drive down housing prices but it leaves a lot less people that can afford housing.

      • Matt the Engineer says

        That brings up another point. Increasing wages alone (even by cutting taxes in our dirt-poor income tax free state) also increases housing prices. This is simply because you’re making it more desirable to live here (well, maybe not in the case of tax cuts – who wants to live somewhere with terrible roads and schools?). The only real way to improve affordability is to add supply.

      • Bernie says

        Matt, you’re assuming that the increased demand would drive up prices more than is possible for any given increase in wages. That won’t happen because, for one thing not all of the wage increase will be directed to housing. Most people will be happy to keep the arrangement they have. Some will move “up scale” freeing up starter homes. Some people will sell and put profits back into the economy. If you really believe that wage increases will always just be eroded away by it’s inflationary effect then there’s really no hope. A house/condo is the largest investment most people will ever make. It’s a good thing when the primary investment the majority of the population owns increases in value.

        State spending of tax dollars is an investment. Like any investment it needs to be used wisely. I don’t think the housing market is fundamentally broken. I believe it’s going to take several years to unwind what were originally well meaning attempts to make housing more affordable. However, on the upside this is a once in a lifetime opportunity for people looking to make the leap from renter to owner.

      • Matt the Engineer says

        With a fixed number of homes, you have a fixed number of people that can afford those homes. Double everyone’s salary and you still have the same number of people, they’re just paying more in rent/mortgage. The person a little bit too poor to live in the city will have double his salary too – and this is who the poorest city dweller is competing with. If she wants to keep living here, she’ll have to pay more than that first poorest person can afford – that’s all of the extra salary she’s been given.

        This is why housing in NYC or Tokyo is expensive. They’ve capped their supply, but not their wages.

      • Christopher Stefan says

        In fact government attempts to create affordable housing via Fannie and Freddie are in large part responsible for the housing bubble and subsequent downturn in the economy.

        Not really, the causes are complex and multifaceted, but Fannie and Freddie had little or nothing to do with it. Otherwise why would there have been a similar housing bubble in countries with no Fannie or Freddie.

        I get really tired of people repeating this myth along with the myth the CRA was in any way responsible for the housing bubble or the financial crisis.

        A much more direct cause was the unwillingness of the Fed to increase interest rates when they saw a bubble forming. Greenspan did pretty much the same thing around the Asian currency crisis and the dotcom stock market bubble.

        Easy credit and too much money in the economy during a boom tends to create asset bubbles and inflation.

      • aw says

        “With a fixed number of homes, you have a fixed number of people that can afford those homes. Double everyone’s salary and you still have the same number of people, they’re just paying more in rent/mortgage. The person a little bit too poor to live in the city will have double his salary too – and this is who the poorest city dweller is competing with. If she wants to keep living here, she’ll have to pay more than that first poorest person can afford – that’s all of the extra salary she’s been given.”

        Matt, that doesn’t make any sense. Living spaces are not fungible. Housing prices don’t rise linearly with demand, and people evaluate a property with more in mind than just price. If there are more people than apartments, then people will make accomodations: find a roommate or move in with the parents (or the kids at the other end of the age specturm).

      • Matt the Engineer says

        [aw] Sure that happens. But I’d argue that it happens when affordability decreases, not necessarily when prices increase. Think of someone with a high wage that lives in a high value area.. Do they have a roommate?

      • Bernie says

        it happens when affordability decreases, not necessarily when prices increase.

        Yes! Prices increasing doesn’t mean housing is less affordable. Affordability has to do with inflation adjusted wages, interest rates and prices. Right now we have an unprecidented situation where mortgage rates are at historic lows and prices are depressed. Normally prices move opposite of interest rates.

        With a fixed number of homes, you have a fixed number of people that can afford those homes. Double everyone’s salary and you still have the same number of people

        Exactly! Same demand except it’s for higher end housing. High end housing is what all developers strive to build. This frees up lower price units. Yes, there will be people moving into the city that previously couldn’t afford it but isn’t that what you want to increase density and decrease sprawl?

        When real estate prices are falling buyers are scarce. Not everyone who lives in a house/condo/apartment owns it but every house/condo/apartment is owned by somebody. If you want to encourage investment in the creation of more housing the last thing you want to do is drive down values!

      • Bernie says

        Not really, the causes are complex and multifaceted, but Fannie and Freddie had little or nothing to do with it. Otherwise why would there have been a similar housing bubble in countries with no Fannie or Freddie.

        What other countries had a housing bubble like we did here in the US? Not in semi-socialist Canada where lending laws are much stricter. Mexico has problems but that’s because of violence and that resort properties are tied inexorably to the US economy and it’s housing market (buy a ski condo in Colorado or beach house in Mexico). The collapse was a series of things but the whole house of cards was built on junk loans banks were able to package and sell started by loose lending practices at Fannie and Freddie.

      • Matt the Engineer says

        I actually agree with most of what you said. Except if the goal is to add supply, and it’s adding supply that drives down prices, then where’s the problem?

      • Bernie says

        if the goal is to add supply

        That shouldn’t be the goal. That’s a market distortion that will ultimately come to no good. The goal should be to meet demand.

        adding supply that drives down prices, then where’s the problem?

        Artificially adding supply not supported by demand (demand, not I want a pony) drives down prices and causes real investment to dry up and lenders to stop lending. Lenders don’t want to write a mortgage if they think government intervention is going to devalue what they are lending on. Like I said in another post, whether or not you rent or own somebody has to buy that property. Few investors have the balls to step into a declining market. Warren Buffets are far and few between.

      • Matt the Engineer says

        That’s a bit of a straw-man argument. You’re generally the one that’s in favor of messing with the market – by keeping our zoning rules. My consistant push has been to reduce zoning regulations to allow the market to function. The only artificially added supply I know about is some built by the city, which is probably too small in scale to affect the market much.

      • Bernie says

        messing with the market – by keeping our zoning rules.

        Maintaining the status quo isn’t messing with the market. People buy into a neighborhood because of price yes but also it’s character. Zoning is in place to protect that character. That’s why there are restrictions on building strip clubs next to elementary schools.

        My consistant push has been to reduce zoning regulations to allow the market to function.

        I don’t think so but maybe I’m wrong. It seems what you’re pushing for is a very limited change to try and recover extra value from the siting of the Link station. A general push to reduce zoning would allow developers to willy nilly build apartments on cheap land far from city centers. It’s zoning laws that force developers to build a certain ratio of residential in exchange for allowing greater commercial development. That’s what Bellevue did with the Spring District and what Redmond has done with the Group Health site master plan. The root problem is the station is in a goofy spot that will never support the ridership projections. Even if a 1,000 apartments go up only about 25% of the occupants are likely to primarily use transit. The other 75% will be driving cars in an area that isn’t well suited to absorb it.

      • Mike Orr says

        “What other countries had a housing bubble like we did here in the US?”

        UK, Spain, Ireland.

    • Mike Orr says

      If the price is high, it must be popular. That’s the fundamental factor. If more cities had Chicago-like density and transit, there wouldn’t be so many people competing to live in New York City, and prices in Manhattan would drop. The reason dense areas are expensive is that zoning has prevented them from being build where they would be useful.

      • Bernie says

        The reason so many people want to live in New York is because it’s one of a handful of cities world wide that control things like investment banking, advertising, global trade, etc. Building lots of density somewhere else isn’t going to lure people from NY. People are there because of their jobs. Some love the city life; others retire to a golf course community in Florida.

      • Mike Orr says

        Some people live there because they like to walk to everything, have 24 hour subways, enjoy the tall buildings and cultural activities, and be able to visit 7 million potential friends in the city and 25 million in the surrounding area without a car. They take whatever job New York is offering or are self-employed. They have nothing to do with the finance industry. These are the people who could move elsewhere if another city offered a fraction of that.

      • Andrew Smith says

        Being productive doesn’t necessarily mean being “less good” it means your service being less valuable.

        The very very best bucket drummer in the world get paid less than the worst CEO, for example.

    • Mike Orr says

      Also, everyone can’t expect a view overlooking Central Park. Those units will always be more expensive than those a few blocks away or in Brooklyn.

  5. ryan says

    Whenever TIFs make the news in other cities it’s usually about how it’s robbing schools of funding or developers screwing over cities.

    I’m not wholly against the idea but I’d have to be convinced that this sort of thing can be soundly structured.

  6. Andrew Smith says

    One thing that’s missing in this is the idea of “induced demand”, which I’m not sure takes place here, but an increase in the amount of a certain type of housing can induce other people to come which will increase demand and thus increase prices. This is a larger deal with suburban development than with most apartment developments, but you can essentially define much gentrification thusly.

    http://en.wikipedia.org/wiki/Induced_demand

    In the Roosevelt case, the demand is going to stem from the transportation system which is a huge amenity, but sufficient amenities in other areas could increase demand in those areas and increase price.

    • Matt the Engineer says

      There is a fundamental assumption we should all use: no matter what we do, we want to end up with a better city. Yes, this makes it more desirable and we need to increase supply faster than we increase demand. But just as it’s a terrible idea to dump trash in the street to lower prices, it’s a terrible idea to not add ammenities because prices will go up.

      • Andrew Smith says

        Yes, You are right. I am just saying that the rules of supply and demand are not as simple as “increasing supply will lower prices”, because increasing supply can increase demand.

      • Matt the Engineer says

        I don’t like the framing of that statement, if we’re trying to get to affordability. Increasing wages can increase demand, and increasing density can increase wages, but then we’re looking at increasing both sides of the affordability equation.

      • Bernie says

        Increasing wages can increase demand,

        Increased wages I guess would increase demand as people currently sharing a housing unit because of economic necessity would start looking for their own place. But typically the higher earners are the first to benefit and they are just going to be looking to move up scale which frees up lower cost units.

        increasing density can increase wages

        How? It increases cost so employers hoping to attract the best and brightest may have to pay more. But I think the increased density only occurs because those jobs existed first. You can’t just build housing and expect “if you build it they will come”.

      • Andrew Smith says

        t increases cost so employers hoping to attract the best and brightest may have to pay more.

        That’s not right. Employers pay more wages when people are more productive, it has nothing to do with cost of living. If McDonald’s employees get paid more in Manhattan, it’s because those stores are way more productive than the one in your neighborhood. And there’s a reason why the McDonald’s in the Bronx doesn’t pay more.

        Which is all to say, that this makes no sense. Employers don’t pay people more just because costs are more, they pay more because they make more money from those employees. That’s the only thing that makes any sense. It’s not as if Google gets to charge more for its software because they make it in Mountain View instead of Redmond.

      • Bernie says

        Employers absolutely have to pay more to attract the same level of worker in a market that’s more expensive to live in. Or are you going to tell me firefighters and police officers in Spokane get paid less because they’re inferior to those in Seattle?

      • Matt the Engineer says

        To be fair, from a purely economic standpoint, employers pay employees as little as possible (to not only hire them, but keep a low turnover) despite profits. If living costs rise, pay needs to rise as long as a company can do so profitably or the employees will go elsewhere.

      • Andrew Smith says

        Bernie, that’s not what I said. Firefighters in spokane get paid less because they are less productive. In Spokane, you cannot possible save, say, the columbia tower. The average house is worth that much more in Seattle than in spokane, so when a fireman saves a house, he saves a more valuable house, which makes his services more valuable, hence more productive….

      • Bernie says

        And police protection for rich people is more valuable than in poor neighborhoods because they have more valuables to steal, I get it. It has nothing to do with offering a wage adjusted to lessen the gap in disposable income when competing for the same skill set.

  7. Brent says

    I’m not a fan of TIFs, as they tend to contain the increased taxes within a well-to-do area to be used only in that well-to-do area, instead of helping the general public, including poorer neighborhoods.

    A slightly better approach is Public Improvement Districts, where the property owners in the area agree to pay a higher tax in exchange for more local service. So, as value goes up, the increased value helps the general fund, but expensive local improvements still happen. One perverse incentive to watch out for though, is opposition to general tax increases if people in the well-to-do PID see more value from the PID than from the general fund’s usage.

    I’m not a fan at all of using TIF or PID money for TOD, when the biggest block is not lack of financing, but overly-stringent zonings (e.g. Pioneer Square, Roosevelt, etc) that legally prevent TOD from getting built. Get the zoning code out of the way before throwing money at TOD. (And no, I am not against zoning. I am against poorly-thought-out zoning, such as Pioneer Square and Roosevelt.)

    • Gary says

      PID’s get you SLUT’s. A developer has an idea, buys up the property and votes in an improvement. 50% of the cost is paid by the rest of us.

      It’s not terrible, but it has a tendency to get things done piecemeal and not to finish anything. And things like the SLUT end at the end of the developer’s properties, and not at a logical place like the UW.

      • Gary says

        In a perfect world, we’d have “The Commons” a world class park in the city and the street car, but instead we have office complexes, Condo’s and a street car and a small park down by the edge of the water on Lake Union.

      • Brent says

        In a perfect world, streetcars would run along dense corridors, not parks.

        In a perfect world, streetcars would have restricted right-of-way, traffic signal priority, and would be center running. The SLUT involved several big mistakes that had nothing to do with the PID boundaries.

      • Gary says

        The “mistakes” for the SLUT were made because 1/2 the funding came from 1 property owner who said, “do it my way, or not at all. And I’ll take my money to some other place that will appreciate me more.” The Seattle City Council would have hung the street car from overhead tracks if that’s what he wanted.

  8. G-Man (Type E) says

    It’s funny to see TIF promoted as a tool for density. When I first learned about it in planning school, my professor who helped establish it in Wisconsin went off about how it had been consistently abused by cities to eradicate “corn blight.” The law required a finding of blight in order to create a TIF district but was too loose about how the borders could be drawn and shockingly, many corn fields were included in TIF districts. That’s because if the increment on a redevelopment parcel looks good, the increment on virgin land is oh so much tastier. mmm mmm mmm You better put a good leash on this dog before you open the cage and let it piss all over our forests and valleys.

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