Creation vs Capture--Evaluating the True Costs of Tax Increment Financing

Creation vs. Capture:Evaluating the True Costs of Tax Increment Financing

Sherri FarrisSenior Research AnalystCook County Assessor’s OfficeNovember 2008

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Executive Summary

Tax Increment Financing (TIF) is a tool for promoting economic development, available toindividual municipalities but requiring the approval of state legislatures and adherence to statedetermined standards. The use of this tool has provoked controversy because it impacts the property tax base that local governments and schools rely on for funding, as well as tax rates andthus property tax bills. This report focuses on understanding TIF in Cook County, and particularly Chicago.The use of TIF in the City of Chicago has increased dramatically over the last two decades and both a substantial portion of the property tax base and the land area of the City are now containedwithin TIF districts. Combined revenues to TIF districts total more than spending on somecategories in the City’s official budget. Despite the extensive use of TIFs there is little empiricalevidence of the effectiveness of TIFs in promoting economic growth, while there is someindication that they benefit disproportionately from already occurring growth.Understanding how TIF works is important because it has an impact on tax bills for individualtaxpayers, not just those within a TIF district, but all taxpayers in the City and Cook County.Because TIF keeps a portion of the property value out of the general tax base, tax rates calculatedusing the remaining base are higher then they would be otherwise. This is true to the extent thatsome or all of the property value growth in TIF districts would have happened without the TIFactivity. It is reasonable to assume that at least some growth would have happened if no TIFshad been created, which means that tax rates and therefore taxes are higher than they would have been without TIF.The effect of TIF on the tax dollars that each taxing agency collects is of less significance thanthe effect on taxpayers. Each agency submits a levy request for property taxes, which is divided by the available tax base to arrive at the tax rate necessary to provide that amount in taxrevenues. The levy does not change if the base is lower because of TIF. This does not mean thatTIF cannot have an indirect effect on the ability of taxing agencies to increase their levies – any pressure on the property tax in the form of higher taxes contributes to the difficulty of increasingthe tax.As of the Cook County Clerk’s 2006 report there were 378 TIF districts in the County, 140 of which are in the City of Chicago.

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TIF districts now comprise approximately 26% of the City’sland area and almost a quarter of the total value of commercial properties is in TIF districts andtherefore not included in the general tax base. Taxes to TIF districts in 2005 totaled $386.5million and in 2006 this increased by almost 30% to $500.4 million. This is more than the City budgets for the Department of Streets and Sanitation, yet the amount does not appear in the budget or any easily accessible public documents.The earliest Chicago TIF district, the Central Loop, was authorized in 1984. It is scheduled toexpire at the end of 2008, which would return $2 billion in Equalized Assessed Value (EAV) to

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This is the latest full report of equalized assessed values available, fromwww.cookctyclerk.com/sub/TIF.asp. Asof the 2007 Annual Reports submitted by the City to the State Comptroller there were 157 districts in Chicago.

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The LaSalle Central TIF was authorized in 2005, removing $153 million in EAVfrom the tax base in just the first year. The LaSalle TIF collected $9.6 million dollars in 2006 – before any redevelopment activity has even begun.It is true that TIF can stimulate growth and to the extent that TIF districts increase propertyvalues, they provide a long-term benefit to the City and taxpayers. And while taxes are onlyhigher due to value growth that occurs within TIFs but is not caused by TIF redevelopment, it isalso clear that there can be substantial property value increases erroneously attributed to TIF.More districts should not be created without first gaining a better understanding of theeffectiveness of TIF and making TIF fund expenditures more transparent.The purpose of this paper is to illustrate both the difficulties in determining the effectiveness of TIF and the importance of considering its costs and benefits as an economic development tool.After a brief introduction to TIF generally in all states and to the specifics of its application inIllinois, the paper goes on to discuss the mechanics of TIF operation in Cook County andChicago, and how it interacts with the property tax system. We then offer a review of TIFdistricts in Chicago, including TIF revenues, expenditures and redevelopment activities.The burden as well as the administration of the property tax has recently been the subject of much scrutiny, particularly during the rapid rise in residential property values and the currentmarket slowdown. In spite of this intense public scrutiny the effect of TIF on tax burdensreceives relatively little attention. The goal of this paper is to focus attention on this important part of the property tax system and to emphasize its effect on taxpayers, to make clear thenecessity of measuring the effectiveness and cost of TIF.

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Until September of 2008 it was unclear whether or not this TIF will be renewed, but the City of ChicagoDepartment of Planning and Development has announced that they will allow it to expire as scheduled (Crain’sChicago Business, “Daley letting huge Loop TIF die”, Greg Hinz Sept. 24, 2008).