New Faces of TIF

(from Maine Townsman, February 2010)
By Lee Burnett

At a time when most state and local officials are scrambling to find ways of stimulating economic activity in Maine, a few of the people very knowledgeable about local government’s largest economic development, property tax incentive program – tax increment financing (TIF) – are calling for a reevaluation, or at least a more complete accounting, of it.

The new scrutiny is being driven by two factors. The first is the TIF-ing of large wind farms in the Unorganized Territory (UT), which has led to the bizarre prospect of spending large sums of tax money in the most remote regions of the state. The second is the growing, sometimes controversial tax shift that comes from the cumulative effect of TIFing hundreds of millions of dollars worth of property over the past two decades.

Sen. Richard Nass, R-Acton and the senior Republican on the Taxation Committee, has waged a lonely fight against the expanding use of TIFs. And, Sen. Peter Mills, R-Cornville, a tax expert, and Majority Leader John Piotti, D-Unity, tried to redirect the tax benefits of wind farms to a regional level, but ran into constitutional and political problems. Meanwhile, officials at Maine Revenue Services are airing their view that the costs of the TIF program have been downplayed and should be more broadly understood by voters.

But these voices have yet to gain much traction. The TIF program remains a popular if not indispensable economic development tool at the local level. So popular, in fact, that the Maine Legislature this year made Maine the first state to allow TIF money to support transit service.

Transit

Much to many people’s surprise, the Maine Legislature in 2009 extended use of TIF funding to support new or expanded bus service, van service, ferry service or bicycle-pedestrian infrastructure. Even the legislation’s leading proponent, South Portland Planning Director Tex Haeuser, professed to being “a little bit surprised” that the bill passed.

“People seem to think it fit – for environmental reasons, for transit reasons, for a lot of reasons,” he said. “I think they [legislators] saw that it could be used in different parts of the state – for van service, ferry service. It wasn’t just bus service.”

Generally, a transit TIF is part of a larger downtown redevelopment strategy of clustering a mix of housing, offices, and retail shops within walking distance of bus and train service. It is already happening without TIFs in places like Saco Island in Saco and Maine Street Station in Brunswick. To facilitate more of that development, South Portland and Orono are now considering implementing transit TIFs.

The way it works, a community designates a zone or corridor served by – or projected to be served by – transit. As development or redevelopment within that zone increases property values, a portion of the additional tax dollars generated by those investments are segregated and directed to support transit service. The TIF money can be used for capital expenditures and, for the first time, it can be used for operating expenses, e.g. bus drivers’ salaries.

South Portland has appointed a committee to consider how to implement a transit TIF, according to Haeuser. It could be used to extend a bus route or to reduce waiting times on existing bus routes, he said.

“To an extent, this is looking ahead. An energy shock could be back. If it does, there could be more interest in this,” he said.

Nass argued unsuccessfully against extending the TIF program to transit, partly on the grounds that using TIF money to support non-profit organizations’ salaries – rather than infrastructure investments, private sector jobs or economic development initiatives – represents “a significant departure.” Nass says the TIF program is being extended into areas where it “doesn’t fit” and it is distorting the state’s revenue sharing formula. More on that later.

Wind Power

A bizarre situation is developing around the TIF-ing of wind farms in the 10 million acres of northern and eastern Maine where there is no municipal government and where tax rates are already among the lowest in the state.

To begin with, it’s highly debatable whether property tax breaks are even necessary inducements for wind development. Wind development already receives substantial tax advantages from the federal government. Nass, as staunch a conservative as there is, says taxation of wind power makes sense. “No I’m not against taxing them, these are huge projects,” he said. The necessity of property tax breaks is certainly undercut by First Wind’s decision to apply for a TIF from the Town of Freedom after it had constructed three turbines on Beaver Ridge. (The $10 million investment lowered the town’s mill rate from $17 per thousand to $14 per thousand, according to Selectman Carol Richardson.)

The merits of wind power TIFs aside, consider how the TIF mechanism is working in the unorganized territory (UT). Washington County Commissioners two years ago TIFed the $65 million wind farm on Stetson Mountain, giving back to developer First Wind $5.6 million in property tax revenue over 20 years through a “credit enhancement” agreement and dedicating the remaining $3.8 million for economic development. (County commissioners serve as de facto municipal officials for the purposes of the TIF program in the UT.) That gives Washington County Commissioners about $190,000 a year to spend on economic development projects in the woods and wetlands of the most remote regions of the state.

“How many snowmobile bridges do we need?” is the mocking refrain that has arisen since then.

“It doesn’t make sense,” said State Sen. Nass. “You’re putting a whole pile of money into an area where no one lives.”

Understandably, Washington County Commissioners opted to spend the TIF money on economic development in Eastport (located in Washington County, but outside the UT), reasoning that money spent there would benefit the most people. But those plans are on hold due to an opinion from Maine Attorney General’s office that the Maine Constitution requires that property tax receipts in the UT must be spent within the UT.

Piotti and Mills pushed to exempt wind power in the UT from property taxes altogether and instead to impose a more broadly usable excise tax on wind power in the UT. The tax would be proportional to the amount of power generated and would be backloaded so it is lightest during the early years when a mortgage is being paid off, explained Mills. But their idea ran afoul of another opinion of the AG’s office – that constitutional fairness dictates the taxation of a particular activity should be uniform regardless of its location. In other words, if an excise tax is substituted for property taxes on wind power in the UT, it should be the same on wind power in organized towns. Mills favored a constitutional amendment to change that, but the wind industry opposed it and Piotti opted not to pursue it, said Mills. “We don’t have a solution. The constitutional constraints are pretty awful,” said Mills

So the status quo continues, barring the UT gateway communities of Rangeley, Jackman, Greenville, Millinocket, and the like, from benefiting from wind power in their backyards. As Mills said he noted in a recent talk to residents of Jackman. “You could have the horror show where Plum Creek leases Johnson Mountain to a wind power developer. You folks in Jackman can look at the turbines but receive absolutely none of the tax benefit, not even any of the power.”

Tax Shift

TIFs are now among the biggest economic development programs in the state. Their use has tripled in the past decade, climbing from $18.6 million in 1999 to $54.4 million in 2008, according to Maine Revenue Services. The TIF program is ten times as big as the state employment tax rebates available under the Pine Tree Zone program and many times larger than the CDBG program. The TIF program’s only rival in size is the $55.5 million BETR/BETE programs for business equipment tax exemptions.

The expansion of the TIF program has coincided with a misperception that the program is painless and cost free, say critics. First some background.

Ordinarily, as the tax base of a community grows, it lightens the relative tax burden on everyone in that community. (Some compensating factors kick in that slightly offset the lifting of the burden – such as a higher county tax, less state aid to education and less municipal revenue sharing – but this is how the state’s imperfect “share-the-wealth” tax system is supposed to work. As the wealth in your community increases you get less state aid.)

By contrast, a TIF “shelters” a new commercial investment from the usual tax consequences. In essence, the new valuation is taken off the state’s books so when a new business expands the tax base it doesn’t penalize a community in loss of state subsidy. Think of a TIF as a tiny short circuit in the functioning of the subsidy formula. It makes it possible for a community to experience only the flow of new tax money in and not the ebb of reduced state aid out. But someone pays when a community retains state aid that should be reduced and that someone is every other community in the state. In wonk-speak it is called a “tax shift.”

The Maine Revenue Service has tallied up the tax shift and produced a spreadsheet that Nass calls “a pretty revealing document.” Maine Revenue Services is quick to point out an assumption behind the tax shift – that all of the TIFed projects would have gone forward without a TIF. [Note: The spreadsheet mentioned in the print version has been removed because of the age of the data (2005).]

What the spreadsheet shows is that nearly two-thirds of the communities in the state – 360 of the 495 communities – have been net TIF losers and the biggest losers are paying more than $100,000 a year for other communities’ TIFs. Even some TIF-active communities wound up in the losers column because the state subsidy their TIFs preserved was outweighed by paying for other communities’ TIFs. The spreadsheet also shows that 91 communities have neither won nor lost and just 44 communities have been net winners. The biggest winners tend to be communities whose TIFs are so large – an expansion at Bath Iron Works, rebuilding a paper-making machinery or constructing a bottling plant – that they more than compensate for paying for other communities’ TIFs.

Officials at Maine Revenue Services have been accepting speaking invitations in communities that are considering TIFs – including Woodstock, Roxbury and Byron – to explain the cost of TIFs.

“It’s not that we’re anti-TIF, we’re pro a fully-informed public,” said David Ledew of the property tax division at Maine Revenue Services. “The public doesn’t always see the broader picture. TIFs are usually explained as ‘what if the TIF is approved.’ We want people to understand ‘what if there is no project’ and ‘what if there’s a project, but no TIF.’”

Ledew said most – but not all – towns understand the mechanics of a TIF. He’s aware of towns that failed to realize the expected benefits because the program was poorly administered.

“It’s almost like: ‘other towns have a TIF, so it must be a good thing. We need a TIF too.’

They do not always understand the mechanics of it start to finish. It’s more a ‘we need a TIF’ rather than looking at what happens after a TIF is in place,” Ledew said.

Nass said he made little headway trying to draw attention to the Maine Revenue Services spreadsheet.

“If you look at the TIF statute and the way it’s been cobbled together over the years, it’s been changed in ways that don’t make sense. You can TIF a child care facility. I’m not opposed to child care but there’s a price,” he said.

“I found myself a committee of one,” Nass said. “People in small towns don’t have any sense of the costs of this,” he said. “People think there’s no cost to TIFs, that it’s easy to do ... But sheltering [valuation] is a cost to the communities that don’t get it. If you do TIF for a long time, there’s a fairly substantial tax shift.”

Economic development officials in Portland and Lewiston were contacted to discuss the tax shift. Both Gregory Mitchell in Portland and Lincoln Jeffers in Lewiston said they were aware of the tax shift phenomenon but they said it does not outweigh the benefits of TIFs. Furthermore, they discounted the assumption that TIFed projects would have gone forward without TIFs.

“That’s not been my experience,” said Gregory Mitchell.

“If there weren’t a TIF, some of these projects wouldn’t have gone forward,” said Jeffers. “Without a TIF, our Wal-Mart distribution center would have happened somewhere else – like Connecticut.”

 

Lee Burnett is a freelance writer from Sanford, leeburnett_maine@hotmail.com