Tax Increment Financing: An economic
development tool or entitlement?
(from Maine Townsman, June 1995)
by Michael L. Starn, Editor
Some people have the impression that state and local governments operate in a non-competitive environment, but when it comes to economic development, nothing could be further from the truth.
Among states, the competition to lure businesses and create new jobs has become fierce. A couple of years ago, the State of Alabama went to great lengths, and considerable expense, to get Mercedes Benz to locate a manufacturing plant near Tuscaloosa. When all the incentives are added up, estimates are that it will cost the state $250-300 million for only about 1,500 direct jobs created by Mercedes. The State of Tennessee agreed to pay one company six percent of its payroll each year for 20 years. In Georgia, the governor reportedly has a $10 million economic development slush fund that he can use at his discretion to "make the deal" with prospective businesses looking to locate in Georgia.
The State of Maine's economic development incentive programs are modest in comparison. Our state is not as flexible as many others, principally because of constitutional and statutory limits on taxation. The principle of equal taxation found in Article 9 of the Maine Constitution does not permit the "give away" programs found in other states.
Those economic development incentives that Maine does offer are performance based, says Alan Brigham, director of the Business Development Office, Maine Department of Economic & Community Development (DECD). The safeguards that are built into Maine's business incentive programs are to ensure that the state and municipalities won't get caught "giving away the farm" in the name of economic development. The Governor of Maine's "slush fund", by way of comparison, is $2 million and has been earmarked by the legislature to be used only for job training or re-training.
Global competition, the exodus of manufacturing jobs from this country to low wage countries, new communications technologies that provide an array of location choices for businesses, and the lingering effects of the last recession combine to make economic development and job creation a top priority for the public at large and hence our political leaders.
Maine municipal officials are not isolated from this political competitiveness over jobs. They too want to maintain existing jobs and lure businesses to their communities to create new jobs. Unfortunately, supply and demand are not balanced. There are more state and local officials seeking new or expanded businesses than there are businesses wishing to relocate or expand.
MORE FLEXIBLE TIF
Tax Increment Financing (TIF) is one "local" tool in the economic development arsenal that communities across Maine are now looking at to help level out the playing field with other states in this quest for economic development and jobs. TIF is a locally initiated program using local property taxes and a local decision making process with public hearings and district designation by the municipality's legislative body.
The first TIF was formed in Maine in 1985. Over the past 10 years, 45 TIFs have been formed and approved by the Maine Department of Economic & Community Development, which approve all TIF projects. In the last year and a half, TIF formation has skrocketed. Over half of all the TIFs formed in the past 10 years were created during the last 18 months, according to Alan Brigham, TIF administrator for DECD. A 1993 change in the TIF statute allowing for "credit enhancement agreements" (CEA) has been the impetus for the sudden interest in TIF.
Before explaining credit enhancement agreements, it is important to first understand the basic concepts of TIF Tax Increment Financing begins with the formation of a TIF district-an area of the municipality targeted for development or redevelopment. The underlying premise and financing mechanism of TIF is that values are frozen for the area and the revenue that a municipality will generate from increased valuation resulting from the new development or redevelopment, is captured and used specifically to assist that development project.
Traditionally, TIF revenues were used to pay off the debt of public improvements, such as water and sewer lines or plant upgrades. However, the 1993 change allowing for credit enhancement agreements gave municipalities the flexibility of making payments from the "captured" assessment directly to the company, which then could spend it on authorized project activities..
Unlike the traditional TIF where public improvements are made and financed through long term borrowing against the anticipated "captured assessment" revenues, credit enhancement agreements do not require municipal borrowing and are generally considered less risky because because if the business fails, the municipality can stop making payments.
Roland Miller, community development director in Auburn, is one of the founding fathers of the TIF program in Maine. He along with other state and local of ficials got involved in the early 1980's promoting TIF legislation. Miller had come to Maine from Wisconsin where TIFs were used extensively.
"I still believe that TIF is a very effective tool whereby municipalities can direct resources," says Miller. He goes on to says that Maine's TIF law is a workable one with safeguards and limitations.
But he's a traditionalist and some of the new approaches to TIF have him worried. "The farther you get away from what municipalities would be doing in partnership with businesses, you weaken the value of this type of tool," says Miller.
Miller asserts that the primary purpose of TIF is to help finance public improvements. He advises those who are looking to expand the concept of TIF beyond municipal infrastructure to look at the long term benefits of what they are doing. "It has to be more than just jobs," he says.
"If you look at what the real benefits are, this type of evaluation will confine (the TIF to public infrastructure improvements," says Miller.
LEADING EDGE TIFs
While philosophically pure, Roland Miller's approach to TIF does not appear to be in the vanguard of current TIF thinking in Maine.
"It's very rare anymore that communities use TIF for strictly public improvements,'' says Virginia Hildreth, economic development director, City of Portland.
The state's premier TIF consultant, Attorney Christopher Howard of Pierce Atwood and Scribner in Portland, sees it this way, "A number of TIFs are 'plain vanilla', others are structured very differently (or creatively) and they're fun."
Howard's favorite brand of TIFs more resembles "heavenly hash" than vanilla, with a little bit of everything thrown in. For example, his projects include the following.
The City of Westbrook has set up a TIF district in the area of the Glass World Industrial Park which federal wetland regulators have classified as undesirable for development. To make it work, city officials set up a the Westbrook Environmental Improvement Corp. which gets 50 percent of the TIF increment for wetland banking; the other 50 percent goes to businesses that choose to locate in the industrial park. Wetland banking is a way of getting credits applied to other wetland development.
The City of South Portland set up a TIF district for one of its major employers, National Semiconductor, allowing this high tech company to build a $127 million expansion. Needed public improvements in the area around National Semiconductor were already on the city's Capital Improvements Program, so what the city council agreed to do was to bring them forward. Additionally, the city agreed to rebate to the company the sheltered revenue gain (or more accurately the money the city would have lost) from the exclusion of the "captured" value from education funding, state-municipal revenue sharing and county taxes.
In Pittsfield, the town bought a building and renovated it using Community Development Block Grant monies, an EDA grant, and a TIF then leased it back to General Signal Building Systems Corp. for about $? a square foot. "We were competing with Oxford, Mississippi, for the General Signal warehouse," says Pittsfield Town Manager Dwight Doherty. "They were offering a 100,000 sq. ft. facility at $2 per square foot."
Large industries, like paper mills, pose a real challenge for TIFs because of the 5% valuation limitation in state law. The Town of Jay, with International Paper, has an interesting TIF in the developmental stages-it still must get DECD. and voter approval. Being negotiated by town and mill officials is a plan to create 17 TIFs inside the mill for targeted investments totaling about $424 million. If you were to draw a TIF district around the whole mill, says Howard, you would be in excess of the 5% valuation limit. By identifying individual areas of the mill where investment will occur and creating TIFs there, the project becomes feasible.
TIF provides opportunities to use (an incentive program) in ways very different from the cookie cutter approach," says Howard. The test, he says, is being able to tailor a development program that fits the need of business and the locality.
HAVE WE GONE TOO FAR?
Any incentive program that promotes economic development without directly affecting a community's tax rate is bound to get stretched to its outer fringes. Has this economic development tool that was started to provide municipal infrastructure improvements to undeveloped, blighted areas of a community to help businesses that otherwise couldn't afford to expand gone too far? Has TIF become nothing more than a corporate entitlement program?
Robert McMahon, associate professor of economics, University of Southern Maine, believes it's heading in that direction. "I'm pro-business," says McMahon who heads up USM's Center for Business and Economic Research, but it appears that businesses (through TIF are pressuring the public sector to give more and more away.
Credit enhancement agreements have transformed TIF from its original purpose of channeling money to municipal infrastructure improvements that enable development to direct, cash payments to companies. "Who's wining," says McMahon. "It was a good idea to begin with, but now I have reservations about it." McMahon and others point to the fact that with TIFs some companies get breaks while others don't, and that with the exclusion from state valuation, other property taxpayers are paying higher taxes than they would be if the property were being taxed and used to lower the overall tax rate.
Larry Record, director of the Property Tax Division of the State Bureau of Taxation, shares some of McMahon's concerns. The issues that Record would like to see addressed more fully are the use of tax monies to assist individual businesses--i.e., declaration of the public purpose- and whether or not the credit enhancement agreement is a back door way of providing a property tax exemption.
In defense of using public monies for economic development, DECD's Alan Brigham says the Common Cause et al v. State of Maine et al case, which involved the use of public monies for the Bath Iron Works dry dock in Portland, decided by the Maine Supreme Court in 1983 gives communities using CEAs a green light. "Economic development is a legitimate public purpose," says Brigham, noting that the use of CEA--direct support to businesses--has not been challenged in a material way since TIF statutes were amended to include them. On the exemption issue, Brigham contends that the CEA is not an exemption because the revenue must first go into the municipality's general fund before it is paid out to the company.
On the subject of fairness among businesses, Chris Howard who has orchestrated a number of TIF agreements in the state, says the issue has never come up. However, should the issue arise, he says, his response would be that
(1) any business can make a request for a TIF and
(2) it's a choice, "more than anything else TIF is an investment by a municipality in its future, as well as the future of the business affected by it."
"Each community will make investment decisions based on their individual circumstances," says Howard. Moreover, Howard says that TIF is not just for large communities. "If you have the opportunity (to make the investment) you will want to take advantage of it, regardless of your size. I am a great believer in the saying that 'great things get done by people who are closest to the action'."
A proponent of TIF but one who has also seen its looming problems, is Portland's Virginia Hildreth.
The City of Portland has done four TIFs in a very short time, spurred on in large part by the change in the statute allowing for CEAs. The city council recently adopted a TIF policy to set some parameters for its uses.
Hildreth says the economic development staff needed some guidelines from the council on how far to go with TIF and at the same time businesses needed to know what they could expect from the city when it came to this economic development incentive program.
"We will have to wait and see how it works," says Hildreth. Among other things, the TIF policy sets a cap (75%) on the amount of the increment (from the captured value) and limits TIF eligibility to projects with a captured value of over $2 million.
"TIF needs to be carefully used, otherwise it has the potential of running into a lot of problems," says Hildreth.
One of those potential problems is this evolving "entitlement" perpective of businesses. "As with any incentive program," says Hildreth, "if one business gets it, will the next say they need it?"
The expanded uses of TIF are a result of not having enough economic development incentive programs in the state, says Hildreth. Given the way in which states and communities are going after economic development, she says it's difficult not to use TIF competitively.
Hildreth thinks the only fair way to have economic development incentives is to get the federal government involved. Unfortunately, the prospects of a stronger role of the federal government in economic development appears dim. Right now Congress and the Clinton Administration are debating "empowerment zones", which would provide assistance primarily to urban, blighted areas, and also discussing "enterprise zones", which would target federal dollars to smaller, less needy jurisdictions. The survival of enterprise zones, however, given the budgetary temperament of the Congress is shaky, at best.
LEGISLATIVE TASK FORCE
A legislative task force to study TIF, and other related statutes, will likely emerge from this session of the legislature.
The task force will look at whether or not the TIF, STIF (State Tax Increment Financing) and PPTIF (Pulp and Paper Tax Increment Financing) laws are working. It is expected that the task force will codify the related statutes in an attempt to make TIF into more effective public policy. Implicit in this review will be a discussion of whether or not the users of TIF have gone too far, or instead, if communities should be given more flexibility to expand the use of TIF.
Some of the issues likely to be addressed are:
The amount of state contribution to STIF. Currently, a TIF district that qualifies a STIF by increasing sales or income tax revenue can be eligible to have 25% of that increased revenue returned to the project or applied to debt service. Some feel that the 25% funding is a little weak for an incentive program. To date, only three communities have qualified for STIF, according to DECD's Brigham.
Another problem with STIF is the retail sales tax increment. DECD's Brigham says it is extremely difficult to calculate increased sales taxes because the tax increment must be netted out. For example, a new WalMart is built. How much of the sales are actually new sales and not sales that other businesses in the areas would have had if WalMart had not been built?
On the traditional TIF, the limitations on geographic size (2% of the community) and valuation (all TIFs in a municipality cannot exceed 5% of the local assessed value) will be reevaluated. These limitations, say some, make it difficult for large industry towns to qualify.
On the Pulp and Paper TIFs, the task force will likely look at the way in which environmental projects are certified by the Department of Environmental Protection, and at future state funding for PPTIFs.