Originally created to solve a problem that no longer exists, tax-increment financing is now being used by cities for a variety of purposes:
- Attracting businesses to an urban-renewal district that probably would have located in a nearby area without any subsidy;
- Capturing funds that voters think they have allocated to schools, fire, and other purposes in order to spend them on grandiose projects that have little net benefit;
- Building neighborhoods that follow the latest planning fads that could not be marketed without government subsidies.
None of these aims provide sufficient net benefits to justify taxpayer subsidies. At best, tax-increment financing does little more than shuffle economic development like deck chairs; at worst, it actually slows economic growth by placing an extra burden on taxpayers and discouraging businesses that do not want to compete with those subsidized by TIF.
Idaho is not the only state struggling with urban renewal. Almost immediately upon taking office, California‘s Governor Jerry Brown proposed to eliminate that state‘s 425 urban-renewal districts in order to eventually make the $5.5 billion in property taxes that go to those districts available for schools and other more vital purposes. Since some of those taxes are dedicated to repaying urban-renewal bonds, eliminating the districts won‘t immediately free up the entire $5.5 billion, but it will curtail the growth of funds diverted from other tax districts to urban renewal.
Idaho legislators will be tempted to try to tighten the rules that govern tax-increment financing to insure that it is used only to fix genuine problems of blight or to produce real benefits that could not be achieved any other way. There are two problems with this approach. First, it is probably impossible to adequately define blight, competitive disadvantage, or other terms so tightly that cities will not abuse TIF. Second, there is little evidence that city governments are better than private developers at determining the type and location of new development that cities need, and plenty of evidence that they are not as good.
It makes far more sense to simply repeal Idaho‘s TIF law. This would lead cities to seek other means of promoting economic development, such as deregulation, that are less costly to taxpayers and probably more successful in the long run.
Short of outright repeal, there are several things the Idaho legislature can do to curb abuses of tax-increment financing:
- Change the law so that, if property values decline, the base value does not decline — and make the change retroactive to 2006 so that urban-renewal agencies do not get a windfall from increases in property values after the collapse of the recent housing and property bubble.
- Require that cities (or possibly counties) obtain a majority vote of residents before creating new urban renewal agencies or districts and before renewing existing districts beyond the originally authorized 24-year period.
- Allow other tax districts to opt out of urban-renewal so that they do not lose future tax increments. This will force urban-renewal agencies to design projects that actually benefit other tax districts rather than projects that benefit developers at the expense of other tax districts.
- Place an upper limit on the total share of property taxes in a county that may go to urban-renewal agencies. A limit of 4 or 5 percent seems reasonable given that the current statewide total of urban-renewal revenues is slightly less than 4 percent of statewide property taxes.