TIF financing

I’m reading a book right now called Downtown, Inc. and given my knowledge about urban  planning, it’s been absolutely perfect so far in giving me a 2000 foot elevation look at urban renewal.

Here’s the story. The federal government used to give out a lot of money for urban renewal to cities via specific pieces of legislation and through highway money. In the 50s this money was used really irresponsibly by government planners to declare war on downtown black communities. Whole neighborhoods were uprooted and cleared away. Not that it’s necessarily bad to clear away dilapidated neighborhoods in the inner cities, it could be a very worthy goal. The problem was that cities pretended there was adequate housing for the dispossessed, and according to this book, that was a lie that has rarely been matched in government ever since.

Anyway, the cities took these destroyed neighborhoods and tried to build things, but their vision was pretty limited and so downtown continued to be an unattractive place to live and play. One solution, pioneered by Pasadena of all places, was TIF financing or tax increment financing. In this type of financing, as I understand it so far, the city puts a box around an area where it wants to develop, looks at the property tax revenue from that area, and records that level. Then, it takes out a loan to build that place up, and for this loan, it pledges as collateral, the difference between the frozen level of tax revenue and the new level (which is expected to be higher after redevelopment). In this way, voters don’t have to be disturbed and politicians get money to build things.

Now, this is the sort of public policy tool that keeps economists employed, and the literature on this seems to vast and interesting, though I have not found a good introductory paper into it.

Two things strike me that I’ve seen casually mentioned in the literature. There are two possible incentives for the use of this type of financing. On the one hand, there are incentives to pick areas that are going to be growing anyway. That way, even failed projects will still be in areas in which property values are going up. This probably makes securing low interested loans for these places easy. However, pouring city money into areas that are already growing is probably not a smart public policy move and is probably evidence of favoritism to business or development forces. On the other hand, TIF financing might encourage going after the worst areas, because the marginal effect of one dollar of public money might be large. If you add a dollar to beverly hills, the property values wouldn’t really go up, but if you add a dollar to some place in downtown Detroit, you might see a big difference. So, it’s hard to say how TIF financing will be used. There’s also a bunch of studies trying to argue whether TIF financing spurs growth or not, but I haven’t read them yet. All in all, a very interesting topic.


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