Michigan’s economic development platform is based on TIF’s, the notion that increased taxes payed by businesses locating in a specific area will be used to pay for infrastructure and other economic development incentives needed to assist their location in the designated area.

It’s a tried and proven incentive offered by all but a few states.  A bit unusual is that Michigan offers a TIF for almost everything – from inland lake weed control to public supplied street, water and sewer infrastructure.  

Have an economic development need – “TIF it” seems to be the mantra of economic development in Michigan.

But a growing number of economic development practitioners are starting to question this approach.  

First, there is a growing public resistance to “channeling” general fund tax revenues away from their intended use, moving county, college and the local unit of government general fund  tax revenues to fund specific authority needs.  Counties and colleges don’t want to target use of their funds to a specific area within the county in lieu of county or district-wide use of these funds.  Likewise, when a  local unit of government moves general use funds beneficial to all, for use in a specific geographic area, it sometimes is resisted in the court of public opinion.

Second, there is some “cold hard economic realities”  facing Michigan that questions whether TIF will continue to work, a question faced by several TIF’s who have already discovered that  projected tax increment revenue is insufficient to pay for the debt incurred for infrastructure improvements.

TIF”s work when new property development takes place and when property values increase.    

Here lies a dilemma – if the Chicago Fed says that Michigan’s auto production capacity is now at 38% utilization and under the most optimistic economic recovery we can expect no more than 83% utilization, what does the impact of this excess capacity mean for new construction and increasing values of existing buildings (see blog post – MICHIGAN AUTOMOTIVE JOB LOSS NOW EXCEEDS 50%).

The law of supply and demand would say that 1) we will see little new building construction untill this supply is used and 2) the value of existing vacant buildings will decrease, due to over-supply.

The cold hard economic realities is that TIF financing cannot be relied upon – our ability to say that we will have new buildings constructed and taxable values of existing buildings will increase is in serious jeopardy.

We have experienced this already, in many cases TIF district tax values are decreasing and holding on to a stable value is becoming more difficult. 

This raises the question – Can we rely on future increases in taxes to pay for infrastructure needed to locate new development?

Northern Indiana experienced this in the 80’s Rust Belt recession era downsizing the steel industry by some 5,000,000 square feet of building space in a 5-7 year period.  It took time to “downsize” the supply of building space with building values declining to almost nothing.

Michigan’s building overcapacity will likely drive down taxable values and lessen TIF revenue.

The story here is whether Michigan can continue to rely upon phantom future tax payments as a platform for its economic development program.

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