Archive for the ‘Tax Increment Financing’ Category


February 6, 2012

California has always been a national trend setter.  It gave us the hippies of the 70’s, Silicon Valley in the 80’s and 90’s and tax limitations in the 00’s.

If being a leader is a forecast of the future, California’s repeal of its Redevelopment Agency enabling legislation in June 2011 may signal similar action by state legislatures elsewhere.

Could Michigan be one of them?

Governor Jerry Brown, under the authority of California’s fiscal emergency legislation enacted two bills (The Termination Bill & The Continuation Bill), “to secure funding for ‘core government services’ including fire protection, police and schools”.  His action bares the state’s 400 Redevelopment Agencies from conducting new business and provides for their windup and dissolution effectively terminating use of Tax Increment Financing in California.  The action did however, allow cities and counties that created Redevelopment Agencies to continue operations if they agree to make continuous payments to fund core government services.

Challenged (July 2011) at the California Supreme Court level by local government Redevelopment Agency sponsors, the court recently upheld the law. In its ruling (December 29, 2011), the Court held that “if the legislature creates a political entity, it can later dissolve it, baring specific Constitutional removal of power”. 

The Court ruling established February 1, 2012 as the terminal date for the state’s 400 Redevelopment Agencies.

This is a major philosophic change in practice of economic development.

California was one of the first states to recognize the need for special financing tools to eliminate blight, establishing in 1945 legislation allowing the use of a portion of property taxes to create public/private partnerships to eradicate blight.  It was the first state to use tax increment financing in the early 1950’s whereby taxes paid on the value of new development was redirected to pay for government supplied infrastructure needed to serve the new development.

Like almost every state, Michigan followed suit enacting similar legislation in 1980’s that gave local government specific power to establish a special purpose local government authority that can establish a tax increment financing district and redirect a portion of real estate taxes to a special fund, funds which are to be used to promote economic development or another specific purpose specified by the authority.

Today Michigan has over a dozen special purpose authorities authorized to use tax increment financing. In fact, to many economic development practitioners, the use of tax increment financing is the “back bone” of local government economic development efforts.

These special local government authorities and use of TIF funds is one of the top, if not the top, Michigan economic development tool to attract and incent new development. 

With the constriction of developer bank financing for project infrastructure today, economic development practitioners in almost every development project consider use of TIF financing for funding required infrastructure improvements needed to make the project happen.

Is Michigan in line for TIF termination?

For the past several years, this author has watched as university research and public and private “think tanks” have studied use of Michigan tax increment financing authority. 

There is no doubt that TIF has been used inappropriately in many cases, the most flagrant misuse being use of TIF funds for purchases and services that would ordinarily be funded by the operating budget of the local government.  Some example being the purchase of public works vehicles since they plow snow in the authority district, purchase of street signs both in and outside the district, replacement of street light luminary globes, development of a park next to the authority district to attract visitors, payment of salaries for the portion of time government employees spend doing their regular job in the special purpose district.

In my opinion call for termination of TIF due to misuse is inevitable.

However we must remember the original purpose of TIF was to provide infrastructure financing not to replace local government general fund budgeted expenditures.

Here’s why TIF in Michigan is necessary. 

During the economic good times land use planners and government officials could require developers of new projects to pay-for, install and donate to local government both on-site and off-site infrastructure necessary for their project.  Today developers are not inclined to do so.

If the private developer can’t or won’t fund public infrastructure needed for new development, the burden is upon Michigan local government to do so in order to support future new growth and development.

With revenue limitations upon local governments TIF may be the only means to effectively financing infrastructure necessary for new development.

There is no doubt in my mind that TIF termination will be on the legislative docket for discussion as Michigan’s financial emergency is no different that California’s.

My hope is that Michigan’s TIF returns to its original purpose “project infrastructure financing”.

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(For an overview of Michigan TIF’s see: Michigan Tax Increment Financing: A Primer; Planning & Zoning News, Dec. 2008, p.11-14).

(For a description of the importance of TIF in Michigan Economic Development see:  If Not TIFA, Then What?; Planning & Zoning News, May 1994, p. 5-8)


December 17, 2009

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.