TIFF As Social Engineering

One of my last official duties as a Nebraska State Senator was to attend a hearing on TIF financing and workforce housing last week at the State Capitol in Lincoln. As a result of that hearing, I am convinced more than ever that TIF is a bad experiment in social engineering and makes property owners pay more in property taxes than they ought to have to pay. If the Legislature ever ended TIF, it would result in lower property taxes for everyone.

Tax Increment Financing (TIF) is a popular way for cities to promote economic development. "Economic development" is the weasel way of describing these business tax credit incentive programs. A much more accurate description would be tax credit social engineering, but you don't have to accept this from me. Fiscally conservative economists have long recognized this fact for years. For example, Randal O'Toole, formerly with the CATO Institute, began referring to TIF programs as exercises in social engineering as far back as May 2011 in an article he wrote entitled, Crony Capitalism and Social Engineering: The Case Against Tax Increment Financing. Although Nebraska State Statutes currently allow for TIF financing, TIF programs result in social engineering for several reasons, and today I would like to explain why that is the case.

First, Nebraska's TIF laws are so vaguely defined that they allow cities to use TIF financing for projects that are unrelated to economic development altogether. For example, Omaha's streetcar project had to declare a swath of 50 blocks as a blighted area in order to qualify for TIF. However, several properties within that 50-block area, which otherwise would not qualify for TIF, are now having their property tax obligations diverted as part of the streetcar program. Nebraska State Law simply requires that 50 percent of the designated area qualifies as blighted. However, when unqualified businesses receive unmerited property tax credits, that's not economic development; it's favoritism.

TIF violates the most basic principles of capitalism. TIF allows city officials to pick the winners. The losers are simply all those competing businesses who don't receive any of the subsidies. For example, TIF is often used for the development of workforce housing, but how can a private developer compete against a rival contractor who receives subsidies from the government? The result is nothing short of social engineering.

TIF lends itself to crony capitalism. We fool ourselves if we believe that Nebraska's politicians are somehow better than those in other parts of the country. As Randal O'Toole wrote in his article back in May 2011, "...no matter how well intentioned, city officials will always be tempted to use TIF as a vehicle for crony capitalism, providing subsidies to developers who in turn provide campaign funds to politicians."

TIF is unfair to taxpayers. TIF results in higher property taxes for many Nebraskans. Structures within a blighted area can be exempted from paying property taxes for 15 years, while structures in extremely blighted areas can be exempted for up to 20 years. Consequently, local residents never see the benefits of the realized gains in property taxes until the TIF bonds are paid off. Asking local residents to wait 15 to 20 years to see the results is unfair and untimely for taxpayers. Moreover, a recent study in Chicago showed that many of the TIF districts in that city were already growing before or without TIF. Whenever that happens the city loses the benefits of those property tax dollars.

Many of the projects which receive TIF financing, simply don't need it. In other words, many of these projects would be built regardless of TIF financing. For example, the Aksarben Village Apartment project in Omaha did not receive any TIF funding for the project until after the statutory deadline had already passed.

One of the hidden flaws of TIF financing is how it makes people pay for stuff they will never use. Omaha's streetcar project is a perfect example. How often will residents living in Millard or West Omaha use a streetcar located in downtown Omaha?

It has become obvious that there is no oversight for TIF projects. The city councils which approve these TIF projects are hardly motivated to enforce the very state laws which are supposed to govern these projects. Why would a city council ever penalize a project that they approved? Therefore, the Legislature needs to rewrite the TIF laws in such a way that only those projects which qualify for TIF can receive the tax credits.