January 19, 2007
study points to the misuse of TIF
The first independent study of the use of tax increment financing in Kansas City, MO was released Jan. 17 by the local chapter of the nonprofit group ReclaimDemocracy.org. The group seeks to restore “citizen authority over corporations” and revive “grassroots democracy.” Previous studies of TIF had been conducted by former Kansas City City Auditor Mark Funkhouser, now a candidate for mayor.
The conclusions reached in earlier studies had Funkhouser repeatedly warning various city councils that TIF districts were under-performing, that the city council had not carefully scrutinized TIF proposals and that the overuse of TIFs could threaten the city budget and the flexibility of city officials in allocating city money. City officials politely ignored Funkhouser’s warnings and the TIF avalanche continued — from just four TIF plans approved by the city council in 1988 to 58 in 2005.
Add the ReclaimDemocracy study to the voices of caution concerning Kansas City’s use of TIF.
Basically, TIF allows taxes to be frozen at pre-TIF levels when there likely would be an increase in property taxes because of the increased value of the property with the development. The taxes are diverted to the TIF Commission for administrative costs and also to the developer to cover expenses in the TIF project or to pay revenue bonds used to finance the development. Missouri, according to the study, is one of four states that allow abatement of Economic Activity Taxes including earnings, sales and profit taxes or EATs. The city also allows for a so-called Super TIF, which increases the usual abatement on EATs from 50% to 100%.
ReclaimDemocracy argued, along with other community activists, that Wal-Mart, the world’s largest corporation, didn’t need tax breaks.
“It was quite a robust citizen effort to stop that from happening,” said Lindsay. “But there was no stopping it.”
The new Wal-Mart opened Jan. 19, the same day the company closed a Wal-Mart Superstore, formerly Hypermart, at Benjamin Plaza near Bannister Mall, a few miles south of the new Wal-Mart.
The effort to deny TIF to Wal-Mart, said Lindsay, led the group to become interested in the development tool and to decide to commission a study of TIF. Lindsay did not state how much the study cost.
Kelsay’s study pointed to rapid growth of TIF use in Kansas City and accompanying increased amounts of “redirected tax revenues transferred to the TIF Commission,” which “has surged by 208% between fiscal 2000 and 2004.”
TIF proposals are recommended by the TIF Commission to the city council, which makes the final decision on approval or not. Kelsay writes in his study, “The present arrangement between the city council and the TIF Commission for its funding provides a built-in conflict of interest.”
Kelsay recommends that instead of the TIF Commission taking a portion of the redirected taxes, the commission be funded through the general funds, leaving those administrative and operating costs claimed by the commission “more transparent to taxpayers.”
“If the TIF Commission went through the general budget process, then it would be forced to compete for funds,” Kelsay said at the press conference.
The study also points out the glaring inequity where TIF projects are proposed and approved. (See map) The study states:
“Demographic characteristics of the Council Districts where TIF plans have been approved demonstrate that TIF is rarely utilized in areas of the City that are the most in need of redevelopment.”
Kelsay noted that council districts 2 and 4 “account for over 67% of TIF.” When districts 1 and 6 are included in the analysis, the number jumps to 88%. According to the study, these four districts contain two-thirds of the city’s population “who are the most affluent, best educated and least likely to be members of a minority group.”
Those council districts (3 and 5) with the highest rates of poverty and unemployment, and one-third of the city’s population, receive only 12% of TIF.
The study does not answer the question why certain districts reap more TIFs than other districts, said Kelsay. But the study reaches a conclusion that “The uneven patchwork of TIF has resulted from a process which awards incentives on a case-by-case basis which is driven by developers, not elected officials…”
When asked if there was a correlation between campaign donations to city council candidates from developers and approval of TIF projects, Lindsay answered, “We haven’t looked at it.”
The study states that the “vagueness of Missouri law” encourages the city to “overuse TIF without performing the necessary cost-benefit analyses…putting the local public sector at financial risk.”
Current state law, Kelsay added, allows “the unbridled application of TIF.” However, the study did not make comparisons between Kansas City and other cities in the state in the use of TIF. But when asked if there is a connection between the use of TIF and the availability of public money for infrastructure, Kelsay replied, “There might be.”
“TIF is not a free ride. Tax abated in some areas must come from some other area.”
Coupled with the ambiguities in state law is the fact that Kansas City does not have a comprehensive TIF policy. This lack of policy, the study notes, leaves the city unable to respond to TIF projects that perform below expectations — “There are no performance measures of penalties if developers do not deliver to City what they had stated.”
The study recommends “clawbacks which tie incentives to performance” outlined in a legal contract.
“If the city had a TIF policy, it would have much more input to dictate what happens to TIF funds,” said Kelsay.
Both Lindsay and Kelsay call for greater public participation, particularly in the early stages of the TIF process. The study recommends that the city council form a citizen advisory committee that would be involved in the TIF approval process.
“We’re not saying TIF should cease,” said Kelsay. “But used indiscriminately, TIF is a loser.”
The complete study by Dr. Kelsay, “Uneven Patchwork: Tax Increment Financing in Kansas City,” can be found at www.ReclaimDemocracy.org/KC or call 816-885-9996 for more information.
Bruce Rodgers can be contacted at publisher_editeKC@kcactive.com.
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