Columbia isn’t done with economic incentives.
The city, which has been exploring Enhanced Economic Zones over the last couple of months, is now mulling another incentive—Tax Increment Financing (TIF)—to entice more new businesses.
On Tuesday, Columbia’s Downtown Leadership Council held a panel discussion with City Manager Mike Matthes, DLC President Randall Gray and businesspeople from St. Louis to discuss TIFs.
How TIFs Work
Tax-Increment Financing is an incentive, similar to EEZs, but there are some differences. For one, retail developers can use TIFs, but not EEZs. TIFs do not have to create any jobs and are structured similar to property taxes. In year one, TIF districts freeze property values at a certain level in order to measure additional revenue. Additional revenues are then diverted to investment projects.
For example, if a property’s 2012 value in a TIF-financed property was $250,000 and it collected 10 percent in property taxes, the city schools would receive $25,000. If that same property’s 2022 value rose to $2 million, the resulting $200,000 in taxes would be split two ways. The schools would still get $25,000, and the remaining $175,000 would go to a fund for more TIF projects. Fifty percent of increased sales tax revenues also go to the fund.
TIFs can cover a whole district or one project at a time. Until now, Columbia has used TIFs on a project-by-project basis, such as with the Tiger Hotel and the Doubletree Hotel. Columbia could even use the money to develop its infrastructure improvements such as stormwater systems, Deputy City Manager Tony St. Romaine said.
In order to be eligible for a TIF, developers must pass what is known as a “but for” test, in which they prove a development would not occur without the financing.
Do TIFs increase taxes?
Like other recent tax incentives meetings in Columbia, Tuesday night’s TIF talk became contentious when the public asked questions. Boone County Clerk Wendy Noren and Laura Radcliff, senior vice president of St. Louis investment banking firm Stifel Nicolaus disagreed on whether TIFs caused a tax increase. Radcliff said the funds do not create any new taxes because they only tax on incremental increases. Noren, however, questioned Radcliff’s point. She said diverting tax money away from schools would cause an increase in taxes in other areas.
The Show-Me Institute, a non-profit St. Louis think tank, agrees with Noren.
“In my opinion, TIF has diverted money away from schools in Missouri,” Show-Me Institute employee David Stokes said.
According to a Show-Me Institute report on TIFs the incentive does not account for normal property value growth or inflation, which can result in lost money. For example, a California city council member estimated that from 1965-75 inflation alone cost taxpayers in that state $4.6 billion. California recently closed its TIF program after studies indicated it didn’t increase property values enough to cover its costs:
“However, given how much of the tax increment revenues RDAs (redevelopment agencies) actually kept, they would have had to grow much faster than their matches to have generated all the property tax revenues they received. The results show that only four of the 38 (California) projects examined generated enough growth to cover all the tax increment revenues they received. Four other projects generated at least 80 percent of the revenues they received. The remaining 30 projects received subsidies ranging from several thousand dollars to almost $4 million in fiscal year 1994–1995,” according to a report entitled Subsidizing Redevelopment in California by Michael Dardia.
TIFs: Some work, some don’t, so the city must protect itself
Columbia City Manager Mike Matthes said when he was in Des Moines, Iowa TIFs were used to redevelop the downtown area and build a new library, but he admitted there are failed TIF projects, too.
“It’s a powerful tool, but it’s a very complicated tool,” Matthes said. “We can avoid mistakes other cities have made.”
For example, Matthes agreed with an audience member who said Kansas City’s Power and Light district was not a good example of how to use TIF funding. A recent Wall Street Journal article called the project a “budget hole.” Matthes said it’s important not to over-value properties when establishing TIF districts. Developers can overstate how much property values increase when issuing bonds.
In the WSJ article, a city council member in Kansas City says the district’s inability to reach predicted property values has caused the city to reduce street maintenance.
Matthes also said it’s important to negotiate deals so developers are responsible if projects fail.
But TIFs can have other uses besides financing. Downtown Leadership Council President Randall Gray said TIFs are good because they give the community say in its development. During his presentation he showed pictures of how Columbia could look if the community took control of its development.
Ken Christian, who worked on Grand Center, an art hub in St. Louis, said TIFs were invaluable to the area’s development because the market didn’t sponsor art or low-income housing, but the community needed it. He said left to its own devices Grand Center would only build student housing.
A number of Columbia residents expressed concerns during the hour-long question and answer session. Not all questions could be answered. Matthes said this is only the beginning of TIF discussion.
“We are in a preliminary discussion,” he said.