More TIF Talk, Since BDN Brought It Up . . .

Keith McBride on February 19, 2014 in Tax Increment Financing

Despite the inflammatory headline, today’s Bangor Daily News article by Maine Center for Public Interest Reporting Senior Reporter, Naomi Schalit, is a fair statement about TIFs in Maine.  The public policyconversation about public infrastructure financing through TIF seems to have been lost on the BDN readers, however, judging from the comments below the article.

And in this case, the reason isn’t hard to fathom.  TIFs are complicated, and it’s hard to grasp the complex details of a public policy decision to use TIF  to finance public infrastructure improvements as opposed to issuing public infrastructure bonds with debt service obligations.  In my experience, when this conversation comes to the table, the room is very quiet.

However, “corporate welfare” –that’s a soundbyte that’s easy to understand, and every knows that they are strongly opposed to it, and  they can voice their opinion with force, and with 100% confidence in it.  At the mere suggestion of public money being handed out to private businesses, and the conversation about complex public infrastructure funding is over.  You’ve lost your audience.

Doesn’t matter if it’s actually happening or not, the dialogue is now about “corporate welfare.”  And it’s a self-fulfilling prophecy:  each time TIF is brought up by the media, it’s discussed solely in the context of “corporate welfare,” and so therefore, they must be one and the same.  That’s how TIF has become synonymous with “tax incentive.”  So, while Schalit’s article paints a more thorough picture of TIFs in Maine, the BDN headline serves only to reinforce the soundbyte.  The conversation Schalit’s article could have inspired was dead before the readers ever got to the first sentence, killed in the name of attracting readership with snappy and inflammatory headlines.

The truth is this:   just like any other pure tax incentive measure, creating a TIF solely to refund tax dollars and entice a business to locate in your town is rarely (if EVER) a good investment.   If your town is doing that, then you have a legitimate complaint.

But before you stomp down to your town hall, let me just say that very few towns in Maine actually do this.

Schalit’s article suggests it, but doesn’t come out and say it exactly, so let me:
There are MANY TIF districts in Maine.
There are SOME TIFs with Credit Enhancement Agreements.
There are VERY FEW TIFs that are solely incentives to business without any public infrastructure element.

And the reason for this is quite simple:  town and city councilors/selectpersons, town/city managers and economic development directors want to see some tangible benefit to their community before they will entertain the idea of a credit enhancement agreement.

The article quotes a good friend of mine from Auburn, Roland Miller, who has been using TIF longer than anyone in Maine.  It discusses the use of TIF to extend public infrastructure (sewer and water) to an area of developable, industrially-zoned land so that it could be aggressively marketed for industrial and commercial development.  The city identified the land as a high-priority for development, and fronted the money for the infrastructure improvements to make it more attractive to businesses.  The businesses came, recognizing the value, not in any tax-incentive, but in the transportation, distribution and logistics advantages that Auburn provides.  The city paid off the costs of the improvements once the development arrived with some portion of the new tax revenues.  The rest of the new tax revenues flowed to the general fund, and once the TIF expired, ALL of the taxable value of the property bolstered the city’s general fund — taxable value that would not likely have existed without the city’s use of TIF.

But let’s assume, in a scenario like this, that the city fronts the money for the infrastructure improvements.  Believing in the potential for new tax revenues, they take all the risk.   What if the development never comes?  The city would be out-of-pocket, or would be stuck paying debt service for sewer and water extensions.   Miller believed that the land in Auburn would attract  investment quickly, and he was right, which is a good thing for the taxpayers.

What if there was a way to allocate that risk?  What if the property owner fronted the money to pay for public infrastructure improvements, and their repayment for that cost was contingent on them actually attracting the development they believed would come if the infrastructure was extended?  What if the town was under no obligation to pay the property owner back for these public infrastructure improvements until the development and new tax revenues arrived?

That’s how a Credit Enhancement Agreement is supposed to work.

A CEA can be an insurance policy.  It can be a risk-mitigation measure.  It can be a public-private partnership.  And, yes, it can be an tax incentive.  But TIF is a tool.   It can be used properly, or it can be mis-used.  As community economic development professionals, it’s our job to advise our communities on how to use the tool properly, and guide our town managers and councils to the decision that’s in the community’s best interests.   But suggesting that TIF should be wiped off the books entirely because of the few mis-uses shows only a soundbyte’s worth of understanding of how TIF has worked in Maine.