Tax Increment Financing

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"Tax Increment Financing"

A West Elm store near my office will be closing to be replaced by a Forever 21. Which isn’t so interesting to a general audience, but this detail raises a larger issue:

West Elm received a $5 million, 10-year tax increment financing (TIF) package in 2007. Under the terms of the TIF agreement the city had been sending sales taxes from the revenue generated from the store to the landlord. The landlord is responsible for covering the difference between $5 million and what the store generates in revenue over a 10-year period. Jemal said he is working to get the TIF transferred to the Forever 21 store, and wasn’t sure if the change would require legislation.

You can see why these TIF deals are appealing. The city is better off with a West Elm and no sales tax revenue than it is with a giant empty space and no sales tax revenue. If nothing else, the retailer generates income tax revenue. But one implicit upshot of this kind of tax break is higher taxes for all the business that don’t get tax breaks. That, in turn, seems to bias development toward large firms that have the ability to lobby on their own behalf. Chains, in particular, can say “well, we might open a store in your city or then again we might not” whereas nobody every hears from the might who might have become entrepreneurs had the prevailing level of taxation been somewhat lower but instead didn’t.

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There’s an important comment below from Kathy:

TIFs are usually applied to an entire district: a neighborhood of the city that has been targeted for redevelopment, so it’s not that one retailer is getting a deal and the one next door isn’t. Within the TIF district, all property owners should all be treated the same.

But more importantly, TIF isn’t usually a tax break; it’s a diversion of property tax revenue towards infrastructure improvements within the designated TIF district, in an effort to promote redevelopment and physical improvements within the designated redevelopment area. The idea is the new businesses will bring in extra (or “incremental”) tax revenue that wouldn’t have existed if the new businesses hadn’t arrived. So the extra tax revenue generated from the new businesses goes directly towards improvements in that neighborhood (usually paying off bonds for improvements that were done to attract the new retailers in the first place), rather than into the city’s general fund. However, from the business’s perspective, they are (normally) still being taxed the same amount; it’s just a question of where those taxes are going.

West Elm’s situation is an unusual one in that the taxes are going BACK TO THE PROPERTY OWNER. That is not typically how TIFs work; normally they are diverted to pay off debt for public infrastructure investments. This case makes TIF seems like a shady real estate deal, when really, it’s *normally* not done that way.

That makes a lot more sense to me. It’s sort of a cousin of the idea that we should pay for transportation infrastructure upgrades by taxing the land in the effected area.

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