Lessons in Tax Increment Financing
Today, it’s hard to imagine the Burlington, Vermont, waterfront at its nadir as a crumbling wasteland, left for dead by the lumber and oil industries, and more likely to be frequented by rats than by residents or tourists. After a renaissance that began in the late 1980s, the neighborhood is now a civic booster’s paradise, with an expansive park, bike trails, a community marina, and science center on one side of tree-lined Lake Street, and hotels, shops, restaurants, offices, and a performing arts center on the other.
The revitalization is widely regarded as a success—Waterfront Park was the backdrop in 2015 for the presidential campaign announcement of Bernie Sanders, a former Burlington mayor who created the city’s Community and Economic Development Office—but it relied, in part, on a controversial economic development tool whose use in Vermont and across the country is being closely scrutinized. As policy makers in Vermont proceed with caution, their experience with TIF could be worth watching.
In 1985, with a nudge from Burlington city officials, Vermont’s legislature enacted a law allowing its cities and towns to use tax-increment financing (TIF), part of a wave of similar legislation in statehouses across the United States. Facing a reduction in federal aid and a citizens’ tax revolt, state and local leaders were drawn to a tool that could pay for economic development at no cost to taxpayers—at least in theory.
TIF functions by earmarking property tax revenues from increased real estate values in a defined district. Cities can use the revenue for development, whether public infrastructure or direct subsidies for private projects. However, as research has shown, TIF comes with hidden costs, from the loss of funds for schools and other local public services to a lack of accountability that can often lead to the questionable expenditure of tax dollars.
While many states have allowed TIF districts to proliferate with little constraint over the past few decades, active oversight by state policy makers has helped protect Vermont from some of the risks TIF critics have identified. However, Vermont policy makers have not yet answered a fundamental question about TIF: Does it truly stimulate new economic activity?
Bruce Seifer, who helped lead the economic development office in Burlington for three decades, believes TIF has been a tremendously useful tool. Beginning under the administration of Sanders, who was mayor from 1981 to 1989, Seifer and his colleagues worked to encourage development of locally owned businesses through loans, technical assistance, and many other programs. They also planned for the revitalization of the Lake Champlain waterfront.
In the 1990s, the city used TIF to reconstruct Lake Street and to build and expand parking garages to encourage commercial development. Since Burlington established this TIF district in 1996, the waterfront has been transformed and the value of real estate in the district has more than tripled, from $42 million to $130 million. Most tax revenues from the increased property value—everything above the original $42 million—are earmarked for waterfront and downtown infrastructure until at least 2025.
Seifer was wary of using TIF because of the inherent tradeoff it demands—every dollar earmarked for downtown infrastructure is a dollar that’s unavailable for schools, police and fire protection, or other public services.
“The last thing I wanted to do was use TIF money, because I wanted to rebuild the tax base,” Seifer said.
The city aggressively sought state and federal grants and used these funds for many projects. But the city needed more funding and TIF was the best option on the table, Seifer said.
“If there are other funding mechanisms I’d rather use them, but if not, use the tool that you’ve got,” he said.
He believes the waterfront and downtown revitalization would simply not have been possible without the initial TIF investment, and says the new development has paid off for the city with other revenues, like hotel and restaurant taxes.
Research Raises Questions About TIF
Was TIF a make-or-break tool, without which the Burlington waterfront revitalization simply would not have happened?
It’s difficult to answer this question for any single project. But researchers have studied the overall effectiveness of TIF on a larger scale, by comparing economic activity in places with TIF to places that haven’t used the tool.
Last fall, in the largest evaluation of TIF’s economic impacts to date, University of Illinois at Chicago Professor David Merriman reviewed more than 30 studies that evaluated how thousands of TIF districts across a dozen states performed over many decades.
“Taken together, this review of the rigorous evaluation literature suggests that in most cases, TIF has not accomplished the goal of promoting economic development,” Merriman wrote in the study.
Last year, at the direction of the legislature, Vermont’s Legislative Joint Fiscal Office published a study that examined the performance of the state’s 10 active TIF districts. Comparing projected TIF revenues against revenues under a hypothetical scenario with no TIF, the study projects that from 2017 to 2030 TIF will cost the state about $68 million in school revenue (Vermont has an unusual statewide funding system for schools), and cost municipal general funds a total of $43 million, although it didn’t account for non-property tax revenues. It concluded that the economic benefits of TIF are uncertain.
The Vermont Economic Progress Council, which oversees TIF in the state, disputes the findings, arguing that the study underestimates how much development occurs because of TIF. But Tom Kavet, the state economist for the Vermont Legislature, argued the opposite—that all the development in question would have occurred somewhere in Vermont, even without TIF.
Graham Campbell, lead author of the Joint Fiscal Office study, presented the results at the Lincoln Institute conference Economic Perspectives on State and Local Taxes this spring. In an interview, he said the study would have had to be exceedingly optimistic about TIF to show a positive impact on state and local budgets.
“Whether or not the study’s numbers are dead-on, you essentially have to go to the extreme to get TIF to be a benefit, at least fiscally,” Campbell said.
Vermont Shows What Strong Guardrails for TIF Look Like
Despite the recent findings, Vermont’s cities and towns are still bullish about TIF. But the state is hedging its bets by enforcing some of the strictest limitations on TIF in the country.
First, the state limits the number of TIF districts that can be created and the length of time they can exist, and it requires each new district to be approved by the Vermont Economic Progress Council. Today, fewer than a dozen TIF districts have formed in Vermont, although the legislature recently authorized a half dozen more. By contrast, North Dakota, which has a similarly sized population, has created more than four times as many districts.
Second, Vermont restricts the use of TIF revenue to public infrastructure in downtown areas only, unlike many other states that allow TIF to subsidize private development, without geographic restrictions. Third, it requires TIF districts to deliver at least one of three specific public benefits—affordable housing, cleanup of a brownfield site, or new transportation capacity. Fourth, unlike many states, Vermont requires approval from voters for a TIF district to borrow against future tax revenues.
Finally, the state posts background information and annual updates on every TIF district online, in contrast with many states where there is no information available to state agencies—let alone the public—about where TIF districts are located, how many there are, or how the funds are being spent. These state laws will at least allow Vermont policy makers to monitor TIF over time, limit its use, and make adjustments.
“Vermont has a very well set-out program compared to other states,” Campbell said. “But with TIF, it’s a low bar.”
Vermont’s TIF laws are the result of compromise. Many cities would like the state to loosen its restrictions on TIF, but some policy makers worry that TIF simply transfers development from one part of the state to another, at the expense of Vermont’s public schools. In the most recent major update to the state’s TIF laws in 2017, the Legislature voted nearly unanimously to allow the six new TIF districts, while at the same time tightening restrictions on where and how TIF can be used and requiring ongoing evaluation and reporting by the Joint Fiscal Office and other state agencies.
Three cities have already laid claim to new TIF districts, leaving room for only three more.
Campbell and others will be keeping a close eye on what comes next. “Once we get to the point where other municipalities are pushing for TIF beyond those three,” Campbell said, “it will be a much more intense discussion about whether the program itself is doing what it seeks to achieve.”