Wisconsin Taxpayer Magazine TIF: The Municipal Development Tool

September 2016  •  Vol. 84 No. 9
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  • Summary
  • Press Release
  • Since 1982, local governments in Wisconsin have used more than $6.2 billion of property taxes on tax incremental finance (TIF) projects, including $3.5 billion over the past 10 years. The state currently has 1,212 tax incremental finance districts, with nearly two-thirds located in municipalities with fewer than 15,000 residents. Despite its widespread use, most state residents know little about TIF.

  • Todd A. Berry or Dale Knapp

    Use of TIFâ€"Main Municipal Development Toolâ€"Continues to Grow

    But Nearly 9% of TIF Districts Now Distressed

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    MADISON—Tax incremental financing (TIF)—the main development tool of Wisconsin cities and villages—has grown from 534 TIF districts in 1994 to 1,212 in 2015. While most TIFs are successful, local governments have designated 106, or 8.7% of the total, as either distressed or severely distressed. This indicates that district tax collections do not cover district costs.
    A new report from the Wisconsin Taxpayers Alliance (WISTAX), “The Municipal Development Tool—TIF: How Does It Work? Is It Necessary? Risky? Overused?” explains tax incremental financing and explores how it has changed during 40 years of existence. WISTAX is a nonpartisan research organization dedicated to citizen education.
    Successful tax incremental financing requires private development to generate tax revenues to fund public investment. Sometimes that investment does not materialize and local taxpayers foot the bill. In 2009, lawmakers allowed cities and villages to identify TIF districts, created before October 2008, that were unable to meet their financial obligations. A review of these distressed districts show that over half (54 of 106) were created before 2000 and were likely struggling prior to the 2007-09 recession. Twenty-nine were created during 2005-08, and for those, the recession was the likely cause of the distress.
    The new report highlights major departures from the original 1974 TIF law that targeted urban areas that were blighted or suitable for industrial development. Today, only a third of all TIF districts are in urban areas. In fact, 43% are in communities with fewer than 5,000 residents. Cities with 60,000 or more residents house just 14.3% of all TIFs.
    A 2004 state law change added “mixed use” as an eligible type of development. A mixed-use project includes a combination of commercial, industrial, and residential properties. Of the 673 districts created since 2005, 284 (42%) were of this type, WISTAX said. Mixed-use TIF districts now comprise nearly 25% of all districts in the state.
    “Tax incremental finance can be a valuable tool for local government to encourage development,” Todd A. Berry, WISTAX President, noted. “But it is also important that local taxpayers and officials realize that TIF carries risk and can leave a municipality and its residents with unexpected debt.” Added Berry, “That’s why it is so important that citizens understand how TIF works. We hope this new report from WISTAX contributes to that understanding.”
    To attract private development, cities and villages spend public dollars on infrastructure (streets, sidewalks, sewers, etc), remediation, or sometimes grants to developers. Property taxes from the new investment are used to fund those costs. State law limits the life of TIF districts to between 20 and 27 years, depending on type. However, they must be closed earlier if costs are repaid. Once the district is closed, property taxes from the district go to fund municipal, county, and school services.
    While TIF seems fairly straightforward, WISTAX cautions that the level of TIF investment needs to be carefully examined. The greater the public expenditure, the more private investment needed to repay TIF costs. If needed development fails to materialize, local taxpayers are responsible for unpaid costs.
    Likewise, if the municipality underinvests, businesses may not find the site attractive. In that case, despite limited public expenditure, there is little or no private development to tax. Again, local taxpayers are on the hook.
    Another risk is dislocation, particularly with mixed-use districts. Sometimes such districts are not downtown or in a main commercial district. New retailers may draw customers away from established stores. In some cases, retail stores move from the traditional commercial district to the TIF district, adding little value to the community.
    For more information, a free copy of The Wisconsin Taxpayer report, “The Municipal Development Tool—TIF: How Does It Work? Is It Necessary? Risky? Overused?” is available by calling 608.241.9789; emailing wistax@wistax.org; visiting www.wistax.org; or writing WISTAX at 401 North Lawn Ave., Madison, WI 53704-5033. o

    (Editor’s Note: An electronic version of this release is available at www.wistax.org.)


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