Insights Blog

New in Cities Journal: "Selling TIF"

April 11, 2022

Tax increment financing (TIF) is a long-standing and popular public financing tool in the U.S., but it’s starting to jump its borders. And while domestic TIF use has had its pitfalls, the U.S. experience can offer lessons learned to municipalities worldwide looking at how best to finance their economic development goals.

A defining feature of TIF is its theoretical ability to be self-financing, or to pay for itself. This description stems from TIF’s operating assumption that public investments will induce private development, increasing property value and tax revenue enough to pay back upfront development costs.

However, recent SCEPA research published in the international journal Cities finds that TIF's self-financing rhetoric can be used by project sponsors to either ignore risk or shift it to the public, resulting in large costs to the public. To protect taxpayers worldwide, the research recommends transparency mechanisms be included in TIF projects to ensure development risk is openly discussed and assigned before a TIF project is implemented.

It is well documented that costs and risks associated with urban development proposals are susceptible to strategic misrepresentation by planners, budget forecasters, and elected officials in the search for political support (Wachs, 1990; Flyvbjerg et al, 2002). This strategy gains particular contours in TIF projects. When described as paying for itself, TIF can contribute to the likelihood of misrepresentation by allowing project sponsors to ignore potential risks and associated costs, reducing opposition and facilitating project approval.

The research article, “Selling TIF: Positioning Hudson Yards as a project that pays for itself” by authors Bridget Fisher and Flávia Leite, found that New York City’s TIF-type project to redevelop Hudson Yards was sold to the public as one that would pay for itself. Project sponsors repeatedly assured residents, other public officials, and stakeholders that the project wouldn't draw from general taxpayer dollars. Thus assured, the project passed in 2005 with widespread support.

However, 15 years into the project’s development, SCEPA researchers found the city spent an additional $2.2 billion on the first of Hudson Yards’ two phases. These unexpected taxpayer costs were largely due to the municipality’s decisions during implementation to 1) ignore its own exposure to development risk such as recession and cost overruns and 2) shift risk from developers and bondholders on to taxpayers by providing tax breaks and guaranteeing the project’s debt.

Yet, despite these costs, Hudson Yards is often cited as an example of how to finance economic development. Case in point – New York Governor Hochul has proposed a TIF-type financing plan to pay for renovation of Penn Station that points to Hudson Yards’ public financing as a “key precedent.

Hudson Yards shows us that TIF’s self-financing premise can be used by project sponsors to camouflage risk even in cities and states with strong public land use and taxing institutions.  If this can cost $2.2 billion in New York City, what could happen in other cities around the world? For example, cities with smaller economies or less robust public institutions could be more vulnerable to potential risk shifting and resulting costs and face consequences such as project failure or cuts to other necessary public programs to balance the books.

To protect against these outcomes, SCEPA authors recommend including requirements to assign project risk before TIF project implementation, a process notably absent in New York City’s Hudson Yards. Such transparency mechanisms could go a long way to protecting global taxpayers from falling prey to the rhetorical power of a “self-financing” TIF project that passes easily but ends up costing billions.