Insights Blog

TIF Case Studies: California and Chicago

August 20, 2020

While tax increment financing (TIF) is a common tool for municipalities to fund economic development (read how it works here), it is responsive to the legal, political, and economic environments of the locality in which it is implemented. 

Authors: Bridget Fisher, Flávia Leite and Lina Moe

While the country’s largest TIF is in New York City (for an in-depth examination, see “The Cost of New York City’s Hudson Yards Redevelopment Project”), California was the first state to use and revoke TIF and Chicago was the first urban area to embrace the tool for most of its development needs. In both cases, the on-the-ground TIF experience resulted in consequences often overlooked in explanations of its theoretical frame.

California – The Hidden Public Costs of “Self-Financing”
California was the first to adopt a statewide TIF program to fund development and the first to revise it following the revelation of its high public costs (Horiuchi and Chapman, 2019).

In 1952, California empowered Redevelopment Agencies (RDAs) to use tax increment financing to finance urban renewal projects. The use of TIF by RDAs, or public authorities managed by a board rather than the local government, was initially limited by public controversy over the fact that TIF revenue was drawn from property taxes that would have otherwise gone to public schools. Resistance to TIF use diminished after a 1972 law promised to reimburse lost school revenue with state funds, a subsidy estimated to cost more than $2 billion annually. In 1978, Proposition 13 then made it more difficult for local governments to increase property taxes.

In this context, TIF provided a politically feasible path for local governments to finance infrastructure projects and entice new businesses. First, by channeling bond sales through RDAs, TIF allowed local officials to avoid getting voter approval to issue debt. Second, TIF allowed cities increasingly in search of sales tax to entice retail business with infrastructure improvements or direct subsidies paid by TIF revenue. However, an increasing number of TIF projects left RDAs with large amounts of debt to pay off. With a limit on property tax rates, RDAs often resorted to creating larger TIF districts or expanding the boundaries of current ones to raise needed revenue. This move towards larger project areas in California appealed to bond investors who prefer larger areas to project-specific TIFs. Since the latter “depend…on a limited geographic area, a single development, and one developer,” they are considered to come with higher risk. By 2008, RDAs claimed 12% of the state’s property taxes, with six projects covering over 20,000 acres (Horiuchi and Chapman 2019, p 163).

This cycle allowed California to fund both development and schools for as long as the state budget could fill the gap in property tax revenue. However, when the state´s finances started to deteriorate, TIF came under scrutiny as critics pointed out that RDA projects were not self-financing, but heavily subsidized by the state. One empirical study found only four out of 38 TIF projects grew fast enough to be considered self-financing. In 2012, facing severe budget shortfalls, Governor Brown abruptly dissolved RDAs statewide, blaming the state’s development subsidy to RDAs for siphoning off needed state revenue.

Without RDAs, TIF use was effectively discontinued until 2014, when the state created a successor program, Enhanced Infrastructure Finance Districts (EIFDs). While EIFDs are allowed to issue TIF debt, the new law created parameters to address the abuses of the old RDA system. For example, TIF is no longer allowed to draw funds from schools, approval from any affected tax district is required to institute a TIF, and voter approval to issue TIF bonds is required, among other limitations.

California’s experience serves as a cautionary tale for those who expect TIF to inherently be self-financing. The state’s property tax system provided incentives for cities to use TIF as a financing tool, leading to the diversion of property tax revenues from overlapping tax jurisdictions and an unsustainable burden on state finances. The true costs of local TIF projects only became clear when the statewide costs were assessed.

Chicago – Inequitable Development

Though intended as a finance tool for blighted areas, TIF use in Chicago grew in the late 20th century to be so widespread that Mayor Richard M. Daley called it “the only game in town.”

Mayor Harold Washington created the city’s first TIF district in 1984 in the downtown area known as the Central Loop. At the time, the area was blighted, and TIF was used to assemble sites for redevelopment, rehabilitate buildings, and build transport infrastructure (Weber, 2010). To pay for the project, Chicago issued both general obligation bonds and TIF bonds from 1986 to 2000 totaling over $500 million (Neighborhood Capital Budget Group, 2003). Thirteen years later, Mayor Daley expanded the original Loop district to more than four times its original size (Briffault, 2010), which allowed the district to bring in approximately $1 billion dollars over its lifetime. By the time Mayor Daley left office in 2011, the city reached it zenith in its number of TIF districts at 163, covering 30 percent of its taxable land.

By expanding TIF, Chicago was able to sell off-budget debt and continue making capital investments in the city despite consistent budget deficits. However, as TIF use expanded, it didn’t benefit all Chicagoans equally. High-dollar economic development projects became concentrated in areas already experiencing growth rather than zones of economic blight. From 2001 to 2014, seven of the ten TIF districts receiving the largest amounts of tax increment funds were in prosperous neighborhoods near downtown. There was also a disparity in the size and impact of TIF investments. TIF districts in low-income, peripheral areas of the city received minor public investments related to local streetscape restoration and subsidies to retailers, while downtown TIFs received large-scale infrastructure investments such as utilities, roadways and transportation improvements.

As the scale of TIF use in Chicago grew, criticism followed. Both the general public and some City Council members (responsible for TIF oversight) complained about the lack of transparency in how the mayor’s office was spending and allocating TIF revenues. Scrutiny focused on the need to disclose what private interests were receiving TIF funds from the mayor’s office.

In 2009, city officials adopted the TIF Sunshine Ordinance requiring information about TIF districts to be made available online. Mayor Rahm Emanuel enacted TIF reform after he took office in 2011, calling for increased transparency and accountability. However, when Lori Lightfoot took office in 2019, she highlighted the continued need to hold TIF recipients to higher standards of transparency and accountability. Central to Lightfoot’s approach to overhauling TIF use is the re-establishment of a more robust ‘but-for’ analysis to limit TIF to areas in which economic development would not happen without public funds. Lightfoot plans to create a TIF Task Force that will review TIF expenditures, using equity as a factor in its decision-making, as well as make public a database of TIF spending While some TIF districts are targeted to shut down, Lightfoot’s new rules may not enable some major projects already in progress, such as the Lincoln Yards and The 78, which received $2.4 billion in public subsidies, to be reexamined or rolled back even though these projects divert city funds to already-wealthy areas.

In Chicago, TIF continues to be an important tool of municipal finance. Currently, the city’s 136 TIF districts receive $850 million in annual revenue. Time will tell if Mayor Lightfoot’s efforts to reduce the misuse of TIF to fuel inequitable development, it remains to be seen how effective a more rigorous ‘but-for’ analysis in selecting projects will be in making TIF a tool of equity as well as development.


Sources

1. Cherone, H. (2020, Feb. 5) Lightfoot tightens rules on spending TIF money for private development. Block Club Chicago.
2. Dardia, Michael (1998) “Subsidizing Redevelopment in California.” Public Policy Institute of California, San Francisco, CA.
3. Hinz, G. (2020, Feb.5). Lightfoot reveals her TIF overhaul plan. Crain’s Chicago Business.
4. Horiuchi, C., & Chapman, J. I. (2019). TIF in California: Birth, Growth, Death, and Resurrection. Em C. L. Johnson, & K. A. Kriz, Tax Increment Financing and Economic Development: Uses, Structures, and Impact - Second Edition (p. 366). New York: SUNY Press.
5. Jordan, J (2019, Dec. 2) Chicago Mayor calls for early termination of four TIF districts. GlobeSt.com.
6. Kerth, Rub & Meiffren, Celeste (2012) “Cleaning up Tax Increment Financing Rethinking Chicago’s Troubled Redevelopment Program”, Illinois PIRG Education Fund.
7. Lefcoe, George and Charles W Swenson, 2014. “Redevelopment in California: The Demise of TIF-Funded Redevelopment in California and its Aftermath.” National Tax Journal 67.
8. Neighborhood Capital Budget Group (2003) NCBG’s TIF Almanac. Chicago, IL.
9. TIF Reform Panel (2011), “Findings and Recommendations for Reforming the Use of Tax Increment Financing in Chicago: Creating Greater Efficiency, Transparency and Accountability.”
10. Weber, R. (2010). Selling Futures: The Financialization of Urban Redevelopment Policy. Economic Geography 86(3).
11. Youngman, J. (2011). TIF at a Turning Point: Defining Debt Down. Cambridge: Lincoln Institute of Land Policy.