While reading up on the length of the school day for a Chicago Public Schools teacher, I came across another paper from the University of Illinois that I’d missed, even though it’s about one of my favorite subjects: tax increment financing and its effect on the local tax base (PDF). This has been a heated issue for a long time, thanks in large part to the Reader’s Ben Joravsky and his indefatigable focus on TIFs. But it goes back farther than that; when Harold Washington and City Council created the first TIF in the city, the Tribune headlined it by emphasizing its effect on schools.
So, TIFs. The way they work is… forget it, here’s Joravsky:
When the city council creates a TIF district, it freezes the value of property in that district for up to 24 years. If your property’s assessable value is $100 when the TIF is created, it will remain at $100 for the following 24 years—at least as far as the schools, parks, county, and other taxing bodies are concerned.
It’s supposed to create a development feedback loop: money above that $100 ("increments") is fed back into the TIF district. That money is used for development; that increases property values; that’s driven into development; and so on for 24 years. For better or worse, that money pools in TIF districts.
Something called “tax increment finance” might sound imposing, but the structural problems are pretty self-evident, and that’s what the University of Illinois researchers, Robert Bruno and Alison Dickson Quesada, address. By their figures, TIFs cost CPS anywhere from zero to $267 million in 2010. You may be wondering how the spectrum is that ludicrously wide. Here’s how that contentious issue works:
TIFs cost CPS because they fix the amount of property taxes available to CPS over a long period of time. More often than not, property values will rise and new development will occur over a period as long as 24 years. And the value at which the property is frozen is not adjusted for inflation. So that $100 becomes less than $100 in current dollars for one year, barring deflation. Which means the taxes that come from it buy you a lot less down the road:
A 2007 report produced by [Mike] Quigley found that local taxing districts in Chicago lost $3.6 million in taxes to a single TIF district in just six years because the Illinois TIF Act fails to adjust the base for inflation.
So if you have a $100 piece of land in the North Loop, it might be worth $500 in ten years. But CPS only gets to take its money from that $100—and that $100, ten years down the line, might only be worth $75 in current dollars. CPS not only doesn’t get to benefit from the growth, its “frozen” value is melting slowly.
Another contentious issue is the “but for” debate. The basic idea of TIFs is that the existing beneficiaries of property taxes get their existing tax haul, and the “increment” comes from development that would not happen “but for” the TIF. Lots of money TIF money from that first 1984 district has gone into North Loop development, and it’s a thriving, mostly upscale commercial district. If the city hadn’t plowed money into the area, perhaps it would be as rundown as it would in the 1970s.
On the other hand, in recent years urban living has become popular again; smart young people like being in cities; employers want smart young people; thriving industries have tended to be ones that do well in thriving cities and can be located in their central districts; stores like to sell to smart young people where they work and live. Have the economic improvements downtown come from city-driven redevelopment, or broader economic and cultural trends? Would it have happened anyway? If so, the schools are getting screwed by subsidzing private development; if not, they’re benefiting from the development, or at least not losing tax money. But it’s a difficult question, perhaps one that’s impossible to answer, or at least assign a value to.
Let’s make the (reasonable, I think) assumption that not all development in TIF districts can be completely attributed to TIFs. That means the citywide pool of money available to CPS is smaller than it would have been if TIFs didn’t exist. So how does the CPS budget go up? That’s easy: taxes.
Each year the taxing agencies determine their levy (the amount in property taxes they get to spend) by multiplying the tax rate by the overall amount of assessable property. Board of Education officials, for instance, claim they need a tax rate of 3.026 to meet their levy. But that rate is higher than it would need to be if it didn’t have to compensate for funds swallowed by TIFs. How much higher is hard to figure, but according to Cook County commissioner Mike Quigley, TIFs have inflated the overall property tax rate by as much as 8.4 percent (and that’s based on the most recent county information, tabulated in 2004).
And that’s just local taxes. As the Civic Fed points out, TIFs raise state taxes as well, or at least divert revenues from other state operations (thanks, Peoria!):
When a TIF is created, it limits the amount of EAV available to the school district by freezing taxable EAV within the TIF at a fixed level over time, effectively making the available EAV lower than it otherwise would have been. This reduces local available resources for a school district and thus increases the General State Aid entitlement of the school.
Minnesota actually capped the amount of school aid that TIF-using municipalities are entitled to because, in 1996, TIF districts cost the state an additional $100 million.
The Civic Fed actually ran the numbers for 2005-2006, and the results are interesting. If you dissolved all Chicago TIFs in 2004:
* In 2005, CPS would get an additional $153.5 million from property taxes
* But CPS would get $110.6 million less from general state aid
* Overall, CPS would get an additional $43 million
But as they also note, it’s unrealistic to expect that the city would eliminate all development subsidies. If TIFs were eliminated, the city would do something different. Whether or not that would be a much better idea is a different question, but it’s almost certainly true. So they decided to see what would happen if you eliminated just the Central Loop TIF district in 2004.
* CPS would get an additional $41.5 million in property taxes
* CPS would lose $29.7 million in state aid
* Overall, CPS would get an extra $11.8 million
The Civic Fed contends that CPS doesn’t lose money because of TIFs. We just pay more local and state taxes because they exist.
But even that assumes a lot: that TIFs either exist or they don’t, and that all 100 percent of the increment goes to the district. That’s not the case elsewhere, as the UIUC researchers write:
Overlapping taxing bodies in Texas have the ability to retain up to 15% of the tax increment for themselves. A comparable allowance in Chicago could have afforded CPS an additional $40,039,622
in property tax revenue in 2010.
At an average salary of just under $75k, that’s over 500 teachers. Not a lot when compared to a total number of over 20,000, but it’s about 25 elementary schools’ worth of them.
In California, where TIFs were invented, they work differently as well:
The State of California allows taxing entities to keep growth from inflation of the EAV base, up to two percent, plus any increase in tax increment stemming from reassessments after an ownership transfer.
TIFs, as they exist in Chicago, are pretty inflexible. If they were more flexible, maybe we’d pay less in taxes—or maybe we’d decide that more money should go to the schools, and the taxes would be just as high. Or we’d spend just as much in development as we do already, just using a different system. That’s where they get complicated, and why hard numbers are so hard to come by. They change how things are budgeted, so it’s hard to say that “CPS would have more money” or “taxes would be lower.” The answer, as always, is somewhere in between.
Photograph: joguldi (CC by 2.0)