Chicago’s tax-increment finance districts were a central issue in the mayoral campaign and the aldermanic elections. It’s an ongoing debate, and a critical one, as the districts consume hundreds of millions of dollars in property tax revenues, and, by their very nature, limit what those revenues can be spent on. Well-informed people in the media, government, and academia have been following the effect of the districts on the city’s finances for years, and in particular on the city’s heavily property-tax reliant schools.
And their conclusion? They disagree with each other. A lot.
OK—that’s really boring. Local experts disagree on complicated political issue! But… maybe it’s not so boring. Maybe it’s kind of strange, if you think about it. Over $400 million goes into TIF funds every year. It’s the most powerful development program in the city’s arsenal. And no one really knows what it does to the city’s finances. That’s at least a little weird.
Take the recent tiff (ha) between Greg Hinz of Crain’s and Ben Joravsky of the Reader. They’ve been covering city politics since time immemorial. And they’re as far apart as they can possibly be about whether TIFs (which, again, are property tax revenues) take potential revenues from property tax-funded schools.
That, however, doesn’t mean Chicago Public Schools gets cheated of even a penny. CPS levies on all of the other taxpayers the property taxes it doesn’t get from TIF districts. And since CPS already is asking for the maximum amount of money it can under state law, “CPS wouldn’t get any more if every TIF district in the city was abolished tomorrow,” Chicago-based Civic Federation President Laurence Msall says. “They’re already at the levy limit.”
There’s a logic to this (even if it contained a significant flaw). The amount of money that Chicago schools can get in a given year is limited to a certain amount above what they received in the prior year. Here’s how it works, as explained to me by UIC prof Rachel Weber:
“Your tax extension is not allowed to increase by more than five percent every year, or the rate of inflation. [The extension] depends on two main things: the tax base and the rate. Multiplied by each other, that equals their extension. If [municipalities] are restricted from raising their tax extension every year by a certain amount, then if their base grows wildly, just because developers are building a lot, or there’s a lot of demand for property in an area so that property values appreciate, they have to lower their rate in response, to comply with the tax cap.”
Pretty simple: If property tax revenues go up, the rate goes down, and vice versa. That’s the result of the Property Tax Extension Limitation Law, or PTELL, which was implemented in Cook County in 1995 in response to what was perceived as excessive increases in property taxes, and shortly before that in the collar counties.
And the intent is pretty simple: if schools use X amount of money in one year, the next year they should need X plus not a ton more. If the schools think they need X plus an actual ton more, it has to go to the voters. Which doesn’t usually fly.
But there’s always a caveat. New construction, as Weber points out, isn’t subject to PTELL, so it can increase revenues for school districts. But if that new construction is in a TIF district, all that property tax on the new construction goes into the TIF fund.
But there’s always a caveat to the caveat, especially when you’re navigating the Byzantine world of tax law. As Msall told Hinz, when the TIF expires, the money goes back into the district and isn’t subject to PTELL, either. Eventually, the property tax revenues for the new construction that would get around PTELL do eventually return to the school district, it’s just delayed. And it can be delayed a long time, since TIFs can last over two decades.
“When a TIF is terminated—let’s say it lasted for 23 years and the overlay disappears—all that tax base can go back on the rolls of the school district,” Weber says. “When that happens, that’s supposed to not be subject to the tax cap. The effect is what municipalities have been saying to school districts all along: Just wait 23 years, and then there’s going to be this massive infusion of tax base onto your rolls. If that was restricted by the tax cap, that would be problematic, because then the schools wouldn’t be getting that much money.”
It can be awhile to wait, and there’s at least an argument that periodic large infusions of cash into the schools on the schedule of expiring TIFs is not the greatest way to budget, at least compared to a steady flow. So some school districts have figured out ways to avoid it.
“Some school districts—like Oak Park—negotiated with the municipalities for certain givebacks over time; they don’t have to wait for 23 years,” Weber says. “Certain areas, once they’ve reached certain property value thresholds—let’s say they’re focused on a new development project. A couple years after that development project’s been built, it goes back on the rolls, even if it is in the TIF district. They call it a carve-out.”
But that has more to do with the timing of that cash infusion than how large it is. Msall (and Hinz) contend that schools are better off for TIFs because of how they allow property tax money to get around PTELL:
As Msall put in an email, referring to that $200 million CPS windfall, “This is revenue that would not be available to CPS without the existence of TIF. It does NOT represent revenue that CPS somehow ‘missed out’ on. If the TIF districts had never been created, all of that growth in the tax base would simply have lowered tax rates (in non-TIF property) without generating CPS another dime because its levy is limited by increases in inflation.”
But there’s a question here worth considering. Everyone agrees that TIFs raise property taxes; even Hinz and Joravsky agree; Weber found hard evidence of it. But would we actually be paying less in property taxes if TIFs didn’t exist?
“School districts that were located in municipalities that TIF’d a lot had higher rates—they’re forcing all of us to pay more property taxes. That’s what you get when your rate is increased,” Weber says. “It’s not just that the value of my home has increased; that’s a benefit to you as a property owner. Your rate increases; we’re all paying more. It’s possible that if we didn’t have TIF districts here, we’d all be paying less in property taxes.”
PTELL was implemented in 1995 in Cook County. Coincidentally or not, this is about the time TIF districts start growing like kudzu. If Weber is right, the absence of TIF districts would mean we would have lower property tax rates; but it follows that rates could be higher than that hypothetical number, and that schools would get more money. There’s just no getting around the fact that TIF districts consume property tax dollars that would otherwise go into the taxing bodies; if they didn’t, it’s worth considering how high property taxes would be and how much money would go where. As two analysts for the county put it in the Journal of Property Tax Assessment & Administration, “TIF can have an indirect effect on the ability of taxing agencies to increase their levies. Any pressure on the property tax in the form of higher taxes contributes to the difficulty of increasing the tax.”
Again, what would happen in the hypothetical absence of TIF districts is a hard question to answer. TIF money goes to economic development; it goes to schools; it goes to infrastructure. The city would do those things anyway. And that’s another issue with TIFs, one Joravsky has been arguing for years: TIFs geographically limit where that money can be spent. In fact, that’s the whole point—it’s supposed to keep the money in the area to create a feedback loop of economic development. But there’s a huge potential downside: a thriving area will generate more TIF revenues to be used in that area, but a thriving area isn’t necessarily one that needs a feedback loop.
“After studying this for awhile, I’m not sure if you can say that TIF causes economic development, or that TIF causes appreciation,” Weber says. “I think what it does do is that it accelerates [development]. That vacant parcel most likely would have been developed sometime in the future, but with TIF, it increases the probability that it’s developed more quickly; it happens in the next couple years instead of in ten years.”
That’s one appeal of TIFs. The other is control. The eternal question with TIFs is “but/for": would the economic development in TIF districts occur but for the existence of the TIF?
“Let’s say half of the development in Chicago would have existed without TIF. Then that is a loss to the schools. If that development would have happened anyway, but it just happens to be located in a TIF district, that is a capture of revenue from the school district by the municipality,” Weber says. “But let’s say half of that increase and appreciation really did depend on the TIF. And under many projects that I could point to as well, that likely would not have gotten off the ground without TIF assistance, then it’s murkier. If the city hadn’t offered it, nothing would have been there, and the school district isn’t any the worse, because that development wouldn’t have taken place. Maybe another development would have taken place that would have been less valuable.”
But consider that question from the perspective of a city planner (or a mayor). If you assume that Weber is right, lots of development in TIF districts would occur anyway, just later or slower or smaller. City planners could sit around and wait for that to happen, but, you know, they’re city planners. TIFs allow them not only to attempt to accelerate economic development, but also to control and shape it—and the city landscape around it.
“It does give local governments a modicum of control over the development process,” Weber says. “Once there is TIF assistance to a developer, then the city can say—this happened a lot during the Daley administration—’We want a green roof on that building. And some wrought-iron fencing, to create these kinds of public benefits that are associated with the development. If we’re going to give you this money, we’d like you to do the following things.’ It allows the city to be more of a partner in the development process. There’s still a question, though: is the city paying too much for that kind of privilege?”
Unfortunately, it’s very hard to determine how much the city is paying for that privilege, to separate development that occurs because of TIF from development that theoretically would have happened anyway. (The most recent study I’ve seen comes from one of Weber’s former students, T. William Lester, and its findings cast a skeptical light on TIF as a development tool.)
But there are things that can be done to tweak them, as I’ve written before. There are the carve-outs that Weber mentions. The initial tax base in a TIF district that gets frozen—the part that keeps going into the usual taxing bodies, like schools, instead of staying in the district—can be indexed to inflation, as is the case in other places, ensuring that its value doesn’t diminish.
Despite its complexity, it’s clear that there are two very basic options. One is to keep building on the work of people like Weber and Lester, running the numbers in further depth and detail and then tweaking the laws around them. Another is to tweak the laws and seeing what numbers come in. Until then, the true cost of TIFs to schools and other government functions will remain something of a mystery.
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