$160 million giveaway to developers? There are TIFs, and then there are TIFS

During this election cycle, there has been a good deal of discussion around growth and development issues, and economic development priorities – being “business friendly”. Recent debate has centered around the appropriate use of “TIFs”; specifically, $160M in TIFs that the current Board of County Commissioners has issued for developers. The term “TIF” has been tossed around so much that many folks probably wonder what a TIF is and why it seems to matter so much in this election?

“Tax increment financing [TIF] is a public finance mechanism by which local government use bond proceeds to make public improvements that are necessary to spur private investment in a designated area.”

So, a TIF is public financing of public improvements to spur private investment, an “economic subsidy” given by the government to a private entity to stimulate a specific desired development or economic activity in a particular market sector. In that way a TIF is similar to a tax-credit or other publicly-funded methods of economic development.

When employing a TIF, a local government issues public bonds against an incremental increase in tax revenues that the development project is expected to generate. The funds raised by the bond sales are frequently used to pay for specific infrastructure improvements. Once taxpayers have repaid the bond debt, they benefit from any increased economic activity and property taxes.

How does a TIF work in practice? Here’s an analogy and example:

First the analogy: You want your boss to give you a raise, but says he can’t afford it unless he expands his factory. You go to the bank and take out a loan to help your boss expand the factory. The boss expands the factory and gives you a raise and – once you have paid off the loan – you get the increased salary for as long as your boss stays in business. You wanted the benefit of a raise in the long-term, so you paid to help expand your boss’s factory.

Next an example: Let’s say that many people commute out-of-county for work, and that elected officials recognize attracting local businesses and increasing good paying, local jobs is a concern in the community. Let’s also say a local developer owns a property where they could build an office building and attract new businesses to the area, but road improvements will be needed to offset some of the impact of this intensified land use.

In order to “spur investment” in development of office space, the county government could agree to give the developer a TIF so that taxpayers borrow the money and fund the necessary road improvements instead of the developer (note: both the developer and the taxpayers may well be paying for the cost of other impacts). The TIF reduces the developer’s costs and increases potential profit, thus increasing the economic incentive the developer has to build the office building. Once the bond debt is paid-off, the expectation is that the community will benefit from the new development and the increased tax revenue that the office building will bring if everything goes according to plan.

TIFgraphic-edit700w

(Click on the graphic to open a larger and easier to read version)

There are plenty of instances of TIFs being employed for economic development. The Board of County Commissioners under Jan Gardner used a TIF to encourage MedImmune to locate a facility in Frederick. The City of Frederick is planning to issue a TIF to support the proposed downtown hotel and conference center. In these cases the elected officials surmised that the prospect of good paying, local jobs and increased downtown economic activity justified the cost contributed by taxpayers through the TIFs.

So then, why the concern over Blaine Young’s Board of County Commissioners use of $160M in TIFs?

The Young Board has largely used TIFs to encourage large residential housing developments. From an economic perspective, this raises several important questions:

1. The residential housing sector in Frederick County benefits from a relatively steady level of demand. Should taxpayers pay to stimulate a market that is already healthy?

2. According to the law of supply-and-demand, artificially increasing housing supply will depress the prices and values of current properties. What effect might that have on the value of existing homes? Is this the best way to create more “affordable” housing?

3. A high percentage of Frederick County residents already commute hours each day to jobs outside of Frederick County. Is it in the county’s best interest to increase population without a corresponding increase in local, long-term employment opportunities?

4. Residential development has been shown to generally be a “net loss” when the costs of schools and other public services are compared with the increase in tax revenues and indirect economic activity. All things equal, is it in taxpayers best interest to use limited tax dollars to stimulate a market that leads to a “net loss?”

5. Housing starts certainly bring an uptick in construction-related labor demand. Are these jobs largely filled by Frederick County residents and do they offer a path to long-term employment above a living wage?

6. Taxpayer funds are limited and economic development dollars scarce. Is a $160,000,000.00 investment, largely in residential development, the right or best use of taxpayer funds? Are there other investments that offer taxpayers a better “Return on Investment?”

The answers to these questions don’t lie in far-right rhetoric found in Letters to the Editor of the FNP or on local blogs. Instead, a more honest answer depends a thorough and objective analysis, and on one’s long-term vision of Frederick County:

If our vision is to be a higher tax, bedroom community of residents that largely commute to jobs in Montgomery County and Northern Virginia, then stimulating an already healthy residential housing market is a good use of tax revenues.

If the vision is to have more local employment, reasonable property tax rates, and a stronger middle-class, then investing in activities that focus on making Frederick more attractive to businesses from a diverse array of industry sectors is a much wiser investment.


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