Tiff Over TIFs

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The tiff over TIFs between Cliff Lambert, Director of Terre Haute Redevelopment, and Mayor Duke Bennett has injected some surprisingly sharp controversy into local news coverage over the past few weeks. Who knew such animosity existed in the government of our fair city? Although Cliff and Duke are excellent names for boxers, so maybe it was only a matter of time until a fight broke out.

Up until Lambert’s accusatory tirade, he and Bennett seemed to be on the same page: both of them were opposed a state proposal that put an end date on TIFs that they wanted to last “to infinity and beyond.” The fact that this same legislation required TIF funds to be overseen by the city controller apparently was a point they both overlooked, since they obviously failed to discuss how the transition would occur. Bennett rushed the funds into a general pool, but Lambert clearly believes they should remain in their own stream.

Our mayor, subjected during his tenure to surprisingly little criticism for a Republican in a Democrat town, has now been tainted with accusations of fiscal wrongdoing that amount to (in Lambert’s words) a felony. Is anyone regretting the way Bennett won his second term in a landslide? Well, maybe nobody in the general public.

The average person who’s trying to keep score may recall that Bennett has managed to get pretty good legal counsel in the past. Like when he won his first mayoral election, and his opponent, incumbent Kevin Burke, thought the results would be overturned on a technicality. Unfortunately for Burke, the law he thought would disqualify Bennett did no such thing. Bennett had acted on accurate legal advice regarding his eligibility to run for office. Now, he doggedly insists he’s on firm legal footing with the handling of the TIF funds and I wouldn’t bet against him.

Investigators are on the case; lawyers have been hired; suits have been filed – sooner or later, the truth will out – or at least a ruling will come down, perhaps to be disputed all over again. There’s little to be gained in trying to prove who’s right. Even a judge will just be offering an opinion. Our time might be better spent looking into some earlier disputes over whether TIF funds should even exist as an issue to fight over.

Tax Increment Financing: Useful Incentive or Unequal Taxation?

Tax Increment Financing (TIF) has been around for a long time. In Terre Haute, The Central Business District Urban Renewal Area and Tax Allocation Area, the first of the current six TIF districts, was created in December of 1985. TIFs are in the same family as tax abatements, and serving the same purpose: they provide a financial incentive for a business to locate in a particular spot. Politicians generally vote in favor of TIFs because it makes them look like “job creators” and who could be against creating jobs?  Ostensibly, the whole function of American government on all levels has somehow become job creation.

On the surface, a TIF appears to be a more equitable tax incentive than an abatement. After all, the company being enticed does actually pay taxes with the TIF system in place.

Let’s look at a definition from Cliff Lambert himself:

TIF is a financing tool created by the Indiana legislature and used by local governments to develop an area by collecting property taxes attributable to increases in assessed value resulting from new development within that specific area known as an Allocation Area. TIF can be used by the local government to finance infrastructure or capital improvements that are in, serving, or benefiting the area to be developed.

 If a company …decides to make a capital investment within a TIF area, the company would pay the same amount of taxes whether the area is or is not a TIF area.

Sounds like everybody wins, right? Well, maybe/maybe not. Further on, Lambert explains the rest of the story:

However, the company’s property taxes … that come from the new assessed values would not flow to the underlying taxing units such as the city, county, school district or library to fund their respective budgets. Instead, the company’s incremental property taxes would be captured by the Redevelopment Commission to further development throughout the entire area.

That “captured by the Redevelopment Commission” is a telling phrase. The Redevelopment Commission set the trap, and they aren’t going to stand for any poaching of the game that wandered into it.

Also, note the entities rather dismissively referred to as “underlying taxing units.” City and county taxes would be dispersed into activities such as police and fire protection, and road and public park maintenance. These, along with supporting schools and libraries used to be the primary reason behind tax collection. Taxes are essentially money “captured” to provide services for the common good of the community.

Lambert’s explanation, quoted here, of the way TIFs work was in the context of a letter published on February 7, 2006 in the Tribune Star. He was responding to an op-ed by Ryan Cummins, at that time a member of the Terre Haute City Council. Lambert, quoting Mark Twain and Winston Churchill, casts aspersions on Cummins’ intellect because of his assertion that TIFs create an un-level playing field for businesses, and shift the overall tax burden.

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As is almost always the case, an argument could be made over semantics, but Cummins did have a point deserving more than a breezy dismissal. While the TIF requires a newly established business in the allocation area to pay the same tax rate as an older business outside of the TIF district, the use the taxes are put to is not at all the same, which is pretty much the definition of “unequal.” And “an un-level playing field” is a fairly common metaphor for “unequal.”

Captured Taxes: Who Benefits?

Lambert’s letter uses the example of the Hilton Garden Inn to support his point about the beauty of the TIF. But the way the “captured” taxes from that project were used illustrates Cummins point just as effectively. As reported by Howard Greninger, in The Tribune-Star on February 9, 2007:

A financial incentive for a private developer to build an extended-stay hotel in downtown Terre Haute received approval from the City Council on Thursday in an 8-1 vote. 

Earlier Thursday, the city’s Economic Development Commission unanimously recommended the City Council approve a revenue bond as an incentive to build Candlewood Suites .

… Councilman Ryan Cummins, R-2nd, was the lone dissenter on the issue.
 Under the agreement, the city of Terre Haute agrees to allow taxes generated from the Hilton Garden Inn, currently under construction, and the proposed Candlewood Suites be used to make bond payments.

 City taxpayers would not be responsible for payment of the bonds.

… $1 million would be paid to Wabash Valley Hotel Partners LLC, owner of Candlewood Suites. The principle partner is Dora Brothers Hospitality Corporation which is building the Hilton Garden Inn. … The bond essentially allows Wabash Valley Hotel Partners to use its property taxes to pay off the bond.

That last sentence brings out the concept that makes the TIF seem like an unfair system. This would be like me being able to use my property tax payments to pay off my mortgage. I would still be paying taxes, but the benefit of the taxes would be entirely mine, not a contribution to the community at large. And if I had this deal, but my neighbor didn’t, wouldn’t my neighbor feel as if she were, in essence, paying more in taxes than me?

TIF funds from the downtown hotels were also used for payments on a previous bond issued to construct the parking garage. So, I have to refine my analogy: a portion of my taxes would go toward something such as the purchase of a vacant lot to be used as a community playground, and thus some benefit would be for others.

At this point, we need to return to the aforementioned job creation at the heart of arguments in favor of TIFs. The hotels the TIF money helped to build hired employees. If my mortgage were being subsidized by my property taxes, I’d have to use the money freed up in my budget to hire someone in order to make the analogy more apt. During the period of my home ownership here in Terre Haute, I actually did hire a carpenter to remodel. The thing is, I did so without any special tax circumstances. Again, we swing back to the anti-TIF side of the argument. Is it possible that some of the businesses that benefit from the TIF would locate in Terre Haute, making capital investments and hiring employees and paying taxes that would flow into the budgets for police, firefighters, teachers and librarians?

Maybe I’m just not financially savvy enough to comprehend the complexities of the system, but it seems to me that the TIF system is ultimately unsustainable no matter who is in control of the accounts.

TIF Proliferation: Have Criteria Changed?

Originally, “blight” was a criterion for an area being eligible to qualify for allocation of TIF funds. However, during the decades that TIFs have been employed as a tool of economic development there’s been what the military calls “mission creep.”

In 2006, a TIF district was created with boundaries along the north side of Interstate 70 East to Indiana 46, then north to an area south of Hulman Street and back to the interstate. This was not an area of urban blight; it was farmland. As such, it generated much less tax revenue than developed property. All that additional tax revenue was captured by Redevelopment for economic improvement and job creation. There are jobs at the Dollar Store, Sonic Drive-In and the other retail businesses that nestle near the Wal-Mart, as well as at Wal-Mart itself.  Rick Jenkins, a member of the Redevelopment Commission at the time is quoted as saying he “does not oppose a TIF district if it creates jobs paying $12 to $18 per hour.” Well, possibly somebody at those stores makes that, so I guess his yes vote was logical.

I only know what I read, and what I read gives me the impression that Wal-Mart is awfully hard for a small local business to compete with. Therefore, it seems as if bringing a second Wal-Mart to Terre Haute through creating a TIF may have worked at cross purposes with bringing small businesses to the original downtown TIF.

This TIF mission creep has one more facet. Greninger, in the 2007 article, quotes City Engineer Pat Goodwin saying,
“One of the most frequent questions I get about this is ‘well, why don’t we let the developers pay and build that infrastructure.’ My answer is we tried that experience and it’s called Honey Creek Mall.” Greninger further reports that Goodwin said traffic patterns and development around the mall became a “quagmire” due to a lack of long-term planning.

So now, in addition to fighting blight and creating jobs, we’ve got the TIF used as a means of altering traffic patterns.

The original meaning of “quagmire” is “soft, marshy ground.” That’s pretty much all been paved over around Honey Creek Mall. Of course, Goodwin must have meant you could get stuck in traffic in the mall area. It’s true there are a lot of stop lights on that stretch of US 41, but isn’t traffic an unavoidable by product of economic development? The eastside Wal-Mart draws more traffic to the area than the fields did. That’s the idea, isn’t it?

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TIF Funded Parking Garage: Economic Failure or Foundation for Growth?

The hope for more traffic was surely behind using tax funding for the three million dollar downtown parking garage dedicated way back in 1988. That facility was sold in 2010 for half a million dollars, after having operated at a loss every year. Last month, WTHI reported that the garage had a fifty percent occupancy rate.

Mayor Bennett made the decision to auction off the garage, but Lambert, who was part of the city’s redevelopment commission back when the garage was built, agreed.

Lambert said, “I think it makes all sense in the world to reduce our operating expenses by selling the garage.

… I think local units of government have a need to act as catalysts in energizing and investing in economic development activities. I also think there comes a point in time when that catalyst activity has been successful, and the local unit of government should attempt to step back and let the private sector do what the private sector does best.”

Lambert was doing a lot of thinking there, but none of it was about how effective the TIF really is as a catalyst. When a three million dollar investment returns half a million dollars – not even counting the loss in operating budget – the math just isn’t in the taxpayer’s favor.

In some ways, the system reminds me of a pyramid scheme. A bond is issued as an incentive to build, taxes are generated to pay off that bond. Another bond helps fund another project and the captured taxes are applied toward bond one and bond two. Wasn’t Bernie Madoff doing something similar?

Maybe I’m just not financially savvy enough to comprehend the complexities of the system, but it seems to me that the TIF system is ultimately unsustainable no matter who is in control of the accounts.

Sources Linked:

Kokomo Tribune Reports SBA Findings on Terre Haute TIF Complaint Not Expected Until Audit Complete

Flashpoint: Cummins Fires Away With Facts that ‘Just Ain’t So’

Terre Haute City Council OKs Financial Incentive for Extended-stay Hotel

Greninger:Commission Votes to Adopt Declaration

Parking Concerns for Downtown Terre Haute

City Puts Old Downtown Parking Garage Up for Sale

Additional sources:

Heller, Tom “Economic Development: Indiana’s Wobbly TIF Law” 10 August 2013 Indiana Policy Review (Request access at director@inpolicy.org

Terre Haute Mayor Accused by Department Head of Using TIF Monies to Meet Payroll

Lunch Downtown: Chewing on the Big Lie

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