Executive Summary

Tax increment financing (TIF) has become a tool for financing and stimulating urban economic development in practically every state in our nation. It was created so that local municipal governments could issue bonds to finance infrastructure improvements, undertake land assembly, and provide incentives to lure private investment to blighted urban neighborhoods that show a pattern of losing value. In Illinois, once a TIF district is approved, the designation stays in place for 23 years. Over the next two-and-a-half decades, any new property tax revenue generated by development of that geographic district will be used by the city or town for further improvements or development subsidies in that district. Other local taxing bodies, such as public school systems, park districts, counties, etc., continue to divide up the amount of property tax collected before the TIF district was created. In effect, their revenue collection from the area designated a TIF district is frozen for 23 years.

Most municipal officials in Illinois express a deeply held conviction that without the intervention of TIF, important parts of their cities and towns would not experience economic growth and the attendant growth of property tax revenues. But as the use of tax increment financing accelerated in the 1990s, controversy developed over its true costs and benefits. Nowhere has the debate been more intense than in Chicago.

In the late 1990s, tax increment financing became the most widely used tool for neighborhood development under the Administration of Mayor Richard M. Daley. Large areas of the City’s downtown and near-Loop neighborhoods became TIF districts, defying most people’s notion of “blighted areas.” But Chicago’s Mayor has repeatedly called tax increment financing “the only game in town,” and “the only tool” that the City has to spur economic growth. First authorized by the Illinois General Assembly in 1977, by 1996 the City of Chicago had set up 37 TIF Districts. At the time this study went to press some four years later, City Hall had tripled that number to 114 TIF Districts. Proposals for at least another ten TIF districts are pending. Approximately 13.4 percent of Chicago’s entire property tax base now falls under TIF designation. Sixty-seven percent of all Chicago TIFs were created since 1996.

What’s the controversy? Many Chicago neighborhood organizations and taxpayers have expressed concern about possible negative effects of TIF. Community residents have worried that TIF will lead to gentrification and accompanying displacement, use of imminent domain, the rapid transformation of a community’s historic character, and the attraction of “replacement” populations, while long-time stakeholders may have to move on to less desirable, but more affordable neighborhoods. Many fear that over-use of TIF will lead to higher property tax bills, as less and less of the property tax base is available to local government agencies to pay for day-to-day services.

Meanwhile, outside Chicago, the 1990s saw public school districts around Illinois join forces with community groups and affordable housing advocates in demanding TIF reform. Suburban and downstate public school officials have raised objections to the overuse or alleged abuse of TIF, charging that public education systems lose significant revenues during the 23-year lifetime of TIF districts. These public officials raise serious questions about the fiscal impact of tax increment financing. While the Chicago Public Schools (CPS) has made efforts to tap TIF revenues for its school construction program, CPS has said little about TIF’s impact on its overall revenues.

NCBG believes that the public’s concerns warrant attention and response by City officials. This study is a partial response to those concerns. This study is one of a planned series of reports aimed at providing a closer look at the costs and benefits of the City’s use of tax increment financing. Since 1996, NCBG has closely monitored the City’s TIF Program, and has been a leader in conducting research on tax increment financing. Building on that knowledge, this study focuses on concerns about the fiscal impact of tax increment financing.

The question, “Could TIF truly be cost-free?” has been asked frequently, but it is seldom answered based upon empirical research. NCBG took up the challenge, developing a sample of 36 TIF Districts in the City of Chicago, for which there is sufficient historical data to track the rate at which property values have increased. After all, the reason that municipalities use tax increment financing is to grow their property tax bases, and thus the revenue stream that supports vital public investments and government services. Were areas that the City designated as TIF Districts already growing in value? If so, what has the public paid to promote their future growth? How can we tell if the benefits justify the costs? As NCBG analyzed this sample, we looked for empirical answers to the question, “Who Pays for the Only Game in Town”?

Basic Assumptions of this Study

• When TIF is targeted at blighted areas declining in value, local governments' rationale is probably sound: New public improvements and subsidies to developers can help attract new business and industry to unused or under-developed land, add jobs and grow the property tax base.
• When TIF stimulates new development, there is also a need for growth in public services to support that development. Particularly in the case of residential development, new growth will often mean additional demands on the services and facilities of public schools.
• When an area is already growing in value, it is reasonable to assume that a similar growth rate will continue in the future.
• When TIF districts are created in areas already growing in value, there is an effect of capturing the “natural growth” of the property tax revenue stream and diverting it away from other local taxing bodies.
• When other local taxing bodies don’t receive the natural growth in revenues from already appreciating areas now under TIF designation, they are paying for economic growth that would have likely occurred anyway. The revenue they forego is used instead to subsidize TIF development.

• Tax increment financing is not cost free when already-growing areas are designated as TIF districts.
  
• Over the lifetime of the 36 districts that NCBG analyzed, the local taxing bodies that draw on Chicago’s property tax base will lose $1.3 billion in tax revenues they would have probably collected if these areas had not been declared TIF districts.
• The Chicago Public Schools will not receive a projected $631.7 million in property tax revenue that it would have received if these 36 areas had continued to grow at their pre-TIF rates.
? The City of Chicago will not collect the projected $254.8 million it would have received.
• Collectively, the local taxing bodies will “forego” the benefits of a projected $1.6 billion in property tax revenue during the
lifetimes of these TIF districts. The amount foregone is the sum of lost revenue and new revenue created by a TIF district.
• The overall gain in projected new property tax revenue that can be attributed to these TIF districts will be $361.9 million.
• Many questions remain unanswered about how to measure the costs and benefits of tax increment financing, and whether the benefits of TIF are worth the fiscal costs to other local government bodies.

Methodological Challenges and Limitations

While the Neighborhood Capital Budget Group took great care to develop the most reliable methodology and most accurate projections that it could possibly undertake, the entire arena of TIF research faces a number of challenges and limitations.

• The City of Chicago and the Cook County Assessor’s Office have inadequate data to fully evaluate the historical rates of growth of most of the City’s TIF districts. Prior to 1999, the Illinois TIF law did not require municipalities to report the prior EAV history of proposed TIF districts. Since redevelopment often leads to land assembly and altered uses, parcel identification of much of the land in TIF districts changes. Due to these circumstances in many of Chicago’s TIF districts, it is not feasible to reconstruct the history of changes in EAV accurately. Of the City’s 114 TIF districts with approved redevelopment plans, only 48 reported the prior rates of growth for a three-to-five-year period.
• The reporting requirements regarding TIF data have changed over time, and are still not uniform even within the City of Chicago’s TIF program. This creates barriers to conducting a comprehensive assessment of the performance of TIF districts and challenges us to find new and meaningful ways to measure the costs and benefits of tax increment financing.
• Projecting the anticipated revenues, growth in EAV and benefits of tax increment financing is more of an educated guess than a science. No one can predict what will happen in the future to change the value of land, patterns of development or tax rates. A careful analysis of existing market conditions, proposed development, current tax rates and assessed value are all used by TIF consultants to project future increment.
• Currently, the City of Chicago and the public rely upon educated guesswork that cannot address a basic limitation of the TIF “game”: TIF is a blunt tool. On its own, it is not calibrated to detect the level at which market forces can take over once the redevelopment tide has turned in a positive direction. It remains a matter of public debate whether the public should continue to pay for subsidies to private developers, once our initial public investments have sparked a neighborhood’s revitalization.

NCBG has provided a detailed appendix on methodology, describing the challenges and limitations of the analysis conducted on the sampled 36 TIF districts.

Reform Strategies

TIF State Legislative Reform Recommendations

Taxpayers and other taxing bodies should have a greater voice in the TIF approval process. Tax increment financing is usually sold to the public with assurances that “TIF does not increase your taxes.” However, NCBG’s study indicates clear warning signs that the liberalized use of TIF captures the natural growth in property tax base, putting more strain on taxing bodies to compensate.
The City’s departments, schools, public library and park district must expand services to accommodate development in a TIF district. Thus, the capture of natural growth places an unfair burden on taxpayers whose property tax payments must make up that difference.

The Illinois TIF legislation, initially passed in 1977 was amended in 1999 to include clearer definitions of blight factors. The 1999 reform mandated housing impact studies for certain TIF districts, added early public notice provisions, created an Interested Parties Registry, and required an annual report for each TIF district, and inclusion of a public member on Joint Review Boards . These reforms have been valuable in ensuring increased accountability and public participation in the creation and administration of TIF districts. However, especially in the City of Chicago, this study points to further needed changes in state law. Therefore, NCBG recommends that Illinois TIF legislation be revised in the following ways:

• Increase the “baseline” of equalized assessed value (EAV) available to taxing bodies by the rate of inflation each year over the life of a TIF district in order to help pay for rising costs associated with development.
• Require local municipalities to perform a detailed analysis of the economic and fiscal impact on all taxing districts that will be affected by a TIF district. This analysis should disclose what the impact on the taxpayer is for each component of the tax rate, and it should include projections over the time period that the TIF will impact the tax rate.
• Require more descriptive and user-friendly reporting process to affected communities and the public at large about TIF implementation and expenditures:



• Require more detailed and user-friendly reporting of redevelopment agreements proposed and approved for TIF districts so that the public understands what subsidies are being drawn from TIF funds, who received those funds, what type of development will or has taken place and who benefited from that development
• Require municipalities to hold annual public meetings in each TIF district, for the duration of the district, at which they would report annual TIF expenditures and updates on the implementation of redevelopment agreements.


• Require County agencies that issue property tax bills to notify taxpayers whose property is in TIF districts of that fact by printing a notice on the face of the tax bill, with the name of the TIF district and how to sign up for the local “Registry of Interested Parties.”