The Importance of Being Prudent

February 15, 2012 5:53 PM

In the 1970's, Madison played a vital role in the creation of Wisconsin's Tax Increment Financing (TIF) law. Our city applied for a grant from the Department of Development to study the model used in other states and construct a bill to bring the tool to Wisconsin.

Our original idea was simple: we sought to encourage the redevelopment of blighted urban sites by leveling the playing field between the cost of urban development and greenfield sites.

TIF is a creative financing tool that allows municipalities to borrow against potential future tax revenue gains in order to make investments and ensure those gains are actually realized. Used properly, it's a critical economic development tool. Too often, however, TIF is misused, creating economic problems in both the community that abuses TIF and those that compete with the abusive TIFers.

Warrens, Wisconsin, with a population of 360, took on more than $18 million of debt assisting the Three Bears water park-hotel-condo development. That's $50,000 for every person in Warrens. When the hotel and water park closed and property values plummeted, Warrens found itself unable to retire its debt without a change in the TIF law. Repeatedly, communities fail to use TIF prudently and then run to the legislature to ask for special treatment.

The legislature should encourage, not discourage, prudent municipal TIF policy. Forcing municipalities to take a cautious approach ensures that taxpayers won't have to bail out troubled Tax Increment Districts. In Madison, we conservatively estimate the increased tax base we expect a project to generate. We discount future revenues at a rate much steeper than our cost of borrowing, and we typically provide only a portion of the increased tax base that a project generates.

When communities fail to employ good practices like these, two things happen. First, they risk overextending themselves and requiring a bailout either from their own taxpayers or from the state. Second, and perhaps more perniciously, they create bad incentives. When a municipality competes with an overly aggressive player, the prudent municipality is pressured to go farther in providing TIF than they find justifiable. This arms race mentality serves neither municipality.

Bidding up the price of landing a company or a development transfers public resources to private interests with no commensurate increase in the public good. Worse, it encourages other companies to seek ever greater incentives, regardless of whether they actually need them. After all, it's not one-time funding, but the quality of life, skilled workforce, great schools, and urban vitality that makes companies successful and prosperous in the long run. Madison is blessed with these enduring factors. And when we compete to offer better schools, a cleaner environment, vibrant neighborhoods, well-trained workers, and low crime, and a great quality of life, everybody wins.

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