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October 14, 2015

CRC Offers Testimony on Tax Increment Financing to Michigan House of Representatives Local Government Committee

CRC Offers Testimony on Tax Increment Financing to Michigan House of Representatives Local Government Committee

At the invitation of the Michigan House of Representatives Local Government Committee, CRC President Eric Lupher testified on the use of tax increment financing.  The Citizens Research Council of Michigan has a long history of analyzing the laws that authorize tax increment financing as an economic development tool and in their interaction with other laws.
Tax increment financing (TIF) is an economic development tool that allows special authorities to “capture” tax revenues generated from the growth of the tax base in designated areas from set points in time. Use of this tool was first authorized in Michigan with enactment of the Downtown Development Authority Act in 1975. A dozen other laws have been enacted since that law to authorize TIF for economic development, brownfield redevelopment, waterfront restoration, and other purposes.
CRC made a number of recommendations on tax increment financing reform to the committee. Primary among those recommendations was that the use of TIF should be tightened to areas that most can agree are blighted. When the Michigan Supreme Court opined in Advisory Opinion on Constitutionality of 1986 PA 281, the validity of using TIF, even though taxes were authorized for other general and specific purposes, was based on the “but for” argument. The Court said that overlapping local governments do not have to forego tax revenue because of TIF. Citing a Wisconsin Supreme Court case, the Michigan Supreme Court reasoned that without the development generated by TIF stimulated investment, there would be no increased tax revenues for the taxing authorities to collect. Such an argument is predicated on the basic assumption that blight is so prevalent in the designated areas that natural economic growth would not lead to an appreciation or growth of values.
The second recommendation is that TIF authorities should only be able to capture taxes that were authorized at the time districts are created. New taxes and tax increases are not authorized by the voters with an understanding that TIF districts will take a cut of the revenues generated by new values. TIF captures are premised on a growth in property values yielding new revenues, not new tax rates yielding new revenues.
TIF districts should have time limits. Each TIF district must establish a plan laying out the intention to use the captured tax revenues. A commonly employed practice is to amend those plans allowing the TIF districts to capture tax revenues into perpetuity. If new development is needed in the districts, a new TIF plan can be established when the present TIF plan expires.
The laws that authorize TIF should limit the use of captured revenues to projects that have finality. Some authorities have used captured tax revenues for services such as public safety, street fairs, and refuse collection. These core government services should not be paid for with taxes levied by overlapping units of government. A straight forward approach to this issue would be to limit the use of these funds to infrastructure improvements such as roads, sidewalks, water and sewer lines, light posts, etc. When these improvements are made and they are fully financed, the need for tax capture goes away.
The laws authorizing TIF should be consolidated and simplified. The existence of 13, at times overlapping, laws creates confusion for economic development officials, elected leaders, and citizens.
Reforms to these laws should enhance reporting requirements so that the state officials and the public has a better understanding of the local governments that are using TIF, how much tax revenue is being captured, for what purposes the tax capture is being used, and whether these tools are meeting their intended economic development purposes.

President

About The Author

Eric Lupher

President

Eric has been President of the Citizens Research Council since September of 2014. He has been with the Citizens Research Council since 1987, the first two years as a Lent Upson-Loren Miller Fellow, and since then as a Research Associate and, later, as Director of Local Affairs. Eric has researched such issues as state taxes, state revenue sharing, highway funding, unemployment insurance, economic development incentives, and stadium funding. His recent work focused on local government matters, including intergovernmental cooperation, governance issues, and municipal finance. Eric is a past president of the Governmental Research Association and also served as vice-chairman of the Governmental Accounting Standards Advisory Council (GASAC), an advisory body for the Governmental Accounting Standards Board (GASB), representing the user community on behalf of the Governmental Research Association.

CRC Offers Testimony on Tax Increment Financing to Michigan House of Representatives Local Government Committee

CRC Offers Testimony on Tax Increment Financing to Michigan House of Representatives Local Government Committee

At the invitation of the Michigan House of Representatives Local Government Committee, CRC President Eric Lupher testified on the use of tax increment financing.  The Citizens Research Council of Michigan has a long history of analyzing the laws that authorize tax increment financing as an economic development tool and in their interaction with other laws.
Tax increment financing (TIF) is an economic development tool that allows special authorities to “capture” tax revenues generated from the growth of the tax base in designated areas from set points in time. Use of this tool was first authorized in Michigan with enactment of the Downtown Development Authority Act in 1975. A dozen other laws have been enacted since that law to authorize TIF for economic development, brownfield redevelopment, waterfront restoration, and other purposes.
CRC made a number of recommendations on tax increment financing reform to the committee. Primary among those recommendations was that the use of TIF should be tightened to areas that most can agree are blighted. When the Michigan Supreme Court opined in Advisory Opinion on Constitutionality of 1986 PA 281, the validity of using TIF, even though taxes were authorized for other general and specific purposes, was based on the “but for” argument. The Court said that overlapping local governments do not have to forego tax revenue because of TIF. Citing a Wisconsin Supreme Court case, the Michigan Supreme Court reasoned that without the development generated by TIF stimulated investment, there would be no increased tax revenues for the taxing authorities to collect. Such an argument is predicated on the basic assumption that blight is so prevalent in the designated areas that natural economic growth would not lead to an appreciation or growth of values.
The second recommendation is that TIF authorities should only be able to capture taxes that were authorized at the time districts are created. New taxes and tax increases are not authorized by the voters with an understanding that TIF districts will take a cut of the revenues generated by new values. TIF captures are premised on a growth in property values yielding new revenues, not new tax rates yielding new revenues.
TIF districts should have time limits. Each TIF district must establish a plan laying out the intention to use the captured tax revenues. A commonly employed practice is to amend those plans allowing the TIF districts to capture tax revenues into perpetuity. If new development is needed in the districts, a new TIF plan can be established when the present TIF plan expires.
The laws that authorize TIF should limit the use of captured revenues to projects that have finality. Some authorities have used captured tax revenues for services such as public safety, street fairs, and refuse collection. These core government services should not be paid for with taxes levied by overlapping units of government. A straight forward approach to this issue would be to limit the use of these funds to infrastructure improvements such as roads, sidewalks, water and sewer lines, light posts, etc. When these improvements are made and they are fully financed, the need for tax capture goes away.
The laws authorizing TIF should be consolidated and simplified. The existence of 13, at times overlapping, laws creates confusion for economic development officials, elected leaders, and citizens.
Reforms to these laws should enhance reporting requirements so that the state officials and the public has a better understanding of the local governments that are using TIF, how much tax revenue is being captured, for what purposes the tax capture is being used, and whether these tools are meeting their intended economic development purposes.

President

About The Author

Eric Lupher

President

Eric has been President of the Citizens Research Council since September of 2014. He has been with the Citizens Research Council since 1987, the first two years as a Lent Upson-Loren Miller Fellow, and since then as a Research Associate and, later, as Director of Local Affairs. Eric has researched such issues as state taxes, state revenue sharing, highway funding, unemployment insurance, economic development incentives, and stadium funding. His recent work focused on local government matters, including intergovernmental cooperation, governance issues, and municipal finance. Eric is a past president of the Governmental Research Association and also served as vice-chairman of the Governmental Accounting Standards Advisory Council (GASAC), an advisory body for the Governmental Accounting Standards Board (GASB), representing the user community on behalf of the Governmental Research Association.

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