Who will pay for Senator Hertz's reform of tax increment financing?

Shortly before Senate Taxation took executive action on Senate Bill 2 to revise the treatment of tax increment financing, its bill sponsor (and Senate Taxation Committee Chairman) Senator Greg Hertz (R-Polson), circulated an article in Montana’s newspapers identifying his bill under the clever guise of “property tax relief”. Thereafter, on February 13, Senate Taxation Committee members Wylie Galt (R-Martinsdale), Becky Beard (R-Elliston), Dave Fern (D-Whitefish), Wendy McKamey (R-Great Falls), and Mike Yakawich (R-Billings), voted to pass the bill. Sometimes, folks vote in a way that just doesn’t make much sense.

Tax increment financing (TIF) is a policy driver that incentivizes private developers to develop in areas they would not otherwise develop, e.g., 100-year-old vacant blighted structures full of contaminants on rural Main Streets. Why? They can't cash flow them.?They can't maximize their profits. It is cheaper to buy ag lands and green lands outside of the city boundaries where they don’t have to hassle with city codes, costly permits and government delays.

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But guess what typically happens after folks develop on the outskirts of town? They call the cities and demand to be annexed so they can access city services. They want better water and sewer, some fiber optics, security lighting, paved roads and parking lots, and more timely emergency response. This land use pattern, called “urban sprawl,” is what led to the creation of tax increment financing (back in the 1960s) because it nearly bankrupted local governments.

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Think about it, folks. What happens when properties are vacant and fall into a state of disrepair? They get more expensive to fix. They attract crime, vagrants, drugs, vandalism, homelessness, poverty, and all those conditions of despair that accompany them. As property values decline, the values of the structures around them decline. Those with the means to do so, flee to the fringes of the city. Businesses follow.

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Meanwhile, the city’s tax revenues plummet and the demand for essential services skyrockets with increased police, fire and ambulance calls; vandalized street, traffic, and security lights; crumbling curbs, gutters, sidewalks and potholed streets; broken water mains and sewage contamination; and more, and more, and more. This is the physical evidence of market failure. And Hertz’s reform offers no remedy for it. Rather, it hamstrings every local government’s ability to address it without shifting it all on to you.

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Tax increment financing is the policy driver that incentivizes private developers to partner with local governments to pay for these public improvements. But it takes money to make money. Private developers must pay for all of the private development costs associated with these properties. When they do that, their property values increase. This is “new taxable value.”? When their property value increases, their tax bill increases. The increased amount of taxes that they pay is the “tax increment.” The tax increment is what the local governments use to pay for the public improvements (lighting, sidewalks, water mains, sewer lines). Guess who pays for those public improvements when there is no tax increment for the city to use? You do.

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It usually takes about 5-7 years before private investments in a TIF district generate a tax increment—longer in rural communities. So, cities will use tax increment revenue bonds and development agreements to incentivize private developers to pay for all the public improvements upfront until enough tax increment is generated to pay them back. Guess who pays for those public improvements when cities resort to general obligation bonds instead of tax increment revenue bonds? You do.

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GO bonds are backed by the full faith and credit of the local government (all taxpayers) and TIF revenue bonds are backed by the projected new taxable value created by private investment. By taking away new taxable value, Hertz’s reform takes away the ability to use TIF revenue bonds. Sure, local governments will still be able to create TIF districts but why in the world would they? It won’t work.

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Do you prefer to pay a portion of public improvement costs (through the use of TIF) or do you prefer to pay for all of them (through Hertz’s reform)?

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Who will pay for Hertz’s reform? Most assuredly, dear reader, you will.

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