Among the significant changes needed to update Washington state’s 123-year-old Constitution is amending it to allow for Tax Increment Financing (TIF), a public-development tool available in 48 other states (Arizona is the other state with no TIF). A recent financial analysis of TIF (discussed below) found that it could generate millions more for public infrastructure around light rail stations than other versions of TIF-lite currently available to local governments in Washington.
Tax Increment Financing allows local government to borrow against the increases created in property value by new development; that’s the “increment” in TIF. A local government using TIF can take the property tax increases caused by a development in a discrete area and use those proceeds (which would ordinarily flow to the general fund) to service the debt it incurs to pay for nearby things like roads, drainage, sidewalks and parks to accommodate the growth created by density around transit. The baseline property taxes, before the development, still flow to the general fund.
The advantage of TIF is that local governments can use future increases in property tax to support comprehensive redevelopment of areas around transit much earlier. That means growth can truly pay for growth, allowing public amenities like parks and sidewalks to be built at the same time as new people are moving into the neighborhood. The amenities, in turn, often trigger the private project, leading to the argument that the boost in taxes from the development wouldn’t occur without this public incentive. After a period of time — 20 years or so — the incremental taxes revert to the general fund.
TIF can support new development to increase aggregate demand for goods and services. That demand creates more construction and retail jobs, and new housing and commercial space. It’s a powerful tool, as a trip to the Portland riverfront would demonstrate; Portland is a leading example of creating public amenities through TIF.
Washington’s Constitution doesn’t allow taxation based on property values, at least in the way we typically think of it. Your property taxes are assessed based on the taxing district’s budget, not increases in your property value.
This budget-based system means your property taxes are a share of the city’s budget, for example, not a fixed percentage of overall value. That’s why your taxes can actually go down in economic good times — because as overall property values increase, your share of the city’s budget goes down, since there is more assessed value to tax. (Read more about how TIF works.)
As growth happens, how do we ensure that it doesn’t crowd out poor people in the community to make way for a new, wealthier group of people? To answer that question, the Department of Housing and Urban Development funded Growing Transit Communities, a project of the Puget Sound Regional Council intended to support creating “communities that all people can afford to live in, where they can walk or take a train or a bus to work, and have good access to shopping and other activities.”
Last year the legislature considered House Bill 1881, the Community Revitalization Financing Act (CRFA), legislation that included an amendment to the state Constitution that would have enabled local governments to create TIF districts to fund public infrastructure, especially in areas around light rail stations. (Disclosure moment: I am a long time advocate of Tax Increment Financing through Constitutional changes, and have offered unpaid technical advice and support to sponsors of HB 1881.) A sub-committee of Growing Transit Communities reviewed the CRFA along with a variety of other TIF-like development tools. The preliminary review included a hypothetical case study of transit-oriented development around transit stations.
According to the early estimates, amending the state’s Constitution through passage of the CRFA would generate as much as $66 million to service debt over 30 years in a case study of the BelRed station area in the Bellevue neighborhood. That compares to $5.8 million from Local Revitalization Financing (LRF), and $1.8 million from Landscape Conservation Local Infrastructure Program (LCLIP) championed by the non-profit Forterra. Traditional TIF similar to Oregon’s would generate about $14.6 million.
The numbers and the analysis are preliminary, but this more robust form of TIF, which I call “Constitutional TIF,“ generates more money than Forterra’s proposed TIF-like LCLIP, which is designed to encourage infill development to save outlying green space. This robust TIF also produces more revenue than the version of TIF considered the gold standard in our region, that used by the Portland Development Commission. Constitutional TIF also doesn’t rely on any funding from the state’s general fund and it doesn’t have to tap into the already limited taxing authority of other local governments, like school districts.
This last problem — the cannibalization of the taxing authority of local school districts — has been a sticking point in the past, leading to suits against the LRF form of TIF more than 20 years ago.
And what about affordability? Constitutional TIF is broad enough to allow local jurisdictions to make their own decisions about what they consider public infrastructure, but generally this includes, drainage, retention, sidewalks, signalization and affordable housing. Tapping into the larger yields in capacity created by the Constitutional amendment version of TIF mean much more funding available to subsidize affordable housing by reducing costs associated with new construction.
Is Constitutional TIF just another new tax? It is a new tax for the properties within the TIF district. It is a new and slightly higher tax because property owners would have to pay incrementally more on top of what they are already paying. So if the value goes up $10 per square foot, the TIF district would take 10 cents more on top of all the property taxes, but only after the property owners voted for it and only for the life of the bonds. Constitutional TIF allows all of that dime to be used for local infrastructure.
To enact this tax, the district must have the support of the owners of at least 60 percent of the property value being assessed to be created, much like the requirement for a Local Improvement District (LID). Private property owners would be benefitting from reduced costs from infrastructure expenses created by their projects, and public amenities such as parks created by TIF would enhance the allure of the projects.
TIF incentivizes new development and public benefit where currently costs are prohibitive and limit private investment. In the end, the property owners will pay for the new public infrastructure through the additional taxes they pay as the assessed property values increase over time. Constitutional TIF could be a powerful economic development tool while supporting smart growth. And since it is an amendment to the state constitution, voters would have the final say on enacting this powerful economic tool.
Previously: Out of Cash: The End of the Nation’s Largest Redevelopment Program, an examination of how TIF played into the power of California’s hundreds of now-doomed redevelopment agencies.