Tax Increment Financing – continuing to learn from Chicago
Professor Kevin Ward, Universtiy of Manchester, 2 May, 2012

When George Osborne, the UK’s Chancellor of the Exchequer, mentioned Tax Increment Financing (TIF) in his 2012 Budget Statement, it marked the latest instalment in a saga that has been running for over a decade.

First named in UK policy circles in the Towards an Urban Renaissance report published in 1999 and then given further impetus in the subsequent Paying for an Urban Renaissance (2001) and Towards a Strong Urban Renaissance (2005), more recently TIF has been actively promoted by a range of stakeholders, most noticeably the British Property Federation and the Centre for Cities.

TIF is a US model based on debt-creation. A political entity – such as a local government – establishes a project area. The property taxes (business rates in the UK) in the project area are then frozen. The local government then borrows money on the open market, in the form of bonds, against the project ‘uplift’ or ‘increment’, on the basis that if they spend the borrowed money on clean up, infrastructure, and other upfront activities then redevelopment will occur. The belief is that this will lead to an increase in property values. The ‘increment’ goes to the political entity to pay off the debt and to reinvest in the project area. After a period of time – normally around twenty five years – the debt will have been paid off, the project area gets dissolved and the property tax returns to the normal taxing authorities.

Part of the promotion of the TIF model in the UK has involved drawing on evidence of how it has ‘worked’ in the US, most especially, in Chicago. Those involved in writing the Towards an Urban Renaissance report visited the city, for example. The city also crops up in various other documents that have made the case for the use of TIF in the UK. Since the mid-1980s Chicago has established over one hundred and seventy TIF areas, many being created in the last decade, when it was the economic development model of choice of the former Mayor, Richard M Daley. This is the era that is referenced in the UK documents. However, and in light of on-going concerns over the long term financial and political consequence of PFI, it may be that those interested in TIF in the UK look to what has been going in Chicago over the last eighteen months.

In the 2011 mayoral election, TIF was an important issue. Concern was voiced over accountability, transparency and the fact that most TIF areas were in the relatively affluent downtown, not in the most ‘blighted’ areas as the legislation required. Rahm Emmanuel, the new Mayor, established a TIF Reform Panel. This was tasked to “create accountability systems that will ensure our TIF investments go to projects that have real return for taxpayers – new jobs and new economic development.” The Panel reported at the end of August. It made a number of suggestions, all aimed at making the model more democratic and more transparent. The city administration subsequently set about making many of these suggested changes. City residents know now more about where the funding comes from and how the money is being used. A case in point was the announcement in January of this year that three firms were returning $34 million of TIF money. The issue was that of job creation. The sum is small fry in the bigger scheme of things in Chicago. However, it indicates a willingness on behalf of those in charge to pay more attention to the regulation of the model.

What might this mean for UK in terms of the introduction of TIF and of other similar financial instruments? Well, it suggests that if – and it remains a big if – TIF is used in the UK, then there is a need for careful monitoring and regulation of projects, with attention paid to issues of local accountability and transparency. Local residents need to know how the financing is organized and have a say in how the benefits are distributed. Contracts need to be drawn up to ensure the public sector has some recourse to those who benefit from the investment if they do not deliver. The policy making community needs to continue to learn from Chicago.