Wichita City Council’s misunderstanding of tax increment financing

On July 8, 2008 I testified at a public hearing at a Wichita city council meeting. Afterward, a council member told me that I had a “glaring error” in my arguments. I won’t identify this member in order to avoid embarrassing the member. The minutes of the meeting don’t identify the member who said this, but video is available.

My purpose in testifying that day was not to question the merits of tax increment financing (TIF) districts. Instead, I was identifying an ethics problem that a Wichita school board member has regarding his involvement in a proposed TIF district. (See Reverend Kevass Harding and His Wichita TIF District.) In my testimony I stated, with a qualification, that the applicant for this TIF district was asking for relief from paying some of the property tax for his real estate development. After my testimony, a council member told me that I was wrong, that the TIF district won’t allow someone to avoid paying property taxes. True, I said. It was sloppy for me to have said that without clarification, but it wasn’t the point I was making that day.

But since the city council member brought up the point, let’s examine how TIF districts work. I am sure you will be able to agree that the use of TIF districts allow developers to effectively avoid paying some of their increased property taxes.

In material prepared by Wichita’s Office of Urban Development and presented at the March 18, 2008 city council meeting, we may read this: “The developers have identified a financing shortfall of $2.5 million, for which they are seeking tax increment financing assistance. The preliminary project budget presented to City staff indicates that TIF funds would need to be used for site acquisition costs in order to spend $2.5 million on project costs eligible for TIF funding.”

So without the formation of the TIF district, the developers are $2.5 million short. With the TIF district, they’ve got the money they need. We must conclude, then, that the TIF district financing, no matter what it is used for, is worth $2.5 million to the developers.

Now if the developers borrowed that money from a bank, they’d pay back the loan over some period of years. Each year, out of the cash flow the project generates, the developers would have to make the loan payments, and also, just like everyone else, they’d have to pay their property taxes. (Those taxes have increased as now the development is worth more due to the improvements made by the developer. That’s the “increment” in TIF.)

But with a TIF district, the “bank” is the City of Wichita, which issued bonds to pay for the benefits the developers needed to make the project work. So the developers have to pay back the city. But instead of making payments on a loan from a bank and their property taxes, all the TIF developers have to do is pay their property taxes. By merely paying the same taxes that everyone else has to pay, their loan (the bonds issued by the City of Wichita) is repaid.

That’s why a TIF district allows developers to effectively avoid paying some of the increased property taxes on their development. When a development is undertaken without the benefit of a TIF district, developers have to repay loans and pay higher taxes. With a TIF district, all the developers have to pay is higher taxes.

It is as simple as this.


2 thoughts on “Wichita City Council’s misunderstanding of tax increment financing”

  1. It’s my understanding that TIF districts usually include not only the development site, but also the surrounding neighborhood. So if developer ‘K’ gets $2.5 million, the cost is shared by the property taxes of everyone in the TIF district, and ‘K’ would actually repay only a percentage of of the $2.5 million.

  2. The economic analysis would essentially be correct; however, one has to understand the underlying public policy that created the TIF financial tool. The TIF statutes in this state were created in 1976 by a Republican state house and senate and signed by a Republican governor. Free market purists would say that we should let the free market address “blight” without government intervention. Fundamentally that would be true until one actually examines the market. In blighted areas, the cost and more importantly the risk to develop or redevelop is significantly higher than in a green field development. Therefore, investors who bet with their wallet will always invest in green field development. Sure there are bottom feeders who will continue to try make a buck, but it won’t be anything of significance. One only has to drive around 9th and Grove to see that. Because economic obslescence brings increased poverty, crime, etc., it makes good public policy to provide an incentive for investment dollars to redevelop these areas and to reduce risk to the developer. New development creates opportunities to create jobs, incentivizes additional public investment, and fosters community pride and growth.

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