Is a tax increment financing (TIF) district a tax abatement? Wichita city council member Jeff Longwell, now Wichita’s vice mayor, doesn’t think so. During this week’s city council meeting, Longwell said this in explaining his support of a TIF district created for the benefit of Real Development: “One of the things that people I think need to understand is that this is not a tax abatement.”
He said tax revenues will increase from $28,000 to half a million dollars, repeating that it is not a tax abatement.
So is it true that TIF is not a tax abatement?
A little background: The Wichita City council grants property tax abatements regularly as part of its Industrial Revenue Bond program. In the IRB program, the city is not the lender of funds, and it does not guarantee that the bonds will be repaid. Instead, the benefit of the IRB program is that the applicant won’t have to pay property tax on property purchased with the bond money. This abatement is generally granted for a period of ten years, although it is reviewed after five years to see if the company is fulfilling the promises it made to justify the tax abatement. In addition, a sales tax exemption may be granted on the property purchased with the bond money.
Confused? Many people are. A few weeks ago the city issued IRBs to a Wichita movie theater operator. Comments left at various online forums often argued that the city should not be lending money to the theater and its controversial ownership group. But as we’ve seen, the city is not making a loan. Instead, the IRB program is simply a vehicle that is used to grant relief from paying property taxes to the city, county, and school district.
So the IRB program, despite its name, is a tax abatement program. What about tax increment financing, then?
Under TIF, a district is formed. The property taxes being paid by a property in the district at the time of formation is noted and called the base. Usually this property is blighted or run-down, so this base is a very low value.
Then a development plan is created, perhaps to build apartments or a shopping center. Based on that plan and the property taxes that the completed project will likely pay, the city will borrow money and give it to the developers.
After the project is completed, the tax appraiser notices that there’s something new and valuable where there wasn’t before, and he levies a higher tax bill on the property. The difference between the original taxes — the base — and the new taxes is called the increment.
Under normal conditions when new property comes on the tax rolls, the tax revenue is used to provide public services such as police and fire protection. The school district is usually a recipient of a large portion of the new tax revenue, which might be used to pay for the schooling of residents of the new apartments, for example.
But in a TIF district, what happens to this new tax revenue — the increment?
Recall that the city borrowed money and gave it to the developers. The new property taxes — the increment — is used to pay off these bonds.
So council member Longwell is correct, in a way. Real Development will pay increased property taxes.
But when these increased taxes are used to pay off bonds that exclusively benefit Real Development, how is this any different from not paying property taxes?
Consider development not in a TIF district. Developers generally borrow money. Then they have to make loan payments and higher tax payments.
But TIF developers pay only higher taxes. There are no loan payments, as their increased property tax payments are used to pay off the loan.
So when considering the total economic reality, council member Longwell is wrong. Several other council members have the same mistaken belief.
Tax increment financing is a tax abatement in disguise. Actually, it’s worse than that. Tax abatements granted in the IRB program don’t require the city to be on the hook for a loan. But in a TIF district, the city is the lender, and city taxpayers are liable if the TIF district doesn’t perform up to projections. This has happened in Wichita, and taxpayers had to pay in one way or another.
Why is Longwell, now Wichita’s vice mayor, unable to grasp these facts? Perhaps he does but chooses to ignore them. He has a reason to do so. Downtown Wichita real estate developers — let’s be clear: developers who seek public subsidy instead of working to meet market demand — are generous with campaign contributions, funding both political liberals like Wichita city council member Janet Miller and self-styled fiscal conservatives such as Longwell.
Longwell’s term expires next spring, and he may choose to run for his same office or even the mayor’s office, as some political observers have speculated.
Longwell has already drawn one challenger for his city council position, tea party activist Lynda Tyler. While lacking experience holding elective office, Tyler has well-established conservative credentials and can be expected to run a vigorous and well-funded campaign.
Longwell, who along with Wichita Mayor Carl Brewer complains that Wichita doesn’t have enough “tools in the toolbox” for dishing out economic development incentives to politically-connected city hall insiders, will have to explain his actions to voters in his largely conservative west-side district.
Someone should ask him if he really understands the economic reality of tax increment financing districts.