Using TIF to Convert Farmland

An article in the Lincoln Institute newsletter discusses the issue of greenfield (Tax Incremental Finance) TIF projects in Wisconsin. TIF allows the use of increased property tax revenues “caused” by a development project to pay for public infrastructure related to the project. Roads and sewer lines are two examples.

I put “caused” in quotes because one point of the article is that, for development in areas that were agricultural, an increase in property taxes could be due in large part to a shift from use-value taxation to market-value taxation, not just to the development as such.

Some notable facts from the article: Wisconsin has 1,317 TIF districts and is creating roughly 100 new districts per year.

Note also the knotty question of whether TIF districts change the rate of development at all. There is evidence that they just shift the location of development within a community. Of course they may shift the costs of development by diverting what would otherwise have been general municipal property tax revenues to pay for the project. See especially the paper referenced at the end of the article, which finds that “non-TIF areas of municipalities that use TIF grow no more rapidly, and perhaps more slowly, than similar municipalities that do not use TIF.”

“Unintended Consequences,” At Lincoln House, May 27, 2007. The use of tax increment financing has primarily been a feature of urban revitalization in recent years. But in Wisconsin, TIF is being used increasingly for greenfield development that often looks a lot like sprawl, says Matthew Mayrl, research associate at the Center on Wisconsin Strategy, who is contributing to research on the subject for the Lincoln Institute.

Tax increment financing is a powerful tool for municipalities to finance redevelopment, public improvements, site preparation and economic development incentives through bonds secured by future increases in property tax revenue within a specific district. It has been very popular in Wisconsin, where tax abatements and other incentive methods are not available; a total of 1,317 TIF districts have been created there since 1975, and new districts are being established at a rate of about 100 per year. In 2004, Wisconsin expanded eligible projects to include not just blighted or industrial sites, but mixed-use including residential. There are no provisions limiting that kind of development in terms of location, such as a downtown area.

Recent experience suggests that TIF districts are being established not just to make redevelopment projects possible, but to make them proceed faster and at a larger scale, says Mayrl, currently at Harvard University’s Kennedy School of Government. He shared his findings at a Lincoln Lecture at Lincoln House May 10. Developers including those representing big-box retailers are negotiating with municipalities in rural and suburban areas to obtain favorable TIF packages - setting in motion a new kind of competition for growth. “This puts local governments in a hard place,” said Maryl.

Rural areas offer prime sites for TIF districts because the base value of agricultural land is calculated on its current use, rather than on market value, and the increases in assessed value when that land is developed can be enormous. Urban areas are at a comparative disadvantage because their base value, which is calculated from market price, is generally much higher. Urban sites are more expensive to prepare, which has an impact on the length of time required for the increased property tax revenue.

Mayrl is part of a team led by David Merriman from Loyola University, Chicago, and Mark Skidmore and Russell Kashian from the University of Wisconsin-Whitewater, on a Lincoln Institute working paper on how TIF districts stimulate growth in real estate values and possibly contribute to sprawl. The research takes into account a 2006 Lincoln Institute working paper by Merriman and Richard Dye, a visiting fellow at the Lincoln Institute. Mayrl’s 2006 guide for Wisconsin municipalities is called “Efficient and Strategic TIF Use,” is here.