Free Money?

Can Tax Increment Financing help stoke demand for energy efficiency?

Free MoneyImagine your home needs some improvements but you’re using your cash just to take care of the basics. But now suppose that your bank is offering a very low-interest loan that would allow you to take care of those basic fixes and do that renovation you’ve been talking about that would create an apartment above your garage.

The bank believes that the money generated from the increased equity (even though that equity doesn’t turn into cash until the house is sold) in the home, plus the new rental income, makes this a low-risk investment for them. The bank makes some profit on the loan’s interest, and you create some affordable housing, absorb some growth, and improve the value of the asset you own, your home. It’s a pretty good deal, right?

In a nutshell, that’s how Tax Increment Financing(TIF)—a financing tool for many local governments—works. Although the homeowner analogy I’ve used isn’t incredibly precise, it does help show how TIF can generate much-needed capital for upgrades residential and commercial sectors—and it could be a winning strategy for energy efficiency retrofits too.

Throughout the region, local governments are faced with a problem similar to the one our hypothetical homeowner has: a need for better infrastructure but declining revenues to invest in the infrastructure. What’s more, the decline in existing infrastructure means declining tax revenues from depressed property values, and perhaps even increased costs for developers to build in areas that don’t have sidewalks, drainage, and amenities like parks. Tax Increment Financing helps cities escape the cycle by allowing local governments to sell debt in the form of bonds—taking a loan from investors—to generate the upfront cash to make investments in infrastructure, especially in areas where there are declining property values and a lack of development. TIF allows a city to improve some of its more dilapidated areas so that they can attract private investment,– building housing, retail, and commercial real estate developments—all of which increases the taxable value of the property. And that increased taxable value is enough to cover the cost of the debt service.

It sound pretty straightforward doesn’t it? Take a loan for performing investments, use the revenue generated to pay back the loan, and once the loan is paid back, keep the extra revenue. Generally speaking, this works.

In Portland where the Peal District is the jewel in the crown of examples of sustainable development, the Portland Development Commission (PDC) played a major role in financing the infrastructure improvements that made the Pearl District possible. The PDC has been a leader in implementing TIF for the last twenty years. Many believe, and the PDC argues, that they—and by extension their use of TIF—has significantly contributed to Portland’s leading status in the region as a sustainable city.

A major argument against TIF is that it is risky because it relies on future increases in property value that potentially might not happen. And it is risky. But so is doing nothing in areas of urban blight and decay.

The PDC began its life as an urban renewal effort intended to revitalize cities, but it’s done much more including to help the city become more compact, livable, affordable, and transit-oriented. Now, some argue that neighborhood character was eliminated in favor of slick new development supported by TIF, but after a recent trip to Portland I’d argue it’s hard to say that the Pearl District has no character. Fuller’s Restaurant in the Pearl is a local institution, and it was there long before the big changes occurred that created the Pearl District. Or walk down the streets near Burnside and First, Second, or Third Street, and try to make the argument the Pearl District killed neighborhood character.

The most recent results of TIF redevelopment in Portland is the South Waterfront neighborhood. While it is a bit cold and still lacking a lot of retail and commercial activity, the sidewalks, transit, and other public amenities are there waiting for new growth when recovery kicks in. And the South Waterfront district is energy efficient by design. In fact, the South Waterfront districts is a good example of how TIF can be deployed for energy efficiency in the residential and commercial sectors.

Imagine a new version of TIF—call it “Green Increment Financing” (GIF)– that would allow a city to use its various powers (condemnation, vacation, and selling bonds) to build infrastructure for ground-source district heating or a super efficient low-carbon energy system. Under GIF, a city could sell bonds, partner with developers, construct the needed infrastructure for ground-source heating and an energy district, and recruit new development. The funds generated from selling energy to the new developments—along with increased tax assessments—would pay for the bond’s debt service. When the debt was paid, the city would keep all the new revenue from the energy sales and the tax value. In other words, Green Increment Financing could take an existing tool, TIF, and put it to work to create green jobs, save money, save energy, reduce carbon emissions, and generate new revenue for strapped cities. I’d say it’s worth exploring further.

Note: Washington remains the only state in the Northwest without Tax Increment Financing because of limits imposed by its Constitution written in the 19th century.  I suggest amending the Washington constitution here and here.

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Comments

  1. John Gear says:

    Seriously off track here. If there were only one taxing jurisdiction, things would be more like you say, but the bottom line is that TIF captures all the gain, robbing other taxing jurisdictions (particularly schools and counties, which fund things like mental health services), even when the gain is based on general rising inflation and not due to anything wonderful done by the developers, who are often weasels who make out like bandits and aren’t around when the revenue projections turn out to have been shall we say “a tad optimistic.”South Waterfront is an enormous disaster in Portland, and it has put the city budget into the dumper. The bottom line is that, just as generally rising markets turn any putz into a sage investment advisor, generally rising property values can turn some bad projects into a TIF success (at least if you’re in the tax-favored government and not in one of the ones whose property tax revenue was grabbed for the TIF) on paper.How about this—anyone wants to do a TIF, they let the other jurisdictions (schools, sewer districts, soil and conservation districts, county services, etc.) all have whatever increases that they are due from generally rising values across the city—that is, limit the TIF capture so that it only captures the EXTRA rise in values that results from the TIF-funded investment. So if values all across the city or region rise 3%, then there’s nothing for the TIF unless values in the urban renewal district rise more than 3%.We’d see a lot fewer TIFs and a lot smarter ones.

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