Development Incentives Can Benefit More Than Just Rich Developers
The use of economic development incentives by local governments paid to real estate developers and other private businesses is one of the most misunderstood and controversial topics in politics and government despite its importance to the continued growth of any regional economy. Most of the controversy surrounding the use of economic development incentives stems from confusion surrounding its purpose and the way in which effectiveness or success should be measured
Purpose of Economic Development Incentives
A government entity should not spend money or time promoting any development that does not meet its quality and aesthetic requirements and is not consistent with the lands best use according to its master plan. Large inconsistencies in zoning requirements and/or quality standards provide mistrust among residents and decrease the certainty regarding what makes a profitable economic development.
Assuming the above requirements have been met the purpose of economic development incentives is to attract a type or quality of development that will optimize tax revenue generated in the long run for the entity providing the incentive and which would not take place “but for” the incentives being provided. This but-for test is a statutory requirement for Tax Increment Financing.
Misunderstanding of the But-For Test
This but-for test requires that “that (the proposed) development cannot reasonably be anticipated but for the adoption of TIF”. Source
The requirement is not that the developer would not make a profit but for the TIF. This is intuitive when understood that a TIF is meant to make a development as profitable in the proposed area as it would be in another region. Therefore if a development site in Indianapolis is expected to result in $2 million of profit and is expected to result in $1.5 million of profit in St. Louis TIF funding of $500,000 is the minimum amount required to make the project a reality. This meets the requirement that the project would not take place but for the TIF.
The requirement is also not that no development would take place without a TIF but instead that the proposed development would not take place without a TIF. For example, TIF funding is appropriate to fund a mixed-used mutli-family, retail and office development in a traditionally low income urban area regardless of whether or not a strip center anchored by a Payday Loans, a gas station and a liquor store could currently be developed with 100% private funding.
Most St. Louis Area TIFs Represent Bad Public Policy
I am in no way an advocate for blindly supporting the request for every incentive made by local developers. In fact, it is my opinion that the vast majority of TIF and other similar tools have been used in the St. Louis region to incentivize retail (mostly strip center type) developments that should occur without public funding in order to artificially stimulate municipal sales tax revenues and allow government officials to garner short-term favor at the poles through reducing or maintaining unsustainably low property taxes. This practice has created the regions problem of competing amongst itself to lure anchor tenants like Target or Schnucks Markets which are already in the region from one municipality to another as shown in Table 1 above.
Leading by Example
An abundance of articles detailing the misuse of TIF in the St. Louis area have already been published. Instead of detailing another failed development project in the area I will explore an ideal example of properly used public incentives using the Lakes at Mustang Ranch Development in the City of Celina, Texas.
The leadership of Celina, Texas (a suburb on the outskirts of the Dallas Metro Area) understood that the long term success of any their City was attracting high quality residents who provide a stable tax base that fund municipal services and that once that resident base grows large enough it will naturally create demand for retail and office space from businesses looking to access the wealth of the community’s residents. With that in mind the City of Celina created a Public Improvement District to incentivize a quality subdivision development that includes a 20 acre lake, resort style pool and 120,000 square foot recreation center. A median made of stone and greenery replaced typically narrow roads, walking and bike paths were created where they otherwise would not be and ornate drainage structures were built instead of infested eye-sores hidden by scant shrubbery. All of these amenities shown below were built due to up-front funding paid to the developer from municipal bonds. These bonds were secured by the cash flow of a 30 year assessment levied against each lot in the development. This assessment only affects owners within the Public Improvement District who are made well aware of the annual fee when making a home purchasing decision. In States where this practice is used (Texas, Arizona, California, Florida, Utah, etc.) residents have shown time and again to be prefer paying the small assessment overtime in order to purchase a home built in a quality community to purchasing a similar home without the assessment for a similar price but without the extra amenities and community feel they provide.
A community base with multiple quality 1,000+ homes can take years if not decades to fully develop. However, once this development is complete it provides a base of residents that naturally attract retail and other commercial development without public subsidy. Additionally, most of these States prohibit or greatly restrict the ability of municipalities from levying local sales taxes which prevents overreliance on sales tax revenues and competition among municipalities for anchor tenants already in the region. This allows the region to focus on working together to attract new business instead of fighting amongst one another to move business from one municipality to another.
While St. Louis County does not have ample undeveloped land in which new subdivisions can be built. However, the current practice of subsidiving retail development where it would naturally occur instead of funding infrastrucuture for well planned residential redevelopments has resulted in one-at-a-time infill housing due to the inability to finance substantial speculative home building on large scale. If funding for infrastructure was offered to residential developers this type of development would significantly increase providing a quality housing stock that would become part of the regions marketing pitch to potential new employers. Reducing the ability of municipalities to raise local sales tax and changing the mindset that residential and not retail development is the backbone of a municipality will take time and strong leadership. Politicians not willing to expend political capital to make this type of broad reform should not be re-elected and those who put their political careers on the line should be rewarded.