“Taxers are on the hook for billions in project costs they did not approve and have little to no say in,” Auditor Galloway said. “Meanwhile, there is no law to ensure developers are accountable for the public dollars they receive and there are few requirements of the municipalities that approve these districts. State laws must be reformed to ensure taxpayers get the protection they deserve.” – Office of the Auditor of the State of Missouri
“Though TIFs are intended for lower-income areas, it is often difficult for communities in weaker retail markets to lure developers to a potential TIF because they are competing against wealthier municipalities” – Team TIF Report
Tax abatement should be focused in areas with fewer economic resources—places that meet a conventional definition of the term “blighted.” – WashU Center for Social Development
“The more “unnecessary” incentives are approved, the more residents lose confidence in these programs. We also should strive to provide only the level of incentive required to facilitate development and no more. – Alderman Scott Ogilvie
Policy “experts” and government officials in the St. Louis region continue to push incremental changes to the tax incentive system meant to increase the transparency, equity and efficiency of the current system.
Some examples of proposed reform include State Auditor Nicole Gallaway’s recent report suggesting annual audit requirements be more strictly enforced for community improvement District and the St. Louis Development Corporations (“SLDC“) proposal to eliminate residential abatement in many more affluent areas of the City while offering close to 100% 10-year abatement for the City’s most economically disadvantaged areas.
These small changes add an additional level of bureaucracy to the tax incentive system without addressing the underlying problem: An unhealthy reliance on sales tax TIF.
The SLDC’s proposal is intended to make tax incentives more equitable for economically disadvantaged portions of the City of St. Louis. However, it does not address the fact that most of the red area shown in Figure 1 above could not attract new development at any tax abatement level. The proposal also eliminates the City’s ability to make case by case exceptions when necessary. If enacted this proposal will increase the cost of tax incentive administration, make wealthier parts of the City unable to compete with areas like Clayton and Ladue and have no meaningful impact on increasing development in economically disadvantages areas.
Instead of making small and costly adjustments to a failing system St. Louis regional leaders should reach out to economic development professionals in States such as Texas. California, Florida and Colorado in an effort to replace the current wasteful and ineffective tax incentive program with a system that aligns the incentives of private and public stakeholders, does not steal tax revenue from local school districts and has a track record of success dating back to the 1980s.
Special Assessment Districts
Sales tax increment should be eliminated as a tax incentive
alternative in the State of Missouri (35 States currently prohibit the use of sales tax based TIF) and replaced with new Special Assessment District legislation modeled after the State of Texas’s Public Improvement Districts.
Special Assessment Districts give property owners within a municipality the ability to assess each parcel of land in the District annually in order to fund infrastructure improvements before construction begins. These assessments create an additional lien on the land which directly increases the cost of owning property within the District.
While not as optimal for private developers as a traditional TIF, special assessments can provide significant pre-construction funding at low tax-exempt interest rates with no personal guarantee and no acceleration clauses. This is significantly more attractive than high interest bridge loans that would likely be required in the absence of an Assessment District.
Incentive to Optimize Special Assessment Funds
Assuming a 5% interest rate and 30 year repayment schedule, $10 million in special assessment funds today would create an increase in annual debt service payments made by the property owner of approximately $650,000 until the property is sold to an end-user.
Potential property owners will consider this increased cost when determining the value of the property just like any other form of debt. Special assessment debt only increases the value of property if the projects it funds generate a return on investment greater than the cost of the loan. Under this structure a developer is naturally incentivized to optimize the amount of assessment funds borrowed.
Increased construction times lead to an increase in debt service payments made by the Developer providing an incentivize for the developer to meet construction deadlines. Because special assessments are secured by land within the District, failure to make annual special assessment payments can lead to foreclosure on developer owned land. Shared exposure to financial downside provides a final incentive for private interests to ensure project success.
Incorporating Property Tax Increment
Traditional TIF funding provides a private developer with non-recourse debt that does not affect a projects carrying cost, the developers financial obligation or the value of the land when construction commences. This terrible structure incentivize private developers to maximize TIF funds regardless of how they are used or the return they provide.
Instead of using tax-increment to provide pre-construction capital it can be used to offset the cost of assessments for property owners over the life of the assessments. Using this technique the benefits of tax increment financing are determined by the increase in property values from the project. Figure 3 below shows how tax increment can be used to offset the cost of annual assessments overtime. Under this method the benefit of TIF is contingent on the ability of the proposed project meet or exceed expected increases in property values providing a mechanism to hold the developer accountable over the life of a project.
Other benefits of Special Assessment Districts include:
- Districts are controlled by the local City Council/Board of Alderman
- Disbursements require City approval
- No revenue taken from other taxing districts
- All additional debt must be approved by current property owners
- Eliminating the collection of sales tax increment minimizes the benefit provided retail developments
- Loss of one tenant has minimal impact on project success
Municipal interest groups and economic development finance association will likely launch a full fledged battle against large scale tax incentive reform of any kind. This opposition has been more than offset by national and local home builders association special interest groups in States across the nation due to the significant beneift Assessment Districts provide the home building industry. The National Association of Home Builders has supported similar reforms in the past and with funds and an organization that far surpases that of the municipal interests. It is timethe St. Louis region end its wasteful, inequitible and unsuccesful tax incentive program for a system that has decades of proven success in States across the Country.