By MICHAEL D. KLEMENS
TIFs: What cost to state treasury?
Two years ago state lawmakers moved to rein in the growth of tax increment financing (TIF) districts that threatened to drain the state treasury. Lawmakers set standards and charged the Department of Revenue with reviewing sales tax TIF districts retroactively. That review has shrunk the size of sales tax TIP districts and limited the state liability; it has left the principal parties satisfied. The review, however, has not eliminated the sales tax TIF districts as a significant cost item to the state's treasury.
The TIF program was begun with property taxes in 1977 to encourage development of blighted areas. It originally allowed a municipality to designate a portion of itself, say a moribund downtown area, as a TIF district. The city fathers would then seek a private firm to build or rehabilitate property within the district, in conjunction with public improvements like roads, sewers or parking garages. The property tax assessment within the district would be frozen at the predevelopment level for general tax purposes, and all taxes generated by the increased assessed value from the new development would be specifically designated for the TIF district which would use the proceeds to pay off bonds issued to pay for public improvements.
TIFs had moved slowly forward until 1986, when state lawmakers changed the rules. New TIF district legislation allowed the entities to capture any increases in state sales tax generated within their borders. In 1986 more than 100 municipalities created 137 sales tax TIFs during a window that ended on January 1, 1987. The issues soon focused on whether TIF districts were created to prevent blight or to capture state money and whether the state treasury could stand the hit that the new program would make on it. In 1988 the Department of Revenue projected that the districts could cost the state $7.2 billion over the next 23 years.
Several complaints emerged, and it was clear that municipalities had created sales tax TIF districts not to eliminate or prevent blight, but to capture a greater portion of state sales tax moneys for local use. Some districts stretched along highways encompassing vacant land that was ripe for development. Others connected a blighted downtown to vacant land on the outskirts with a narrow strip. Still others included the entire municipality within the TIF district.
The Taxpayers' Federation of Illinois studied sales tax TIP districts and concluded that they should be curtailed. "The state funding program for TIF districts represents a classic case of public officials and government bodies refusing to be critical of one another. . . . There has been a lot of fingerpointing, but there have been very few signs of restraint or accountability," Douglas L. Whitley, president of the taxpayers' group, contended in March of 1988.
In June of that year lawmakers opted to get out of the sales tax TIF business. They phased out sales tax TIFs over 20 years, limiting the program after 2007 to its original property tax form. The 1988 reforms also required that the Department of Revenue review all sales tax TIF districts for compliance with state standards set out in the reform law. Those standards included limitations on:
• Acreage. Land included in TIF districts cannot exceed 25 percent of the municipal area for cities over 12,000 or 35 percent of total area for cities under 12,000.
• Property tax base. The equalized assessed value (EAV) of property in the TIF district cannot exceed 20 percent of the municipality's total EAV if the city or village population is more than 12,000 and cannot exceed 30 percent of the total EAV in municipalities of less than 12,000.
• Sales tax base. The sales tax generated within the TIF cannot exceed 25 percent of total state sales taxes collected in communities of more than 12,000 or 35 percent of total sales taxes collected in communities of less than 12,000.
The 1988 revisions also required the Department of Revenue to confirm that property within sales tax TIF districts was either blighted or in danger of becoming blighted. In large municipalities the recertification reduced total TIF acreage from 22,380 to 13,620, a decrease of 39 percent, and the TIFs state sales tax base from $90.3 million to $59.6 million, a decrease of 34 percent. In small municipalities the TIF acreage was reduced from 19,724 to 13,440, a 33 percent decrease, and the sales tax base dropped from $30.5 million to $18.7 million, a decrease of 39 percent.
The state also realized some immediate savings from a new allocation formula. Return of state sales taxes to TIF districts was, and is, subject to appropriation by the Illinois General Assembly. Because lawmakers appropriated less than the increase in sales taxes collected within the TIF districts, the money returned to TIFs had been prorated. The new formula
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ensured that a few wealthy TIFs do not receive all the money. In 1989 the Belleville, DeKalb and Highland Park TIP districts received $3.7 million, or 38 percent of all TIP payments. In 1990 their share dropped to $1.3 million or 13 percent of all payments.
Effective with fiscal year 1989 the districts got to keep 80 percent of the first $100,000 in state sales tax revenues generated within the district, 60 percent of sales tax receipts between $100,000 and $500,000 and 40 percent of sales tax monies over $500,000. At the same time the limits distributed the money more widely, thus eliminating the situation where a few wealthy TIFs got a goodly portion of the total.
For fiscal year 1989 (sales taxes collected in calendar 1987) application of the 80/60/40 allocation formula reduced the total available for distribution to TIF districts from $17.0 million to $10.7 million, a reduction of 37.2 percent. For fiscal year 1990 (collections in the first nine months of calendar 1988) the amount available for TIF districts declined from $18.7 million to $11.8 million, a decrease of 36.8 percent.
Overall the state and the TIF districts are satisfied with the review. Donald F. Eslick, president of the Illinois Tax Increment Association, said the review held few surprises for him and that he hoped lawmakers appreciated the efforts that cities had made. "Now we've got some good TIFs out there that have been validated by the Department of Revenue."
Similarly the sponsors of the 1988 legislation believe the situation is under control. Both Sen. Richard N. Luft (D-46, Pekin) and Rep. James F. Keane (D-28, Chicago) believe the effort was worthwhile. "It's getting better," says Keane.
Darlene Logsdon, who oversaw the review for the Department of Revenue, says that cities recognized the purge needed to be done, but that the process of second-guessing municipalities caused some tension. In the short run, Logsdon says, the state has reduced its exposure. Growth, however, will be significant. The $11.8 million diverted from the general funds in 1990 for TIFs represented only nine months of collections. Full-year collections will be higher, and for successful TIF districts, the rate of sales tax growth will be higher. "There is a cost; there is no free lunch. . . . You're not creating money, you're devoting money to a particular plan," says Logsdon.
The issue of sales tax TIF districts may have been put to rest, but the Department of Revenue raised a number of issues about TIFs generally, issues that will apply to property tax TIFs that can still be created. The department review recommended a series of clarifications of various sections of current law, such as what constitutes "chronic flooding." The department suggested that some logic was needed in configuring TIF district boundaries to prevent linking revenue generators with depressed sections to redistribute taxes. The department also recommended that the definition of blight be expanded to include land with unusual terrain or significant environmental contamination.
The department estimated that there are 180 property tax TIF districts, none of which has been reviewed for compliance nor held to the standards imposed on the 133 sales tax TIF districts. The department noted that property tax TIF districts also represent a significant cost to the state. Public schools are the biggest losers when property assessment growth is diverted from schools by TIF districts. The state general school aid formula, in turn, partially compensates the schools for that loss. The department concluded: "It is entirely possible that more state tax dollars are affected by property tax TIFs through the General State Aid formula than by state sales tax TIFs,"
Here we go again.
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