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VIEWPOINT: TIF study is ‘deeply flawed’

February 20, 2016

viewpoint-cook-culp.jpgEarlier this month, Ball State University made headlines when it released a study purported to examine the relationship between Indiana tax increment financing districts and adjacent non-TIF parts of regions. The study (incorrectly) concluded that non-TIF districts in a given region suffer because of the existence of TIFs.

The study is deeply flawed, as are its results.

Consider:

First, the study concludes higher effective tax rates are associated with TIF districts, and points to increased cost of public services for adjacent taxpayers. What it mentions, but fails to emphasize, is that communities with higher effective tax rates use TIF more intensively than those with lower effective tax rates. Areas with higher tax rates, higher bonding capacities and generally stronger growth tend to use TIF more frequently.

Second, the report notes a “small but positive” relationship between TIF assessed valuation creation and adjacent-region AV creation. This important point was lost in coverage of the study’s release.

Third, “employment” is defined as employment levels, number of businesses established, and sales tax revenue in the county.

Let’s take that one piece at a time. According to the report, a county with 50,000 working individuals with annual salaries of $40,000 is credited more strongly than a county with 20,000 working individuals with annual salaries of $100,000. This approach ignores quality of jobs and looks only at quantity. It takes the same approach with number of businesses, giving more credit to those with a higher quantity of business establishments. Last, the study includes sales tax revenue, a questionable metric. Should Indiana’s economy focus only on enterprises that generate sales tax? This myopic perspective fails to take a company’s broader economic impact into consideration. What about research and development; high-wage professional service jobs; or other value-added, non-sales-tax-generating operations that Indiana and most other states covet?

The study recommends the Legislature get more involved in studying TIF districts. The Legislature already plays an important role in enabling TIF legislation, and has passed numerous provisions in recent years to enhance TIF oversight. Some changes have been positive. However, state legislators should not arbitrate what is a uniquely and wholly local creation. Local officials are in the best position to determine whether TIF makes sense for a particular project.

Last, this report takes a uniformly academic approach to assessing a tool in TIF that operates outside the classroom and within the fluid environment of the business world. At their core, TIF districts are no different from any other economic development incentive: They are primarily designed to make deals happen that wouldn’t otherwise. A study cannot quantify the intangible variables that drive site selection decisions. Rather than recognize this point, it negatively assumed that TIF is used to support projects that would have happened anyway.

To be clear, TIF districts are not the right answer for every deal. We strongly favor education on the effective use of TIF and constructive criticism where necessary. But one unfortunate consequence of this report is its potential to hurt Indiana’s economic development efforts, particularly at this critical juncture when new municipal administrations are just getting their feet wet and trying to make good decisions to help their home communities.

All economic development tools should be carefully evaluated. We hope municipal and state leaders will dig deeper than the headlines into this one.•

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Tim Cook and Katie Culp are CEO and president, respectively, of Indianapolis-based KSM Location Advisors. They have consulted and advised clients about economic development incentives, location analysis, and related economic development opportunities on more than 400 projects in all 48 contiguous states.

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