Tax Increment = Crony Capitalism

Steven Greenhut: Republican who defend redevelopment agencies and who rallied to save them from Gov. Jerry Brown’s cuts, often argue that they don’t like the central planning and property-rights-abusing features of redevelopment, but support them as a way to keep dollars in local communities. That is done through a process known as tax-increment financing: After a redevelopment project area is created, the local agency keeps the increase in property values from this day forward. But such financing is not a pro-free-market mechanism as GOP members would have us believe.

A new study by Randal O’Toole of the Cato Institute, “Crony Capitalism and Social Engineering: The Case Against Tax-Increment Financing,” makes the following points:

While cities often claim that TIF is “free money” because it represents the taxes collected from developments that might not have taken place without the subsidy, there is plenty of evidence that this is not true. First, several studies have found that the developments subsidized by TIF would have happened anyway in the same urban area, though not necessarily the same location. Second, new developments impose costs on schools, fire departments, and other urban services, so other taxpayers must either pay more to cover those costs or accept a lower level of services as services are spread to developments that are not paying for them.

Moreover, rather than promoting economic development, many if not most TIF subsidies are used for entirely different purposes. First, many states give cities enormous discretion for how they use TIF funds, turning TIF into a way for cities to capture taxes that would otherwise go to rival tax entities such as school or library districts. Second, no matter how well-intentioned, city officials will always be tempted to use TIF as a vehicle for crony capitalism, providing subsidies to developers who in turn provide campaign funds to politicians.

Whenever you hear a Republican defend redevelopment, remember that it is indefensible from a pro-free-market standpoint. Instead of allowing businesses to operate on their own, redevelopment is a process by which subsidies are ladled out on hand-picked developers who build the types of projects favored by City Hall. Redevelopment agencies use eminent domain to clear away property owners who don’t want to give up their properties to the new developers. Cities call the shots. It increases rather than decreases regulation. Redevelopment diverts tax dollars from more legitimate public uses and sends them to private businesses, thus exacerbating the call for higher taxes.

If a Republican defends redevelopment, then you know that Republican has no real free-market principles.


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  1. Hcat
    Hcat 4 June, 2011, 00:26

    Yes. Lots of people understand the eminent domain issue, but few understand TIFs. And few understand that local government is indeed “government.”

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