Sunday, March 04, 2007

TIF and Tax Abatement

(Updated and bumped: Joe Miller of Kansas City Soil does a great job in this post of excerpting a good article by the Star on just how badly TIF is hurting this city.)

A commenter asks: What is the difference between TIFF and tax abatement. Does KC use both to spur development? Do different parts of gov. approve each?

TIF is a form of tax abatement. When used properly, it's kind of cool. Let's say you have an old, decrepit buidling you want to knock down and put an office building up in its place, that will bring 100 new jobs to the area. Unfortunately, the dollars just don't quite add up. By the time you add in the increased property taxes, parking, and some streetscape improvements, etc., you'd wind up losing money on the deal. So, no new jobs, and same decrepit building. And the increased city revenue that might have come from the increased property value and all that economic activity won't ever happen.

Well, TIF might give you an extra income stream. Under TIF, the city comes and says, okay, if you build it, we will take the money you would have to pay in increased property tax, and let you spend it on the project. And we'll let half the local sales taxes, earnings taxes, utility taxes, etc. go toward making it happen. On top of that, if it's in an area the state government really wants to develop, we'll kick in state taxes, including the income tax from the new employees.

Suddenly, there's a whole lot more money to make the project happen. And, theoretically, it's no real loss in taxes, because the project would not have happened without the help.

The problem is that developers understand that this money is available without much control. Nobody really wants to raise a fuss about it - the people involved in the process, from the EDC, to the city government, and pretty much on down the line, all have a bias in favor of getting the deal done. Indeed, the organization that handles the money on these projects is the same organization that is supposed to recommend whether to implement the plans - and is a subset of the Economic Development Corporation of Kansas City. Please note that the name of the organization is not the "Responsible Watchdog for Tax Dollars Corporation". Similarly, the city council gets campaign donations from the same developers, lawyers and construction companies who have a strong bias in favor of these projects.

Economic development sounds progressive and positive. Indeed, economic development IS progressive and positive, but cutting the city and schools who need tax revenue is not. That's what TIF does - in fact, it does a little worse than that, because it increases the services the city needs to deliver, without adding to the tax base to pay for those services. The next time you want to complain about a pothole on Troost, think about the smooth, manicured roads at Briarcliff that the BMWs and Lexi are gliding over, while the tax dollars generated there go to line the pockets of the developers.

Now, beyond TIF, there are a bunch of other forms of tax abatement. Under RSMo Chapter 353, there is a state tax abatement opportunity, similar to TIF. Kansas City's Planned Industrial Expansion Authority hands out tax abatement like the Secret Santa used to hand out hundred dollar bills. To be honest, I don't even know all the different forms of tax abatement and governmental support available to those who have money and want to make much more of it.

In a nutshell, if you want to make money in commercial real estate Kansas City, you'd be a complete jackass to pay your fair share to support city services or our schools. Instead, hire a competent real estate development lawyer, and make more money. But, to answer your questions, my dear commenter, TIF is a form of tax abatement, Kansas City uses many forms of tax abatement to "spur development" (and help developers get wealthier), and the approval policies for each form of tax abatement differ enough that you should hire a real estate development lawyer to guide you through the gilded, byzantine world of taxpayer financing.

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3 Comments:

Anonymous Anonymous said...

A friend of mine bought a condo downtown for over 250K. They built new condos on a vacant lot. His property tax bill last year was $80 (it is supposed to go up in like 20 years).

From talking with him, it sounds like they pay taxes based on just the land value and not the improvements that were made.

So when it comes to TIFF we basically don't have one govmnt group to praise/blame for it's use in KC?

3/03/2007 1:36 PM  
Blogger Dan said...

Anonymous -

That is correct. Your friend's property tax is based on the value of a vacant lot, not on the value of the land as it is today. It will stay that way for up to 23 years from the time the project started.

Like I indicated, TIF isn't inherently bad, but now nobody will build anything in KC without TIF money, because the City Council and the EDC have been so lax in requiring the numbers to really necessitate TIF.

I think the vast amount of blame for TIF abuse goes to the City Council - they are the ones who have to approve every TIF plan, and they are the ones who should be asking the hard questions, rather than asking for campaign contributions.

3/03/2007 3:25 PM  
Blogger Groucho K. Marx said...

Also-

To PAY for the increased city services what do they do?

Right Gracie, raise the property tax.

Guy on the newly-developed then pays maybe $20 more - elderly in their homes (worth far more than a vacant lot) pay $100's more.

Fixed incomes do not cover the increase year after year so the elderly's have to sell.

More TIF's- more taxes every year to subsidize them.

So these "benefits" cause the government to go looking for money elsewhere - from the pockets of existing businesses and homeowners.

This system's really f-ed up!

3/03/2007 9:46 PM  

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