June 26, 2014
Last week Cook County Clerk David Orr announced upcoming changes to property tax bills that will allow residential and business taxpayers with properties located inside tax increment financing (TIF) districts to see how much of their payments are going to TIF funds.
For the first time, Cook County second installment property tax bills mailed this summer will show the tax amount and percentage of the total tax bill used for TIF. Previously, tax bills identified properties within a TIF and then directed taxpayers to use the Clerk’s Office online tax tool for more detailed information.
The Civic Federation applauds Clerk Orr’s action. It will provide important information to taxpayers. We have long supported increased transparency for TIF programs, such as having annual municipal budgets include full financial information about TIF districts, including expenses, revenues, fund balance and debt. Taxpayers are entitled to full and complete information about the financial activities and obligations of government.
It is important, however, to note that:
1. The new tax bills, while helpful, will not (and cannot) provide a complete picture of the full fiscal impact of TIF on taxpayers; and
2. The additional information on tax bills should not be viewed insolation from a broader understanding of how TIF works and what it does not do. Contrary to common belief, it does not divert millions of dollars from schools and other jurisdictions to municipal projects in Cook County.
New Tax Bill Information Won’t Provide a Complete Picture of TIF Impact
TIF has a financial impact on all taxpayers, whether their properties are located within or outside of a TIF district. While the new tax bill format will provide important and useful information for properties locate within TIF districts, it won’t provide information about the impact of TIF on properties outside TIFs. (For a full discussion of how TIF works in Chicago and Cook County, see the Civic Federation 2007 Issue Brief on TIF).
Tax rates are calculated by dividing the levy, which is the amount requested by a government in property taxes per year, by the taxable base of property in a jurisdiction (the equalized assessed value or EAV). The rate charged to a Chicago taxpayer is a composite or total of the rates of all the various taxing bodies that overlay a jurisdiction. The larger the taxable base of property is in an area, the lower the composite tax rate will be. Conversely, the smaller the taxable base of property, the higher the composite rate will be.
TIF freezes the property tax base of overlying tax districts such as school districts for 23 years. Many of these jurisdictions overlap substantial areas not located in the TIF district. The impact on property taxpayers is to raise tax rates since the tax base is smaller than it would have been without the presence of TIF. Therefore, taxpayers both within and outside of a TIF district subsidize the TIF. More specifically taxpayers in the non-TIF district portions of a municipality indirectly subsidize TIF districts as tax rates are higher than they would be otherwise. These taxpayers may pay proportionately less than their peers located in TIF districts, but the amounts they pay could still be substantial. This also means that taxpayers in other municipalities are affected by the presence of TIF districts; they pay for the TIFs of other municipalities with shared taxing agencies (such as the Metropolitan Water Reclamation District or the Forest Preserve District of Cook County or school districts that overlap several municipalities). Consequently, tax rates are higher than they would be otherwise. The new tax bill format does not capture these fiscal impacts.
Unfortunately, it would be extraordinarily difficult to calculate the impact of TIF on taxpayers outside a TIF. That would require the calculation of tax rates in a way that would accurately reflect how much of the rate could be attributed to the presence of TIF. Some have suggested that tax bills show what tax rates would be with and without TIF. But, this approach is misleading because those calculations make a flawed assumption that all development would have occurred without TIF. It would be a very complex undertaking to disaggregate what portion of TIF tax rates are explicitly caused by TIF and which are not. Therefore, it would be almost impossible to determine how much taxpayers outside TIF districts pay in property taxes due to the existence of TIF elsewhere.
TIF 101: Misconceptions about TIF Diverting Funds from Schools and Other Governments
When reviewing the new information about TIF on Cook County property tax bills it is important to understand what the actual impact of TIF is on taxpayers and governments. As noted above, it does lead to tax rates for overlying taxing districts that are higher than they would be without the presence of TIF. It does not, however, divert millions of dollars from overlapping non home rule governments such as schools or park districts.
TIF opponents often argue that cash strapped non-municipal governments like the Chicago Public Schools are deprived of badly needed dollars for basic services because TIF diverts funds from their treasuries to municipal projects. In their view, TIF is a zero sum game. Municipalities are the “winners” and other taxing districts the “losers.” TIF represents nothing more than the capture of non-municipal tax revenues by cities and villages. However, this view is overly simplistic. It presumes that the TIF “but for” test is never met and it fails to consider the impact of property extension limitation limits (PTELL) or “tax caps” and rate limits on non-home rule governments.
Tax caps limit the annual growth of a non-home rule jurisdiction’s tax extension in certain counties to the lesser of 5% or the consumer price index (CPI). Certain parts of the tax base, such as new property (in the first year after its construction) and dissolved TIFs are also exempted from the tax cap calculation. These exempted parts of the levy and EAV provide additional property tax revenue beyond the 5% or CPI annual growth limit.
The impact of TIF on the ability of non-home rule jurisdictions such as the Chicago Public Schools to increase their revenue is limited. The tax cap restricts extensions (which are the amount of money a jurisdiction is entitled to from property taxes annually) regardless of changes in property value. TIF simply raises tax rates. The additional dollars going to TIF come from taxpayers, not governments. Taxing districts do “lose” the portion of TIF revenues generated by new construction that would have occurred even in the absence of TIF. However, this “loss” only represents a fraction of total taxable TIF property value and it is not precisely quantifiable. It is also important to note that TIF funds collected by municipal governments are regularly used to finance capital improvements for other governments; as of 2010, TIF had provided more than $813 million in funding for Chicago Public Schools capital improvements according to information from the TIF Reform Panel.
In sum, TIF does not lead to the diversion of millions of dollars from school districts and other local governments. This is not to say that governments should not distribute TIF surpluses to overlapping governments or that TIF projects should not be subject to requirements of transparency, rigorous scrutiny and public debate. Governments may appropriately choose to limit the use of TIF, dissolve TIFs and return the tax base to overlapping governments or to pursue alternative methods of economic development funding such as issuing bonds or using pay- as-you-go methods. However, discussions of TIF should be focused on a clear understanding of how they actually work.