Property Taxes – Eliminate all Tax-Increment Financing Districts

 Revenue: $100 million

Tax Increment Financing (TIF) is an economic development tool used to promote private redevelopment of commercial, industrial, and residential sites throughout the City.  Generally speaking, TIF districts[1] commit a portion of future tax revenues to fund subsidies and other financial incentives to spur economic development that otherwise might not occur.

When a TIF district is created, the total equalized assessed valuation (EAV) within the TIF district is measured and frozen at that amount for a fixed number of years.[2]  Then, revenues from any incremental growth in EAV above the frozen EAV baseline are transferred into the TIF district and used to fund redevelopment projects at the discretion of the City.  Currently, the City has over 160 TIF districts.

Under this option, the City would eliminate all the City’s TIF districts, and return the property tax revenue currently being collected by the TIF districts to the City and the six taxing districts that collect taxes on City property.  In 2010, the City’s TIF districts collected $469.9 million in property tax revenue.[3]  If the City were to terminate these districts, the property tax revenue would then flow to the seven taxing districts that collect taxes on property in the City.

 9/27/2011 @ 7:00 a.m. update:

If the City were to terminate these districts, the TIF property tax revenue would revert to the taxpayers of the seven taxpaying districts that levy taxes on property in the City.  In order to capture the revenue, the City would have to increase its property tax levy equal to the amount of the TIF revenue it currently collects, which would then be available for use in the City’s general operating budget.

The table below details what portion of the property tax the seven districts receive:

Taxing District

Percent of Property Taxes

Increased Revenue from TIF District Elimination

City of Chicago

21.40%

$100.56 million

Board of Education and School Finance Authority

53.80%

$252.81 million

Cook County

8.60%

$40.41 million

Chicago Park District

6.70%

$31.48 million

Metropolitan Water Reclamation District

5.20%

$24.43 million

City Colleges

3.20%

$15.04 million

Cook County Forest Preserve

1.10%

$5.17 million

Thus, if the City eliminated TIF districts, the City would receive 21.4 percent of the revenue those districts are currently collecting.  Assuming the City’s 2012 property tax revenue is the same as it was in 2010, the seven taxing bodies would split the $469.9 million in property tax revenue in the manner shown in the table above. As a result, the City’s revenue would increase by approximately $100 million annually.

(end of update)

Legality of shutting down TIF districts with outstanding obligations

 It is unclear if the City would be able to terminate TIF districts that had outstanding obligations, such as future bond payments or future subsidy payments.  The Illinois TIF act states:[5]

“Upon the payment of all redevelopment project costs, the retirement of obligations, the distribution of any excess monies pursuant to this Section, and final closing of the books and records of the redevelopment project area, the municipality shall adopt an ordinance dissolving the special tax allocation fund for the redevelopment project area and terminating the designation of the redevelopment project area as a redevelopment project area (emphasis added).

 Thus, the City may not be able to terminate a TIF district until all of its outstanding obligations are satisfied.  But the City may be able to use existing TIF fund balances to satisfy the majority of these outstanding obligations.

 Existing TIF balances and Future Obligations

 At the end of 2010, the City’s TIF districts had a combined balance of approximately $1.4 billion.[6]  However, the vast majority of that money is designated for future projects or debt service on bonds that have already been issued on TIF revenues.  This balance is not assumed to generate revenue for this option because we assume that the City will use the balance to pay off the $156.9 million in TIF bonds that were outstanding as of the end of 2010 and the costs associated with development projects that are already under way.[7]

Proponents might argue that TIF diverts needed property tax revenue into projects that fail to generate economic development and subsidizes investment activity that would have occurred anyway. They might point to a 2007 study by researchers at UIC that found that TIF districts did not have a substantial impact on housing values in Chicago.[8]  Additionally, some might argue that TIF raises the property tax burden on City residents by diverting property tax funds away from the Chicago Public Schools, the Park District, and other governments.  This in turn causes these bodies to increase their property taxes to make up for the shortfall caused by TIF.

 

Opponents might argue that TIF has been a valuable economic tool for the City and point to a recent study that found that between 2004 and 2009 the assessed value of property within the City’s TIF districts grew 150 percent faster than City property outside of TIF districts.[9]  Additionally, one might argue that TIF has provided funding for school construction projects in the Modern Schools Across Chicago program that would not have been completed otherwise.[10]  Finally, some might argue that TIF has leveraged significant private investment in the City with “$7 billion in private funding invested in the City of Chicago as a direct result of TIF investments.”[11]

 

 

Discussion and Additional Questions

In order to make a decision regarding the elimination of City TIF districts, decision makers would need to answer the key question central to gauging the effectiveness of TIF: would the projects and economic development subsidized by TIF occur without the subsidies.  This “but-for” analysis (would the development happen but-for the subsidy) is the most important question when considering whether TIF is a useful tool for the City.

Budget Details

Fund: NA Type of Revenue:  NA
The revenue appropriations begin on page 16 of the 2011 Annual Appropriation Ordinance.

http://www.cityofchicago.org/content/dam/city/depts/obm/supp_info/2011BudgetOrdinance.pdf

 

 

Supporting Information

  • 2010 Property Tax Revenue by TIF District (xls, csv)

[1] In order to use TIF to fund redevelopment projects, the City must first create TIF districts.

[2] EAV is the taxable value of real estate, which is determined by multiplying the assessed value of a property by a state equalization factor and then subtracting any applicable tax exemptions. For more detail see the Civic Federation’s primer on the Cook County Property Tax. http://www.civicfed.org/civic-federation/propertytax

[3] City of Chicago. Financial Management and Purchasing System (FMPS).

[5] Illinois Compiled Statutes. Illinois Municipal Code Chapter 65. Sec. 5‑11‑74.4.-8 Tax Increment Allocation Redevelopment Act. http://www.ilga.gov/legislation/ilcs/ilcs4.asp?DocName=006500050HArt.+11+Div.+74.4&ActID=802&ChapterID=14&SeqStart=208800000&SeqEnd=210900000

[6] City of Chicago 2010 Comprehensive Annual Financial Report. pg. 36. This figure also includes the fund balance of Special Service Areas, but the combined fund balances of the City’s Special Service Areas are minimal compared to the fund balances of the City’s 160 TIF districts.

http://www.cityofchicago.org/content/dam/city/depts/fin/supp_info/CAFR/2010/CAFR2010.pdf

[7] Id.. pg. 159.

[8] Weber, Rachel; Bhatta, Saurav Bev; Merriman, David. “The Impact of Tax Increment Financing on Residential Property Value Appreciation.” 2007. pg. 36.

[9] Polsky and Associates LTD. “2011 Chicago TIF Study.”

http://www.polskylaw.com/2011chicagotifstudy/page17.html

[10] Civic Federation. “Chicago Public Schools Reap TIF Revenues.” November 2009.

http://www.civicfed.org/civic-federation/blog/chicago-public-schools-reap-tif-revenues

[11] City of Chicago. Department of Housing and Economic Development. “New: TIF Projection Reports.”

http://www.cityofchicago.org/city/en/depts/dcd/supp_info/tif_projection_reports.html