Why Land Value Taxation Is Superior to Tax Increment Financing (TIF)

PA municipal governments love Tax Increment Financing (TIF), but I think it?s a bad way to go about financing development. Here?s a good treatment of the issue from Rick Rybeck, showing why a land value tax (or value capture) is superior. I really can?t recommend this paper enough. Check out the section comparing what a vacant lot and an improved property near a transit station would pay over 20 years to get a sense of why real estate tax incentives matter to development choices. :

Tax Increment Financing (TIF) has become a relatively well-known technique for financing new infrastructure. It assumes that in the absence of new infrastructure, new private investment in real estate will not occur. Therefore, within a defined area, revenues from one or more taxes are benchmarked. By legislation, any revenues within this area above these benchmarked amounts are diverted from a jurisdiction?s general fund and dedicated to a special fund used to finance new infrastructure.

Based on this questionable assumption about private investment, TIF makes it appear thatthis infrastructure investment has no cost to the public treasury (because supposedly in the absence of the new infrastructure investment, property, sales, and income tax revenues would remain static). Therefore, the investment of public funds can be made without appearing to cut spending on existing programs or raise tax rates. As with the special assessment district, the boundary of the TIF district will be somewhat arbitrary.

Furthermore, because tax increment financing obtains revenues from existing taxes, any negative incentives embedded in the existing tax structure remain. Thus, although TIF can succeed in raising revenues, it lacks the positive incentives associated with the split-rate tax that promote more compact and affordable development.

In general, a split-rate property tax uses market forces better than these other techniques to promote compact and affordable development. Also, it automatically captures land value increases from a wide array of new and improved public facilities and services. From an equity standpoint, owners who receive the greatest benefits would pay proportionately more than those who receive the least. On the other hand, a split-rate property tax typically produces revenues for a jurisdiction?s general fund. Therefore, a split-rate property tax does not provide a dedicated revenue source that can help structure debt financing for transportation projects.

These alternative techniques must be evaluated on a case-by-case basis. In most instances, they are not very sensitive to the fact that properties receive different levels of benefit from infrastructure projects. Finally, they do nothing to diminish the adverse affects of the property tax applied to building values. In cases where a surcharge is applied to the tax on buildings, they exacerbate these adverse effects. Their primary advantage is that they provide a discrete and dedicated source of revenue to finance a project. A jurisdiction might obtain the best of both techniques by creating a special assessment district generates dedicated revenues from a tax on land values alone.

randy travis unclaimed money godspell media matters hana mountain lion taylor momsen