Submitted to OU Daily for possible publication
Tax Increment Finance robs voters of choice, constrains
future councils, puts budget at risk
The proposed arena-entertainment district plan calls for the
creation of one or more Tax Increment Finance (TIF) districts. Norman City
Council took the first step to create to create statutory review committee to evaluate
and make a recommendation about the proposed plan. This step takes us down the
path of TIF without, first, evaluating if Norman residents want this project,
and if so, is TIF the best way to fund it?
TIF allows local governments to engage in long term
borrowing contracts which can last up to 25 years. The popularity of TIF stems
from the ability to secure a tax revenue stream for authorized projects in a
designated area. The TIF captures some or all of the incremental growth in
taxes collected in the designated increment district. The incremental growth is
calculated as the actual collections minus the baseline collections. Lenders
consider if the revenues diverted to the TIF district are sufficient to cover
project and borrowing costs. This is the sort of analysis that TIF consultants
perform.
TIF locks in a revenue stream which eliminates uncertainty about
future council budgetary priorities. If there is a crises or opportunity to
invest in a promising venture, TIF funds cannot be touched much like water fees
go into the water fund and can’t be used for public safety or other general
purposes.
By sequestering funds, TIF agreements constrain future
councils. The share of tax revenues collected in the TIF increment district which
are diverted to the TIF fund instead of going into the general funds is
predetermined. Future councils cannot unilaterally change the amount of taxes
that are siphoned to the TIF fund even if they face budget shortfalls or
emergencies.
TIF agreements are hard to unravel, even if development
plans don’t pan out as promised. When city council tried to end the UNP TIF tax
siphon back in 2018, the developer threatened lawsuits. In the end, city
council gave up $8 million the developer was contractually required to pay for failure
to build the promised lifestyle center. Not an inch was built, not a penny of the
penalty was returned to tax payers.
TIF agreements are desired by private developers because a
simple city council majority can approve a TIF without the need to get voter
approval. In contrast, general sales tax rates and sales taxes for special
purposes such as the Norman Forward quality of life program, must be approved
at the ballot box. Representatives from OU Athletics Department told faculty
groups that they don’t want a public vote. They do, however, want taxpayers to
hand over more than $200 million for an arena to host OU athletic competitions.
TIF schemes can be (and often are) used for development that
would happen anyway. Take for example the University North Park TIF which was
used to finance infrastructure for a retail shopping district. Clearly, raw
land along the fast growing I-35 corridor would have attracted retail without
public expenditure. The Target store planned to relocate from Main Street to
the UNP regardless of the approval of the UNP TIF. Further, we see development
along I-35 and Classen Blvd in Southeast Norman with no TIF.
TIF master plans are speculative and include conceptual
drawings. It is easy to overpromise public benefits and hire consultants to
generate wildly inflated projects of returns on investment, but much harder to
deliver on such promises. Again, Norman has first-hand experience with OU
developers who promised a walkable lifestyle center with high end stores
(Neiman Marcus was mentioned at the time). The promises were unrealistic.
Norman spent $7 million dollars on Legacy Park to complement the illusive
lifestyle center which never was built.
Standard TIF feasibility studies are limited and
misunderstood. TIF consultants do not consider returns from other potential uses
of tax dollars. For instance, they are not asked to provide advice about what
sort of project would deliver the biggest bang for the buck. Instead, they are
asked to estimate activity IN the TIF area and commonly ignore displacement effects
on non-TIF areas.
To the extent that competition-related spending shifts to the
Arena TIF district and away from existing Norman businesses, the general fund tax
would suffer. Further if the Arena TIF district attracts most of the new
restaurants and entertainment venues, then growth in the TIF would displace
growth in the rest of Norman.
The displacement effect is exacerbated by the plan to keep
Lloyd Noble in operation along with the proposed new arena. Norman is not a large
enough town to support two large capacity arenas. Competition for live
entertainment and convention events is fierce.
Displacement effects are well recognized in the data-driven,
academic research on the economic impacts of sports facilities. This is why
cities which use tax dollars to fund professional sports facilities are not
shown to exhibit economic benefits. There is little reason to think that a
college sports-anchored arena would fare better.
The bottom line is that we need to be clear about how TIF
mechanisms work. TIF does not create NEW tax revenues, avoids voter approval at
the ballot box, and constrains future council budgeting decisions for up to 25
years. These are important shortcomings of any TIF project.
The proposed Arena TIF is a huge ask – over $200 million in
public spending using tax dollars. Regardless of how appealing you find the
concept of another arena-entertainment district, the financial implications of
TIF cannot be ignored. If projections of net new taxable sales revenues do not
pan out, as is generally the case, then tax payers will be left to deal with resulting
budget shortfalls.
Cynthia Rogers
OU Professor of Economics
