Tax Increment Finance robs voters of choice, constrains future councils, puts budget at risk

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