Drawing a Line on TIFs

The time has come to draw a line on property tax abatements that subsidize developers. The prevalent form of abatement, known as Tax Increment Financing (TIF), has proven to be a valuable tool in downtown revitalization by making it financially feasible for developers to restore to active use the many vacant and often dilapidated buildings that once lined Gay Street. And as long as they are confined to historic buildings and blighted or underdeveloped areas such as the South Knoxville Waterfront, the use of TIFs continues to be justified.

But one thing leads to another, and now suburban developers are seeking TIFs that would facilitate new shopping centers in affluent areas of Knox County such as Halls and Hardin Valley. The rationale for these expansive commercial TIFs is that revenues derived from the tax abatements would be dedicated to pay for infrastructure associated with the development, such as roads and traffic lights, and thus provide a public benefit. But up to now, developers have been required to pay for such improvements as stipulated in the traffic impact studies they must submit in order to get approval for their plans.

It's fallacious to assume that dedication of incremental tax revenues to a project, via a TIF, doesn't cost taxpayers and their city or county governments anything. So long as a development enhances property values and thus their property taxes, these revenues should be viewed just the same as all others that go to fund our local governments and be allocated in accordance with their overall budgetary priorities.

County Finance Director John Troyer makes this point well when he says, "a TIF makes revenue allocation choices in a vacuum without considering all of the county's other expenditure choices." The county's director of engineering and public works, Bruce Wuethrich, is clear the roadwork that would be paid for by the proposed Halls and Hardin Valley shopping center TIFs doesn't "come anywhere close to being a priority" in relation to other needs for road improvements across the county. And the prioritization process doesn't stop with roads. A TIF is claiming money that also could be going to everything from schools to covering the $57 million that's surely needed to fund the voter-mandated pension plan for sheriff's deputies.

The criteria differ where a convincing case can be made that proposed development wouldn't be feasible (and won't occur) in absence of a TIF. In these cases, there's no resultant increase in the city and county property tax base and thus no increase in their revenues "but for" a TIF. Moreover, if a TIF facilitates such a development, the incremental taxes will add to governmental revenues in the long run (following the typical 15-year life of the TIF), and a portion of them will do so even in the short run.

The city has applied stringent "but for" tests to the 10 TIFs it has approved for restoring moribund downtown buildings, primarily as condos. A third-party evaluator must determine there's a financing "gap" that can't be covered in any other way. And beyond the "but for" test, the city must determine that a public purpose will be served by letting the incremental tax revenues go toward financing a private project.

Being as downtown-centric as I am, it's clear to me that revitalization that has occurred as a result of TIFs meets the public-purpose test. I'm also persuaded that South Waterfront development warrants the TIF district that has been established there to apply the incremental taxes from private development to public improvements such as a riverwalk and riverfront parks as well as access roads.

Where pure commercial development in the suburbs is concerned, the city has on a few occasions appropriated money for roadwork that arguably should have been a developer's responsibility. For example, the city put $2 million into improvements at the intersection of Chapman and John Sevier highways that benefit the adjacent South Grove shopping center. But that outlay was part of a deal under which South Grove's developer, Tim Graham, agreed to city annexation of the property, and the city is reportedly getting a good return on that investment.

Where Knox County got into trouble was by granting Graham a $2 million TIF for South Grove-related roadwork. Not only did this form of subsidy fail to pass Troyer's standard for budgetary prioritization, but it also set a precedent for other suburban shopping center subsidies. Graham can claim that the $5 million TIF he's now seeking for his proposed Willow Creek development in Halls passes the "but for" test. But Chamber of Commerce President Mike Edwards observes that, "If the market is there, retail developers are going to figure out a way to meet that need [without a subsidy]."

The decision on whether to approve the Halls and Hardin Valley retail TIFs now rests with the Knox County Industrial Development Board. And when the board convenes next Monday, it should reject them.