Though there are myriad economic development financing tools available to local and state government officials and practitioners, from a practitioner’s standpoint, five in particular are more successful at furthering development objectives at the local government level.
Driven by the profit motive of lower property taxes, businesses searching for new locations or existing firms that convey a reasonable threat of mobility will lobby politicians representing high-property-tax jurisdictions for tax relief as a condition for setting up shop or remaining. Local representatives of these high-business-tax jurisdictions in a state then ask their state’s law-makers for the ability to offer property tax abatements. Once the previously higher-tax jurisdiction offers abatement, another jurisdiction in the state faces the same pressure to also offer abatement. This series of events is one likely reason for the marked increase of tax abatement programs across the county.
- Both surveys of business leaders and empirical evidence show that taxes affect business location decisions.
- Abatements finance local job creation and thus are potentially cost-effective.
- Abatements foster competitiveness and dissuade governments from imposing too high a business property tax burden.
- Abatements offer local officials the ability to be action oriented in their approach to economic development and allow local politicians to send out a positive signal about the locality’s “pro-business climate.”
- Stand-alone property tax abatement programs allow a local jurisdiction to neutralize a state and local tax system over which they otherwise have little influence.
- Property taxes are a relatively small portion of overall costs faced by businesses making location decisions.
- Some empirical studies have shown abatements to be cost-ineffective.
- The selective use of abatements raises questions of equity because jurisdictions often favor corporations over smaller or local businesses.
- Abatements pull public dollars away from improvements in infrastructure, health, and education.
- The proliferation of jurisdictions offering tax abatements turns the decision of where a business will locate into a game not of where a business will best operate but of where it can receive the most handouts.
- The ability to offer abatements creates a zero-sum game in which, on the microscale, cities, in their competition with one another, drive deals so far down that the only real beneficiaries are the companies. In addition, for state governments, one locality’s gain likely comes at the expense of another locality within the state.
Score: B–. Tax abatements are
a well-established tool for economic development of an area. Though their effectiveness is not always as strong as anticipated, they show that a jurisdiction is pro-business and at least actively trying to attract businesses. The success of offering tax abatements depends on the level of government from which abatements are offered, how abatements are structured, and the expected response from other jurisdictions vying for the same economic development activity. However, as long as one jurisdiction offers them, others will follow suit in an attempt to remain competitive.
- Federal and state promotion of brownfields has yielded numerous success stories of underused, contaminated properties that now accommodate a variety of economic activities.
- Redevelopment of brownfields can increase a city’s tax base, neighborhood revitalization, and job creation.
- Financial support reduces de–vel–opment costs, increasing the expected rate of return on a private investment to counter the uncertain liabilities that often occur in redeveloping contaminated properties.
- Redevelopment of brownfields improves environmental quality through cleanup of contamination while reducing the demand for undeveloped land. According to a 2001 George Washington University report, every acre (0.4 ha) of reclaimed brownfields saves 4.5 acres (1.8 ha) of green space such as park and recreation areas.
- Little has been documented about how economically distressed populations—those who often have the fewest tools to make brownfield redevelopment work—capture the benefits of brownfield regeneration within their communities.
- Some federal, state, and local brownfield programs deemphasize the “brown” and focus on the economic development priorities.
- The remediation strategy of choice at many brownfield sites—to leave contamination in place but limit the public’s exposure to it through capping, fences, and institutional controls—could unfairly or unwisely transfer risk to future generations.
- It is not completely clear which kind of public sector assistance for brownfield redevelopment is most beneficial to the private sector.
Score: B+. The uncertain liabilities in redeveloping brownfields and the significant costs (compared with clean parcels) associated with investigating, remediating, and redeveloping such sites make public assistance in brownfields welcome and sometimes essential.
Created in 1974, the community development block grant (CDBG) program, one of the longest continuously running programs at the U.S. Department of Housing and Urban Development (HUD), is one of the federal government’s largest community development and neighborhood revitalization programs. Despite the debate regarding the best use and distribution of funds, bipartisan support for CDBG in Congress and strong support at the local government level are encouraging signs that the program will continue to direct investment into low- and moderate-income communities.
- A survey by the Urban Institute of 17 CDBG recipient cities found that all saw that their CDBG investments were linked to improvements in neighborhood quality (based on median loan amounts and number of businesses).
- The broad range of uses allowed under the program means that local allocation strategies can be crafted in ways that are responsive to local conditions.
- The use of CDBG funds for many programs, even on a small scale, is a more politically appealing approach than funding fewer programs on a larger scale.
- The flexibility of the CDBG program can make it susceptible to mismanagement.
- The current allocation formula, which includes the program’s core variables (such as poverty, age of housing stock, overcrowding, and population), has not been updated since 1978.
- The program is generally targeted to low- and moderate-income communities, often in a scattershot approach. More careful programmatic targeting could generate more effective leveraging of resources but may conflict with benefiting low- and moderate-income areas.
- The variability of program uses creates difficulty in establishing uniform performance standards and in assessing program impacts.
- Documenting eligibility can be time consuming.
Score: C+. CDBG funding, when used in combination with other community development programs such as HUD’s HOME program and low-income housing tax credits, can be successful in incentivizing development in low- and moderate-income communities. More leveraging of program funds to benefit targeted groups may yield a higher score. The lower grade reflects the fact that the funding is used for a broad range of community development programs that are not always related to economic or real estate development.
Tax Increment Financing
Tax increment financing (TIF) is a tool that uses expected future tax revenue to pay for a variety of development costs related to a real estate project. The basic TIF process begins with the demarcation of a geographic area that is designated as a TIF district. This area can vary in size from a large district encompassing many acres and parcels to a single parcel. Next, there is the determination of the existing tax value assessment of the land and improvements within the TIF district; this is the base level. Finally, the future or incremental tax value assessment that will result from the planned real estate development project is forecast. The increased assessed value above the base level will generate incremental, or new, tax revenue.
- It is a targeted mechanism providing solutions to projects with significant development challenges.
- It has the potential to garner public support because it allows for public investment without affecting existing tax rates.
- It is widely used, understood, and accepted by public finance and real estate development communities.
- It is possible to have a successful TIF district without issuing bonds.
- It can be used to fund public improvements when traditional financing is not available.
- It may require negotiations and agreements with other taxing authorities (school districts, county, etc.).
- It is susceptible to misuse when applied to projects where need is not adequately proven (e.g., liberal interpretation of blight definition).
- Due to the administration/issuance costs related to the formation of a TIF district and issuance of TIF bonds, tax increment financing is more effective for large projects.
- Depending on the structure of a TIF bond, it could affect a municipality’s credit rating and ability to issue additional debt.
Score: A. As shown by its widespread and longstanding use as an economic development tool, TIF is an effective and flexible mechanism. The structure enables policy makers to direct investment into areas that have a need, while leveraging private investment for large projects that are likely to have a significant positive impact on surrounding areas. Furthermore, because the public investment is financed through future tax revenue, TIF is seen as an equitable tool that does not have an impact on the existing tax base.
New Markets Tax Credit Program
The New Markets Tax Credit (NMTC) program is a community development lending tool designed to stimulate the flow of investment to underserved communities by creating new jobs and accelerating economic revitalization. The program can supply needed capital for real estate and other economic development projects by providing federal tax credits to investors when a qualifying investment is made. (Unlike a tax deduction, a federal tax credit allows a $1 reduction in federal tax liability for every $1 in secured tax credits.)
Among the reasons NMTCs are used are the following:
- They provide a financing solution to fill a funding gap that can prevent investment in low-income communities; and
- They provide a mechanism to leverage federal investment with other sources of private and public capital.
- The NMTC program was established by Congress in 2000, and through 2007, $26 billion in tax credits have been allocated to 294 community development entities (CDEs). The types of CDEs include banks, community development organizations, government entities, and real estate companies. NMTCs can be used for a wide range of real estate projects—retail, office space, education and community facilities, child care centers, and community health centers—and for business financing. NMTCs have been used to finance rural and urban projects throughout the United States.
- Federal tax credits provide a significant financial incentive to investors.
- The program is flexible: it allows creative deal structuring that involves investors, lenders, and project owners.
- It has limited availability, requiring project sponsor to either partner with or become a certified CDE.
- It is only available for projects located in areas that qualify as low-income census tracts.
- Tax allocations are awarded on a competitive basis (in 2009, the Community Development Financial Institutions Fund received applications from 249 CDEs and selected 100 for allocation awards, a 40 percent selection rate).
- Due to fixed compliance and monitoring costs, NMTCs are more effective for large projects.
Score: B–. The NMTC program can bring an additional source of capital to a project that would other-wise not be feasible. The structure of the program also allows for flexibility and creative mixes of various types of financing. However, given the certification requirements, eligibility criteria, monitoring and compliance costs, and competitive award format, NMTCs may not be available for many redevelopment projects.
Some tools—such as TIF and brownfield funding—offer significant advantages over others in terms of flexibility and positive impacts, not only for the desired project, but also on surrounding areas. Other tools—such as CDBG funding and tax abatements—are more challenging to use because of competing local interests that count on these funds for other community development programs or the negative perception tied to offering some businesses a “deal” over others. Finally, while potentially valuable tools, some programs—such as CDBG and NMTC—present obstacles regarding certification, eligibility, compliance costs, and other elements that may hinder interest in their use.