Tax increment financing 101: A look at the area’s big public subsidy

For the last two decades, cities on both sides of the metropolitan area have embraced tax increment financing as a way to dole out hundreds of millions of dollars in public subsidies.

Kansas City used this incentive to make it possible to build the downtown Power & Light District. Independence approved TIF projects to attract development near Interstate 70 and Missouri 291. Recently, Prairie Village endorsed a plan to help redevelop the Meadowbrook Golf and Country Club.

Let’s stop right here.

What, exactly, is “tax increment financing”? What’s it supposed to do, who approves using it and who raises questions about it?

The topic is much in the news these days because a citizens initiative has stalled progress on a TIF plan intended to help renovate a building in the Crossroads Arts District into the new home of BNIM architects.

As the petition indicates, more people are asking questions about this kind of public incentive. Here’s a brief overview of the subject.

How it works

Tax increment financing is meant to entice developers to build projects they otherwise might not without such help — renovating old shopping centers, constructing office towers and everything in between.

The Economic Development Corp. of Kansas City notes: “TIF encourages development of blighted, substandard and economically underutilized areas that would not be developed without public assistance.”

Developers can make this happen if they don’t have to pay full property or sales taxes on their projects. Instead, they are allowed to keep some of the future tax revenues.

City of Overland Park officials put it this way: “When an area is developed or redeveloped, there is an increase in the value of the property. The increased site value and investment creates more taxable property, which increases tax revenues. The increased tax revenues are the ‘tax increment.’ TIFs pledge the future increased revenue for repayment of eligible costs associated with the improvements.”

The eligible costs often include public infrastructure, such as upgraded roads, parking lots and garages.

The cities decide how long the incremental taxes can be diverted to the developers and by how much. In Kansas City, the period commonly lasts up to 23 years for larger projects and can include 100 percent of higher property taxes; the time length is often shorter in smaller cities.

In Kansas City developers also can keep some or all of the earnings tax revenue linked to their projects. Other area cities do not have an earnings tax.

Eventually, a project is supposed to be returned to the fully taxed roles, providing a surge of new revenue for taxing jurisdictions.

Who approves TIF plans?

In Missouri, elected city officials make the final calls on TIF projects, after they are reviewed by a commission made up of representatives of the city and other taxing jurisdictions.

In Kansas, city officials also approve TIF projects, but a county or school district has the power to effectively “veto” a TIF project, though that has not happened recently in this area.

City officials say the lengthy process of evaluating projects always uses a “but-for” determination that supposedly shows if a development would have occurred without the incentive.

What are concerns about TIF?

One huge one is that officials connected to cities drive this entire process, with the caveat noted above about the Kansas “veto.”

Generally, the city always has more representatives on a TIF commission. That can make it difficult for other taxing jurisdictions — schools, libraries, counties, mental health agencies and others — to battle TIF projects they think are not worthy or to at least argue the amount of incentives should be reduced.

City councils approve projects and divert future tax dollars from taxing entities. The cities decide the fate of public dollars that don’t belong to them.

TIF projects can siphon customers away from and thus harm businesses that pay full taxes to a city and other jurisdictions. The best example is a new, subsidized shopping center that, yes, can reduce blight in a certain portion of a city but also provides more competition for existing shopping centers.

Finally, the definitions of “blight” and “economic conservation” can be abused or at least stretched in Missouri. That debate especially has gone on for years as development has occurred on and around the venerable Country Club Plaza. Meanwhile, TIF detractors say the tax break is not used aggressively enough in truly blighted areas such as the East Side.

Ultimately, city officials say the jobs and development created by tax increment financing are good for the communities in the long term. Critics say the giveaways are often excessive, and some development paying full taxes would have occurred anyway.

Tension around these contentions won’t go away. Developers will continue to pursue tax increment financing to help complete their projects. And cities eager for jobs and economic growth will continue to approve them.

But as that happens, the community needs to see more cooperation, trust and transparency in assuring that incentives are worth the public investment.

This story was originally published January 23, 2016 at 6:01 AM with the headline "Tax increment financing 101: A look at the area’s big public subsidy."