Chapter Two: Literature essay

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2.0 Introduction

There is sufficient evidence that TIF is the most popular program deployed by local governments for funding the economic development in the US. According to various studies, this program is allowed in about 49 states and has been adopted in almost each kind of community: resolute urban industrial neighborhoods, suburbs, small towns, farmlands and central business district. According to Briffault (2010), TIF is extremely controversial. Even the most ardent supporters of TIF affirm that it can frequently bring forth personal and emotional response more than any other public economic tool. In this regard, this literature review discusses the use of TIF in Los Angeles County.

2.1 The Basic Structure of TIF

Various studies have acknowledged that TIF regulation differs from one state to another. However, according to researchers such as Brueckner (2001), the basic idea behind this program is simple. A territorial district is established in a city and the assessed valuation of the property in the district is determined. Dye & Merriman (2000) and Gibson (2003) referred to this assessed value as base value. Property taxes continue to be levied, and the revenues, which are earned through the application of tax rate to base value, continue to be paid to the local governments: school district, Municipality County, park district, fire district and any other special district. According to Gibson (2003), the revenues earned from the application of tax to any property value in the district are set aside and paid to the economic development agency within Los Angeles or the municipality. The findings of Brueckner (2001) and Naccarato (2007) indicated that these expenditures might be made based on pay-as-you-go approach as the incremental revenues are received. In addition, Kerth & Baxandall (2011) found out that larger TIF districts, including some in Los Angeles, might issue bonds supported by the anticipated incremental revenues. These bond proceeds are used in making chief public investment upfront. According to Briffault (2010), this jump starts the process of development in the districts within Los Angeles.

Brightbill (2003)theoretically views the process as a closed circuit. In this case, the incremental revenues pay for expenditures by the public, which then induces the private investment that in turn generates incremental revenues that in turn pay for expenditures by the public. Finally, the bond is paid off as the TIF program expires

In about 18 states in the US, non-property taxes, especially economic activity taxes and sales tax can be committed to TIF programs. According to the studies of Brueckner (2001) and Dye & Merriman (2000), such states depend on the notion that they are utilizing incremental revenues to earn further revenue increments. However, due to the problems associated with computing incremental revenues earned from property taxes, TIF programs in these states normally dedicate a specific portion of the revenue or tax within the district, perhaps assuming that it is attributable to TIF investments (Johnson & Man, 2001).

2.1.0 Project-Specific TIFs vs. TIF Districts

The application of TIF can be either district wide or project specific. This application depends on the scope of the effort. However, according to Kerth & Baxandall (2011), this two applications offer redevelopment, rehabilitation and revitalizations of a certain geographic region, whether is an entire neighborhood or one site. Gibson (2003) also argued that it should be noted that the two applications of TIF have limitations depending on the risk levels. As such, PSU Center for Real Estate  (2009) suggested that the significant of the right method should not be played down. Failing to reflect on which approach is significant for a certain situation can lead legal and pragmatic issues. These issues are most likely to prevent the effective implementation of public policy objectives.

Project-specific approach is deployed when a single piece of property or project is aimed for a fundable project. According to Briffault (2010), this approach is also applied when there is a specific TIF user. The singularity aspect of this approach makes it to have less complicated transactions, resulting in cleaner process. This is perhaps because fewer parties are involved. The importance of this approach is that it can be achieved faster than its counterpart district-wide application. Frequently, the property is under the control of a one owner interested in maximizing development potential. Another importance is that this approach is very effective in offering gap financing for certain improvement. According to Gibson (2003), a project can be the catalyst for private investment that transforms entire neighborhood around.  Briffault (2010) pointed out that project-specific approach could be cost-effect way of improving a larger region.

On the other hand, district-wide TIFs cover many users and possibly many property owners (Santivasci, 2005). Due to the involvement of many players, these transactions are very complex and need substantial amount of diligence to accomplish. This approach is conventionally applied when a large land or entire neighborhood is aimed for redevelopment. The district can include a diversity of land uses and property that not part of redevelopment. Communities deploy this approach to assists in eliminating deterioration and blight in larger regions (Swenson & Eathington, 2002).

The benefit of district-wide approach is that it has transformational and lasting benefits. According to the findings of Naccarato (2007), when a community concentrates on redeveloping an entire neighborhood, business relocate and develop that region with confidence that their investments have the support of public partner. This approach also presents itself to the land assembly, thus allowing a community brings together small pieces of property or land to attract businesses or institutions.

Brueckner (2001) pointed two key elements that need to be looked at when developing and implementing TIF programs. The first one is identifying key stakeholders and their specific interests. The second one is developing and following clearly explained public policies concerning TIF application.  Briffault (2010) pointed out that adopting these two key elements will result in greater sensation. Comprehending the basics of TIF in the community as well as due diligence is crucial. It is important to identify potential public concerns and other hot-button issues.  Briffault (2010) also pointed out that understanding the legislation in the state is also important.

The redevelopment powers law of each state specifies how TIF districts are approved and created. The law also defines every jurisdiction rights concerning such approval. For instance, in some cases, the local government can compel participation from the school district tax increment once it approves a TIF project or district (Santivasci, 2005).

2.1.1 Opportunity Cost vs. Current Assessed Value

Various authors have compared opportunity cost and current assessed valued. If a portion of a property has significant profit prospective to be developed without TIF, then, according to Briffault (2010), there is no reason that local governments should give up many years of forthcoming property tax revenues.  Brueckner (2001) also agrees with this suggestion by claiming that even though local governments receive property taxes based on assessed value at the time of redevelopment, it is not paid for the property tax revenues. According to Gibson (2003), the opportunity cost to many local governments is usually not considered. According to economists, opportunity cost is the value of the next best option. As such, Naccarato (2007) agreed that if a property can be profitable without TIF, an individual could assume that developers would much willing to incur the costs. This allows the local government to fully earn property tax revenues from the beginning. Presently, many local governments are missing out this revenue. The missed revenue is what economists refer to as proper comparison.

2.2 Legal and Economic Issues Concerning TIF Programs

There is sufficient evidence that TIF has resulted in various economic and legal questions. According to Kerth & Baxandall (2011), legal questions integrate the application of debt restrictions and state constitutional tax to TIF activities, and the legislative requirements for endorsement of a TIF program in a city like Los Angeles. On the other hand, many economic issues involve the determinants of the adoption and effectiveness of TIF in encouraging economic development. According to recent studies, legal issues concerning TIF are enormously addressed, though some resolutions vary from one state to another. For instance, the mechanism of addressing legal issues concerning TIF in Los Angeles is very different from the methods used in the City of Chicago. International Coucil of Shopping Malls (2007) and Gibson (2003) noticed that economic issues remain open; especially the effect of TIF on development seems unclear. Until now, the uncertainty concerning whether TIF is effective has had extremely little impact on the adoption of TIF.

2.2.0 State Constitutional Issues

According to the findings of Briffault (2010), tax increment finance implicates three distinct elements of state constitutional moderation on local financial behavior. These elements include public purpose obligation for the use of tax dollars, regulations on taxation and rules the governing debt.

In relation to public purpose, Los Angeles city requires that expenditure of taxpayer dollars be used for public purposes. According to Dye & Merriman (2000), this public purpose obligation shows a long-term concern about the potential for public support of private activity to invite actors in the private sector. However, most modern notions of the government responsibility for encouraging economic development have eroded the private-public differentiation that is embedded in the public purpose doctrine. In Los Angeles city, the state court has frequently held that the spending of TIF with the objective of promoting economic development is in line with the public purpose obligation. According to International Coucil of Shopping Malls (2007), the results of a public purpose is usually unaffected by the fact that private interests might benefit from TIF plans. In fact, instead of express concerns about TIF program, which shadow the divide between private and public, some courts in Los Angeles have approved the legal finding that private-public partnerships, which capitalize on special expertise of the private sectors, are specifically suitable means of encouraging economic development.

In relation to tax restrictions, according to various legal authors, TIF infringes uniformity. According to the findings of Brueckner (2001), this is because the incremental revenues generated within TIF district are used in district to pay for developments within the district. On the other hand, revenues generated from elsewhere in Los Angeles city are utilized throughout the city, including TIF district. TIF district taxpayers in Los Angeles are taxed less than other taxpayers. As such, they are capable of allocating their taxes for expenditures. Moreover, TIF district taxpayers are able to utilize their incremental revenues to pay for the expenditures. Nevertheless, the courts have constantly rejected uniformity issues. In Los Angeles, the courts have pointed out that TIF only departs from uniformity with regard to spending, while the state constitutional uniformity obligation only applies to tax rates and tax assessment.

In relation to debt limits, Los Angeles restricts local government debts. The city achieves this by either requiring voter endorsement for the issue of local bond, or by imposing restrictions on the amount of debt that local government of the city can incur. According to International Coucil of Shopping Malls (2007), state TIF regulations excuse TIF debts from the limits of municipal debts. Researchers such as Brueckner (2001) and Briffault (2010) have also noticed that the municipality of Los Angeles turned to TIF bonds in order to avoid partly the voter endorsement and debt restriction obligations. In some states, where the authorization of TIF is uncertain or unclear, the deployment of debt limits to TIF-supported debts has frequently been contentious.

2.2.1 Statutory Issues

The most popular constitutional issues concerning TIF are whether it is an essential tool for promoting economic growth in Los Angeles. Does TIF meet the standards of underdevelopment in the designated districts of Los Angeles? 

The first statutory issue is the “but-for causation.” According to International Coucil of Shopping Malls (2007), the theoretical heart of tax increment financing is that its expenditure is the “but-for” cause of following economic development in the TIF district. In fact, courts have occasionally rejected TIF proposal where it appears that investment would likely take place without the adoption of TIF. However, according to the findings of Naccarato (2007), for most parts of Los Angeles, as the adoption of TIF increases, the “but-for” obligation has fallen away. Presently, less than half of states in the US seem to be using the “but-for” obligation in their TIF legislation. Naccarato (2007) mentions that this obligation is often a very low hurdle and is not applied rigorously or uniformly. Courts are likely to accept conclusory and debatable judgments of cities.

For tax increment financing aiming at encouraging a certain project or retaining a certain retailer or firm, Los Angeles court frequently depends on the status of the investor or developer in question. For various TIF projects that are specific, the reasonable premise of the “but-for” obligation almost yields a positive outcome. Los Angeles city officials might frequently claim that TIF is the “but-for” cause of TIF-financed development. This might allow the city officials to claim credit for projects that would have occurred anyway. However, Gibson (2003) claims that they are not legally obliged to prove the “but-for” cause. When the city officials are legally obliged, then their claims are regularly accepted.

The second statutory issue is blight. As mentioned above, TIF is adopted and justified as a policy in order to reduce the effects of blight. Blight is a legal obligation for the creation and adoption of TIF program in more than half of the states. Nevertheless, state courts and statutes have changed the meaning of blight from the slum perspective or deteriorated structures to something similar to underdevelopment. In Los Angeles, blight includes lack of community planning. It is not surprising that these legal standards seem to cause judicial acknowledgement of municipal claims of blight even without showing that a region is severely deteriorated.

2.3 TIF and Local Government System

From a single point of view, the propagation TIF is puzzling. It was initially created to encourage urban renewal plans and was not fully focused on addressing urban blight. However, it is presently used in regions that are plainly not blighted. Tax increment financing brings in no outside revenue and offers no new authority for raising revenue. According to Kerth & Baxandall (2011), there is insufficient evidence that the program has achieved much in helping the municipalities use it.

One crucial aspect of TIF is that its decision-making is fully decentralized to the municipal level. According to Briffault (2010), the local government of Los Angeles makes all the decisions concerning whether to create a TIF district, location, infrastructures and types of investments to pursue among others. The laws of the state set out the essential rules regulating the creation of local TIF programs in Los Angeles. Comparatively few states require localities to account for their TIFs or assess the efficiency of TIF activities.

According to Gibson’s (2003) findings, TIF empowers local governments. Briffault (2010) agrees with this view by affirming that it allows Los Angeles city to mold more economic and physical development of the community than tax breaks, which focuses more on services to business. By allowing municipalities to fuse TIF’s incremental revenue to traditional planning and zoning of powers of land use, it offers them a significant amount of city-shaping ability. By investing public finances in public facilities, infrastructure, land acquisition and site clearance, TIF allows local governments to shape and articulate a distinct urban development vision.

2.4 Fiscalization of Development Policy

According to Gibson (2003), TIF fits suitably with the rising fiscalization of municipal decisions about land use, that itself is because of the highly concentrated system. Local governments are hugely reliant on their resources to fund activities. The local capability to increase revenues by increasing taxes is restricted by interlocal competition, internal local politics and most importantly property taxes. Therefore, the primary objective for Los Angeles local government is to raise the value of taxable resources in order to raise revenues without increasing the rates. TIF is an appropriate tool for accomplishing this function. Indeed, its primary goal is to augment the tax base.

Dye & Merriman (2000) added that TIF reinforces the fiscalization underlying it. However, it can only succeed if the tax base of the district engenders new revenues. The bonds of TIF require investment analysis, feasibility studies and financial oversight that are intended to ensure the repayment of those bonds. Despite having the beneficial impact on making a TIF program succeed, it also implies that the growth of the tax base becomes the definition of the success of TIF. This fiscalization underscored and evidenced by the increasing use of TIF for underdeveloped or vacant land on the urban periphery. Severely blighted regions are unlikely to lure investment, even with significant infrastructure.  This is because of the tremendous costs of making high-poverty areas covered with poor structures attractive to investors.

2.5 Conclusion

This section has discussed the various studies of different authors. Various studies have acknowledged that TIF regulation differ from one state to another. Despite the variation in the state laws, funds generated from TIF generally can be utilized for various purposes such as installation, upgrade of infrastructure and repair. There is sufficient evidence that TIF has resulted into various economic and legal questions. Legal issues integrate the application of debt restrictions and state constitutional tax to TIF activities, and the legislative requirements for endorsement of a TIF program in a city like Los Angeles. On the other hand, many economic issues involve the determinants of TIF adoption and effectiveness in encouraging economic development.

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