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New research released today outlines problems with the growing trend among cities to borrow against future growth and divert tax revenues as a way to attract economic development. Arizona is the only state to not have legalized tax-increment financing deals or “TIFs.” Arizona eliminated its TIF law in 2006, but there have been several attempts to reauthorize the tool.
“Localities too often use tax-increment financing as an all-purpose subsidy for developers rather than its original purpose as targeted tool to revitalize neighborhoods with circumstances that otherwise discourage investment,” said Serena Unrein, Public Interest Advocate for the Arizona PIRG Education Fund. “In Arizona, we have seen a number of problems that have arisen with the TIF-financed Rio Nuevo district in Tucson.”
TIF deals divert future growth in the tax base from a prescribed area toward special development projects over many years, sometimes hurting school departments and other public structures that must then be financed from a narrower tax base.
“If done badly, tax-increment financing can steer development away from the places that most need it,” added Unrein. “Tax-increment financing can also leave municipalities with unexpected shortfalls or create slush funds with little public oversight.”
The new report, Tax-Increment Financing: The Need for Increased Transparency and Accountability in Local Economic Development Subsidies makes a number of recommendations for stronger guidelines to ensure TIF becomes more targeted, transparent, accountable, and democratically governed. For instance, TIF deals should be:
- Used only as part of advancing part of a specific development strategy in limited areas.
- As temporary as possible, with unspent funds promptly returned to the general budget if left unspent after a certain number of years.
- Capped by the state as a percent of a municipality’s land that can be placed under TIF agreements.
- Conducted through a fully open and democratic process, with information about TIF projects placed online like other best practices for spending transparency.
- Accompanied by clear, measure benchmarks for the responsibility of developers.
“It’s not hard to understand why municipal officials like a sudden infusion of cash and developers like the subsidies, but localities need to ensure that tools like tax-increment financing are closely targeted with long-term public interest needs in mind,” said Unrein.
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