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Tax Increment Financing: The need for transparency and accountibility in local economic development subsidies
Tax-increment financing (TIF) has been a widely used tool for municipalities seeking private investment. TIF allows cities and towns to borrow against an area’s future tax revenues in order to invest in immediate projects or encourage present development. When used properly, TIF can promote enduring growth and stronger communities for blighted neighborhoods; but TIF can also end up wasting taxpayer resources or channeling money to politically favored special interests.
Tax-increment financing can be wasted on projects that:
- Fail to achieve public goals. Since, TIF divert money from schools, parks, and other important services, they won’t be justifiable if the projects supported fails to bring hoped-for investment or harms the community in other ways.
- Enrich special interests at the public’s expense. Poorly designed TIF programs can give government officials a tool to lavish subsidies on favored or well-connected developers – regardless of the project’s public benefits.
- Encourage development in areas where it is least needed. TIF is intended to spur redevelopment of areas in difficult economic straits; but the tool has also been used to fuel development of previously undeveloped areas.
The process of awarding tax-increment financing often takes place without sufficient public awareness and input – creating the opportunity for favoritism and corruption.
• TIF often lacks transparency: The public often lacks the tools to evaluate whether a particular TIF project makes sense.
• TIF often lacks accountability: TIF laws do not adequately require follow up reporting that would enable the public to determine if the goals of the project were realized.
• TIF can create “slush funds” that lack public oversight and accountability.
To prevent these problems, states and municipalities should adopt strong rules governing the use of TIF districts and similar development subsidies. In short, rules should ensure that TIFs are targeted, transparent, accountable, and democratically governed.
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