Economic Development Policy Part 5: Geographically targeted policies: Tax increment financing and Enterprise Zones (demand-side policies #3) ECON 4480 State and Local Economies 1

Geographically targeted policies Many states have the ability to target incentives to a specific geographic area. These policies typically involve one of two types: – Tax increment financing, or – Enterprise zones. 2

Tax increment financing Tax increment financing (TIF) involves the usage of tax incentives to generate development in a specific geographic area. This is how TIF works: – A local government designates a TIF area consisting of a few blocks or up to 2-3 square miles. – Developers are encouraged to engage in capital spending in the area, with the goal of creating jobs and income. 3

Tax increment financing – The developer is allowed to capture the increased revenue from property taxes and/or sales taxes in the TIF zone; thus, the developer keeps the increment in tax revenue (hence the name). – The baseline tax revenue (below the increment) continues to flow to the local government. – The incremental tax revenue is earmarked for paying the long-term capital costs of developer, usually a loan. – After these costs are finally paid in 5-30 years, the tax increment reverts to the local government. 4

Tax increment financing The idea is to encourage development in ‘blighted’ areas, where development would probably not otherwise occur. If the area truly would not otherwise have been developed, then the policy is win-win for both the private sector and local government. Several issues regarding TIF remain. 5

TIF issues Opportunity cost – What does the local government give up by allowing TIF? If alternative development for an area is likely without TIF, the local government must take into consideration the benefits from foregone alternative development. What are they giving up? Shifting development – does TIF generate new development, or simply shift development from one side of town to another? 6

TIF issues Capturing revenue – is the baseline tax revenue fixed, or is it allowed to rise as it would before the TIF? Allowing the TIF to capture all baseline revenue above a fixed level is not appropriate, since the area would have generated at least some revenue growth without the TIF. Solution: index the baseline revenue to grow at the same rate as the surrounding jurisdiction. 7

TIF in Tennessee Tennessee authorizes three variants of TIF: – TIF areas for use by local housing authorities, – Municipal sports zones, and – Tourist Development zones. 8

TIF in Tennessee Tennessee authorizes TIF for use by local housing authorities. Housing authorities may acquire ‘blighted’ property for redevelopment. Then sell or lease the land for redevelopment, and authorize a TIF area. Property taxes are frozen at the base level, with the developer receiving the future increment. 9

TIF in Tennessee A related tool is the Tourist Development Zone (TDZ) A TDZ allows a developer to capture incremental sales tax revenue to be used to retire debt. The incremental tax revenue can be used to retire development debt for up to thirty years. 10

TIF in Tennessee The local government continues to receive the baseline sales tax revenue, with the base adjusted each year to reflect the growth of sales tax revenues for the county as a whole. Substantial TDZs have been in operation in several Tennessee localities. In 2006, the following amounts were disbursed: $427,000 in Chattanooga, $319,000 in Sevierville, and $7,085,000 in Memphis. 11

Diagram of a TDZ 12 $ Years Baseline revenue Sales tax revenue Baseline plus development revenue Increment paid to debt service Development begins

Local Examples The cancelled Bible Park project for Murfreesboro would have used TDZ (and industrial revenue bonds) to finance the project. The new Music City Center (under construction) has at TDZ component

Music City Center Funding April 2010: Convention Center Authority issued $623 million in tourism revenue bonds. Proceeds to pay for: – Design, land acquisition, and development, – $415 million for construction, and – $40 for debt service reserve fund (equal to max annual debt service on bonds) 14

Music City Center Funding Payment for the tourism revenue bonds to come from five sources: 1.2 cents of the hotel/motel tax (of 5 cents total tax): funds had been designated for debt payment for the existing convention center ; debt has since been retired. 2.Additional 1 cent to the hotel/motel tax. 3.$2 convention center fee per room/night countywide for all hotels and motels. 15

Music City Center Funding 4.Rental vehicle tax of 1%: levied on rentals of vehicles, trucks, or trailer. ‘primarily applies to travelers’. 5.$2 ground transportation departure tax: fee on contracted vehicles (taxis, shuttles, buses, etc) exiting the airports. 16

Music City Center Funding 6.Incremental sales taxes from the Tourism Development Zone: captures annual increase in sales tax collections within the zone that are above the increase for the county-at-large. Designated for debt service payment. Both local and state sales tax collections will be captured. Zone covers nearly all of downtown, stretching up West End nearly to Vanderbilt. 17

Music City Center Funding Tourism Zone proposed by the city initially covered three square miles, stretching east of the Cumberland River. State government building commission modified the size of the zone, since east Nashville would not likely benefit from the convention center. Final zone is 2.8 square miles, with the following boundaries: East: Cumberland River North: Charlotte Avenue South: Interstate loop West: West End nearly to Vanderbilt Specific non-tourism businesses in the zone (auto dealers, for example) are exempt. 18

Music City Center Funding Questions: Are county-wide sales tax collections an appropriate baseline for the increment? Should the baseline consist of future collections that would have occurred in the zone? Would pre-zone tax collections have grown faster than the county average without the convention center? Can all the future sales tax revenue growth in the zone rightly be attributed to the new convention center? What is the opportunity cost of using state and local sales tax growth for the convention center instead of other uses? What are we giving up? 19

TDZ As long as the baseline revenue is allowed to grow along its trend path, the local government is no worse off. The TDZ authorizing statute adjusts the baseline revenues according to county-wide sales tax growth. A similar TDZ was anticipated for the proposed Bible Park USA in Murfreesboro. 20

Enterprise Zones An enterprise zone is an area established to generate new investment and employment in declining neighborhoods. Businesses willing to locate in the zone are offered lower taxes and sometimes regulatory relief. Using the supply-side argument, lower taxes and less regulation should lead to job growth, boosting local government revenues. 21

Enterprise Zones Idea is that businesses can be induced to invest in areas they normally would not invest. State governments took up enterprise zones in the 1980s. By states had authorized enterprise zones. 22

Enterprise Zones Some successes of enterprise zones are documented: – Harlem USA retail development empowerment zone, – Detroit empowerment zone. A number of issues with enterprise zones have been identified in the literature. 23

Enterprise Zones Biotech companies spun off by Yale in New Haven contribute little to the tax base. When tax breaks are set to expire, companies move out of the city. Large companies do not take advantage of enterprise zones even considering tax breaks and regulatory relief. The availability of labor and crime rate seem to outweigh the tax advantages. 24

Enterprise Zones Companies most likely to benefit from enterprise zones are capital-intensive firms with high tax liabilities. 25

Issues with Enterprise Zones Benefits: – Planning required in many states requires employers, public sector, and neighborhood groups to work together. – Properly structured, enterprise zones provide incentives to encourage growth where little is likely to occur. 26

Issues with Enterprise Zones Issues: – Some cities have too many zones, resulting in unfocused incentives. – Many zones require little in terms of commitments on the part of employers (# of jobs, amount of investment, length of time). – When zones are established where growth would occur anyway, public funds are wasted. 27