TIFfing Etiquette

(November 2013)

City Council is poised to extend economic development assistance to a proposed Center City hotel project.  While this individual project may be a good deal for the city, it is time we started making better use of the tool of Tax Increment Financing to build a better Philadelphia.

In Philadelphia, Tax Increment Financing (TIF) has mostly been used to facilitate construction or renovation of individual buildings.  Oversimplified, Philadelphia has encouraged development by allowing developers to pay off debt with funds that would have otherwise gone to the city as tax revenues.  When TIF is used, the incremental increased taxes (in Philadelphia’s case, usually the incremental increase in Real Estate Taxes) a property produces after it is developed do not go to the city; instead, for a set number of years, that revenue stream is used by the developer to offset the overall cost of the project.  Proponents argue that, because development would not move forward without this subsidy, the city is actually not giving up any tax revenue.  Indeed, those who favor the use of TIF would contend that the city wins over time: when Philadelphia has used the Real Estate Tax in TIF deals, it has encouraged developments that produce increased Business and Wage Tax revenue as new occupants conduct business in the completed building.

Now, we can never know for sure if a project would not move forward without subsidy or whether an alternate project might work without TIF help.  We do know that conventional wisdom is that assistance -- whether through TIF, tax abatement, or other subsidy – is often necessary, given Philadelphia’s general economic-competitiveness challenges, to move projects forward.

In the case of major hotel development, this help has created a bizarre circular logic.  A quarter century ago, the public made a major investment in the Pennsylvania Convention Center to grow the hospitality economy.  By creating a showcase gathering place, we sought to spur private investment in hotels and other businesses that cater to travelers.  But, in addition to funding the construction of the center itself, as well as an annual operating subsidy, the public has been asked for additional TIF and other assistance for development of hotels that were supposed to have resulted from the demand fueled by the Convention Center itself.  Of course, boosters asserted, we needed more hotels to house visitors or the Convention Center would not succeed.  That logic became even more convoluted as many of those new (and subsidized) hotels struggled.  Hospitality boosters pushed for an expansion of the Convention Center to help fill the rooms of the (publicly subsidized) hotels.  

So the public invested hundreds of millions more to expand the Convention Center to help fill up the hotels that required public subsidy even though the public had already invested hundreds of millions to build the Center in the first place to encourage private investors to develop hotels.  Now, we are asked to subsidize the construction of a new hotel that will compete with the hotels we already subsidized, which could not make it on their own despite the public investment in the construction and expansion of the Convention Center.  Of course, on top of all this, labor issues continue to plague Center operations and discourage conventions from coming and returning to Philadelphia.  

We may not be able to fix the Convention Center's issues, but we can use the TIF mechanism more effectively in the future.

First, since property values for tax purposes in Philadelphia are now linked to the actual values of properties, we can much more accurately track incremental increases in tax value.  We can now be more confident that we can use the TIF tool for grand efforts instead of individual projects.  Do we believe that transforming the Reading Viaduct into elevated park space will increase the value of property in the neighborhood surround the park?  If so, we can issue bonds today to fund the creation of the park to be paid off by the incremental increase in real estate taxes paid by area property owners.

Second, if we believe that enhanced services in neighborhoods will result in increased demand for that neighborhood -- and increased property values in that neighborhood -- then we could explore using TIFs to fund the improvements.  Philadelphia could utilizing TIF to improve schools, clean neighborhoods, or reduce crime so that we can fund today's investment in communities with tomorrow's incremental Real Estate Tax growth.

Finally, in contemplating the use of incremental taxes, we must be mindful that while the "bet" on future tax increments may make sense to the City of Philadelphia, it makes next to no sense for the School District of Philadelphia.  The city generates a relatively small portion of its tax revenues from the Real Estate Tax and realizes gains from Business and Wage Taxes when projects move forward.  But, the School District relies on the Real Estate Tax to a much greater extent and, therefore, gives up much more and benefits much less from participation in TIF deals.  Especially given its precarious financial state, we should absolutely not shut off any District revenue streams.  If we believe that the TIF tool makes sense for projects, we should do so making sure that they make sense without victimizing the School District in the process.

Tax Increment Financing is a tool.  To date, it has been used with little imagination in Philadelphia.  But if we think bigger, and if we use that tool well, we can build a better city.