The Kannapolis City Council’s plan to borrow $168 million through tax increment financing exposes key problems with that type of funding scheme. That’s according to a new John Locke Foundation Spotlight report.

“Tax increment financed bonds, or TIFs, are more expensive for local taxpayers than other options, such as general obligation bonds or certificates of participation,” said report author Joseph Coletti, JLF Fiscal Policy Analyst. “A TIF scheme will also allow local governments to hide the targeted tax incentive they’re providing to a private developer.”

The Kannapolis council is scheduled to finalize its TIF plans Nov. 26. Most of the borrowing is tied to a private developer’s plans for the North Carolina Research Campus, Coletti said. The state Local Government Commission will address the plans in December. The LGC must sign off on any TIF proposal, Coletti said.

“Tax increment financed bonds have three disadvantages for taxpayers, and it’s no surprise that these disadvantages make TIFs extremely valuable to some government officials,” he said. “First, TIFs do not require voter approval. Second, TIFs divert tax revenue before it reaches the general fund. That means the fiscal effect is hidden, along with the TIF’s role as a taxpayer subsidy to private developers. Third, the lack of voter approval and transparency help make TIFs far more expensive than other forms of debt.”

Tax increment financing allows local governments to build capital projects with debt that’s repaid from new tax revenues collected in special districts tied to the projects. Nearly every state uses TIFs with mixed results, Coletti said.

“North Carolina’s local governments gained the right to pursue TIFs when voters approved Amendment One in 2004,” Coletti said. “Voters had repeatedly rejected tax-increment financing in the past, but advocates secured passage of a statewide referendum on the issue after they started calling TIFs ‘self-financing bonds.’”

Whatever name it takes, tax increment financing costs taxpayers more money than other borrowing options, Coletti said. He analyzed the costs of different options for generating $67 million for the North Carolina Research Campus in Cabarrus County. “In present-value terms, a general obligation bond could save local taxpayers $6.8 million compared to the TIF,” he said. “Over the life of the debt, the interest savings could be $38.5 million.”

Advocates contend that TIFs impose no burdens on taxpayers, Coletti said. “This is simply not true, and those who say it have confused costs with budget items,” he said. “It is true the government does not use general tax dollars to pay the debt tied to a TIF. That’s because the revenue never makes it to the general fund in the first place.

“This has no cost in the same way that having taxes deducted from your paycheck has no cost,” Coletti added. “The money used to pay off the TIF debt is not available for other needed services, even in the special TIF district itself. A private development without tax increment financing would pay the same amount of taxes, with all of the tax revenue available to pay for city services instead of new debt.”

The net effect of Kannapolis and Cabarrus County’s plans is $111 million in interest savings for Castle & Cooke, the private developer pursuing the North Carolina Research Campus, Coletti said.

“If this is a legitimate purpose for local government, the city and county governments could have chosen less expensive options for meeting that goal,” he said. “Instead, Kannapolis has chosen the most expensive form of borrowing to hide both the fact that it is borrowing money and that the borrowing leads to a taxpayer subsidy for a private developer.”

“Tax breaks for individual developers and similarly targeted economic development incentives are never a good idea,” Coletti said. “Hiding the incentives behind the veil of a TIF that also can lull people into not recognizing the risks of a project is even worse. Local governments need to be honest with taxpayers about the costs and risks involved in TIFs and also about their use as targeted economic incentives.”

© John Locke Foundation