More on TIFs, Schools and Streetcars

A recent Politifact undertook to fact check Alderman Joe Davis' statement that the use of Tax Increment District revenue to fund the Milwaukee streetcar would cost the Milwaukee Public Schools revenue. The newspapers' verdict is that Davis got it "mostly wrong." That's not a fair evaluation. My colleague Mike Fisher wrote to the author, James B. Nelson, explaining what he got wrong. Mr. Nelson did not respond, so I'll share Mike's critique at the conclusion of this post.

At Urban Milwaukee, MPS teacher Jay Bullock says that MPS can't be hurt by the loss of tax base that would be caused by TIF financing of the street car. Purple Wisconsin blogger Cindy Kilkenny, who initially didn't think so, says Jay is right. She shouldn't have given up so easily. There is more to be said here too.

Let's start with Jay. Under most scenarios, it would be city taxpayers and not MPS itself that would be are hurt by the street car financing. This is because, as he points out, school districts are subject to revenue limits. If MPS had more tax base available to it, the revenue limits - in any given year - would remain the same. Assuming that it is already spending the maximum amount that it can (and it is), then it would be normally be unable to collect more in taxes and spend more money. It might be able to reduce tax rates, but the reduction would , to some degree, be offset by a loss in state equalization aid because the district is now richer. State equalization aid works by trying to "equalize" school districts' tax base per member. How much the offset would be depends on a whole host of factors that would differ from year to year. Jay's argument is that the district would still have the same amount of money. (Of course, schools are only part of the property taxes paid by city residents.)

So assuming that we don't care about the taxpayer, all else equal, you might think that MPS should be indifferent to an increase in its tax base. But there are problems with the notion that a loss in tax base cannot hurt MPS. Everything else does not stay equal. First, it is possible for school districts to exceed their revenue limits through referenda. That's hard to do, but it happens. Second, state aid doesn't stay the same in relation to revenue limits. Indeed, after a substantial increase, state aid as a percentage of the cost of k-12 education in Wisconsin has been declining. When that happens, school districts have to pick up the difference and it is easier to do that if you have a robust tax base. If I'm MPS and I care about the future, I should not be indifferent to my community's tax base. Equalization aid notwithstanding, its better for a school district to be rich than it is to be poor.

Jay then channels developers in arguing that TIF districts don't cost taxpayers - or any other taxing entity - any money. That is sometimes true and sometimes false. The conceit of tax increment financing is that the city needs to spend money to support particular development or the development won't happen. The story is that using the additional tax revenue to generate that development to "repay" the city for this support doesn't hurt taxpayers because, without the support, there would have been no development and no additional taxes.

This is why - before a TID can be formed - the relevant municipal authorities must make a finding that the development would not occur "but for" the municipal subsidy. In reality, this "finding" is often untrue.

But in the case of TID funds being used for the Milwaukee streetcar, we know that it is untrue. We know that the development generating the tax funds to be used for the project would, for the most part, be generated in the absence of the streetcar because they are already being generated. The TID revenue to be diverted to the streetcar comes from an existing TID, No. 56, and a newly created TID, No. 82. Here are the facts as explained to Mr. Nelson by my colleague:

1) TIF 56:  The development that this TIF was created to support has already taken place.  The property in the TIF consists of the Marine Terminal Condominium and the two Harbor Front condominiums.  They are built.  The improvements made by the city, consisting mostly of extensions of the Riverwalk along these properties and street and lighting improvements, have been almost completely paid off.  In the ordinary course these properties would revert to the normal tax rolls and the property taxes paid on them, which are substantial, would be used for general municipal purposes including MPS.  By extending the TIF, the Mayor is excluding these already developed and valuable properties from the tax rolls for another 15 or 20 years.  There will be no new development in this TIF district as a result of the streetcar.

(2) TIF 82: Consists of two parcels, one that will be the Couture and one that will be the 633 office building.  The 633 building is already under construction.  In the normal course the increased tax revenue from this building when completed would roll into the normal city tax rolls and could be used for general purposes including schools.  Instead, by including the 633 Building in TIF 82, the taxes relating to this new and expensive office building will go to support the streetcar.  The Couture is the only development within either of the two TIFs that even arguably fits the template of a building that would not be built if not for the TIF financing.  Of course, it was planned long before the TIF was created but it may be true, as developer Barrett says, that he will abandon this project without the streetcar.  So it is possible that the incremental tax revenue that will accrue from the Couture project would actually fit the TIF paradigm.

Bottom line:  no TIFS, the tax revenue from the three condominiums and the 633 building become part of the City’s normal tax base.  As noted, TIF financing for the streetcar has absolutely nothing to do with the development of these buildings as the condos are already there and the 633 project is financed and already underway.

So the TIFs really just remove these four properties from the normal tax rolls for 15 or 20 years and the general revenue for the City that they would otherwise produce goes to streetcar construction instead of other city needs including the schools.

Now it may well be that spending more on schools won't happen because MPS would have "taxed to the max" anyway and doesn't want to - or can't - get voter approval to spend more. Maybe the money gets spent of police protection or community centers. Maybe city taxpayers get a break. The point is that the City of Milwaukee taxpayer is footing the bill for this streetcar just as much as if the Mayor had raised tax rates to get the money.

Now, of course, if you believe that human beings have changed so that what was once a failed technology will now miraculously cause millions - even billions ! -  in new development, that reality won't bother you. If you're a developer that likes the idea of the city manipulating transit to dump customers on your front step, it's all good. But it's wrong to pretend that you aren't making city taxpayers foot the bill.

Cross posted at Purple Wisconsin.