How Tax Increment Financing Districts Raise Our Taxes

From Susan Handelsman:

Understanding how TIF Raises Taxes and Lowers Property Values

An easy way to understand how TIF raises taxes and lowers property values of real estate (other than commercial development receiving TIF subsidies) is to look at the model of a universal ‘TIF for All’.

1. Imagine a TIF encompassing all of Woodstock taxable Equalized Assessed Value (EAV).  Statutory standards to qualify as “blighted” or “in danger of blight” are easily met.

Tax districts would be denied any increases in tax revenue generated in this 562 acre swath of Woodstock for 23 years. It represents 5% of Woodstock’s current assessed valuation.  All taxpayers in all tax districts getting real estate tax dollars from this property–everyone in McHenry County–will see higher property taxes if this Increment Financing District is approved.

2. Year one, just like the proposed Woodstock TIF 2, inflationary increment of 6.2% of EAV is diverted to ‘Universal TIF’. That makes the TIF tax rate calculation:  Levy/ 100% Frozen EAV, instead of Levy/ 106.2% of EAV.
3. Woodstock currently has a property tax rate of 12% of EAV (4% of fair market value).

This ‘NO U. TIF’ example tax rate can be represented as 12/100=.12= 12% of EAV (4% of full fair market value).

If NO U. TIF, Next year, knowing 6.2% EAV inflation is on the books (assuming levy staying the same),

EAV tax rate would’ve dropped to 12/106.2= .11299= 11.30%

1. In Universal TIF, there is an “incremental tax” revenue owed to TIF, in the amount of 6.2% of EAV multiplied by tax rate.

This would be deducted from the total tax extension, but then the taxing bodies would come up short: the money which would have been paid to taxing bodies is suddenly diverted to UTIF.

Therefore, the levy must be raised by taxing bodies to duplicate the amount which will be diverted to UTIF: That amount of TIF revenue is quantified as: “tax rate times 6.2% of 100% of Frozen EAV”.

New effective tax rate calculation for universal tif:    = 12+(.12 x .062 x 100)/100= .12744= 12.74%

Year zero:  12% of EAV tax rate (4% of total value tax rate).

Year One: If No TIF: 11.30% EAV tax rate (3.77% of total fair market value).*

Year One: Universal TIF: 12.74% tax rate (4.25% of total fair market value).**

Universal TIF causes tax RATES to rise, and tax obligation AMOUNTS per property to rise.

1. Second year of TIF, with 300 new residential units built, 100+ new students are added, causing D200 to raise levy \$900,000. Other taxing bodies follow suit to accommodate increased social service need. That is about 1.5% levy increase.

(1.015 x12) +(.1274 x .062 x 100) /100 = .133899 = 13.39% of EAV tax rate

Year 2 tax Rate calculation, assuming EAV assessments flat from previous year:

Year Two if No TIF: 11.30% of Year Zero EAV tax rate. (3.77% of full fair market value).***

Year Two if UTIF: 13.39% of EAV tax rate. (4.46% of full fair market value).

1. Going forward, you have the formula. Calculate out a few years. See how quickly tax RATES and tax obligation amounts will rise. Are you one of the lucky few getting a piece of that TIF money that you are a piece of paying for? Can you survive 35 years without it?

*Nominal amounts of taxes stay the same in Year One example, but RATES are lower Because all property values are higher. Lower RATES are critical to the value of local property. If we can get the local RATE down to averages of competing regions (like Crystal Lake, Huntley, Chicago, e.g.) we would have no problem attracting development because our property values are so depressed relative to regions with reasonable p-tax rates.

See Academic studies on TIF property value depression by Dye&Merriman, and Ryan Gallagher on Property Tax Rate Capitalization.

**With TIF, nominal amount of tax payment must rise, in order to pay both full levy to taxing districts AND TIF increment payment. NOTE this is due to normal price inflation, NOT development.

***(no levy increase, because no new TIF residents’ social service provision to pay for).

The ALTERNATIVE/SOLUTION to TIF is: LOWER TAX RATES.

The Self Defense to Woodstock TIF is: get out of Woodstock taxing bodies’ reach. FORM a SELF-DEFENSE TIF of OUR OWN. If TIF is good for Woodstock politicians to support, it must be a darn good thing and we should all find a way to get into one, and get us some of that TIF money.