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TIF reform

In 2004, North Carolina voters narrowly approved a constitutional amendment that permits local governments to use a form of public debt called tax increment financing (TIF). The stated purpose of TIF is to promote private economic development in designated districts through the development of public improvement projects.

To put it simply, government financing of a public improvement project, such as water and sewer lines, would allegedly help attract private developers who otherwise would have ignored an area. The public improvement project would be financed through the extra property tax revenue (incremental revenue) that would exist due to the new private development.

Elected officials and development supporters claim there are no costs or risks to taxpayers in this financing method. Instead of eliminating the costs and risks, however, TIFs hide them. The costs are hidden because incremental tax revenues are diverted to pay debt instead of paying for government services. The risk are implicit in that a local government would not allow a TIF to default, for fear of facing higher fees and interest rates on future borrowing.

Key Facts

• TIFs do not affect a government's credit rating because they do not pledge tax revenue.
• TIFs are paid by tax revenue that never reaches government coffers.
• TIFs have higher interest rates and fees than similarly structured general obligation bonds or certificates of participation.
• TIFs do not increase spending because they divert tax revenue before government can spend it.
• North Carolina has had three TIF projects: a theater in Roanoke Rapids, a research campus in Kannapolis, and a town center in Woodfin.
• Amendment One states, "these instruments of indebtedness may be issued without approval by referendum," which leaves room to have a referendum. The Local Government Commission approved all three TIF projects submitted to it.
• The Randy Parton Theatre (now Roanoke Rapids Theatre) was financed with the first TIF in the state. The city of Roanoke Rapids pledged sales tax revenue in addition to the incremental revenue from the enhanced property values. The Theatre was the first venue built as part of the Carolina Crossroads entertainment district, but its feasibility study assumed hotels and retail venues would be in place before it opened.

Recommendations

1. Put TIFs to a vote of citizens, like general obligation bonds. If these projects are good for economic development, voters will approve them just as they approved the constitutional amendment that makes them possible.
2. Make the costs known. The public is provided far too little information about the true nature of TIF projects, including the taxpayer exposure of the projects. The TIF statute should have strong protections to ensure the public has accurate and detailed information about TIFs. Local governments must make clear the additional costs involved in a proposed TIF project.
3. Keep it honest. There are too many ways for backroom deals to take place when it comes to TIFs — the TIF statute needs strong protections against conflicts of interest and other possible ethical risks.
4. Review projects thoroughly. The Local Government Commission needs to have real oversight powers and not be a rubber stamp for local governments. Current law sets approval of a TIF as the default and does not require enough disclosure.