Tax Incremental Financing Growing
Primary Municipal Development Tool Used by 385 Cities and Villages

MADISON—In 2008, more than 1,000 Wisconsin tax incremental finance (TIF) districts in 389 municipalities generated $334.4 million in property taxes. At 3.5% of gross property taxes, TIF levies are approaching in dollar value total municipal levies for towns (3.7%) and villages (4.0%), according to a new report from the Wisconsin Taxpayers Alliance (WISTAX). Now in its 78th year, WISTAX is a nonpartisan, nonprofit policy-research organization dedicated to citizen education.

The new WISTAX study, "Tax Incremental Financing in Wisconsin," shows the increasing use of TIF as a tool for municipal economic development since its inception in 1975. By 1980, 201 TIF districts existed; by 1990, that number had grown to 485; and by 2008, 1,006 districts, or five times the number 28 years before, were in place. TIF tax revenue has grown faster. Between 1980 and 1990, TIF property taxes rose from $8.1 million to $93.8 million. Over the ensuing 18 years, they climbed 257% to $334.4 million.

The new WISTAX study also outlines the mechanics of TIF, highlights some of the risks involved, and reviews some outside factors that can affect TIF finances. WISTAX researchers also note an unprecedented expansion of TIF included in the 2009-11 state budget. The provision allows municipalities, after all project costs have been repaid, to extend the life of a TIF district for up to one year and use the TIF revenue for affordable housing and improving the municipality’s housing stock. At least 75% of the revenue must be used to "benefit" affordable housing. This is the first time TIF revenues have been allowed to be used for something outside the scope of a TIF project.

When a municipality uses TIF, typically it invests tax dollars in infrastructure (streets, sewers, etc.) or other improvements to encourage private real estate investment. Public costs are repaid with tax dollars generated from the private development. Districts with relatively rapid growth in TIF district values are generally able to pay off the investments earlier than when values grow more slowly. Of 678 TIF districts in existence for at least five years, WISTAX found 445 (65.6%) had average annual property growth of 10% or more. Ninety (13.3%) grew less than 5% annually.

A municipality can face difficulties when the value of TIF property is a large share of its total value, WISTAX said. State law prohibits a municipality from creating a new district if the value of the proposed district plus the value currently in a TIF district is greater than 12% of the municipality’s total value. Of 385 cities and villages using TIF in 2008, 104 had TIF values above the 12% limit. Twelve had values totalling 30% or more of municipal value.

WISTAX researchers also examined the finances of 81 recently closed TIF districts. On average, these districts lasted 16.5 years, with 14 lasting less than 10 years. Another 21 had lives from 10 to 14 years, while the same number existed for 15 to 19 years. The remaining 25 were in existence for 20 years or more.

More than 93% (76 of 81) of the closed districts had revenues that met or exceeded TIF expenditures. The five that did not were in Fond du Lac, Francis Creek, Rhinelander, and Stanley (2). Of the five, the two in Stanley and one in Fond du Lac existed for at least 25 years and were at the end of their legal lives. State statutes set TIF lives at 20 to 27 years, depending on district type and creation date. The Francis Creek district existed for just over nine years when it was closed in 2003, just prior to a new one opening in 2004. The Rhinelander district was closed in 2005, nearly 16 years after being created. The city transferred $660,000 from another TIF district to pay off the public investments.

Rhinelander was not the only municipality to use revenues from one district to help finance another. Among 81 districts studied, 10 received financial help from another district within the municipality, while 23 generated enough revenue to subsidize other districts.

In examining expenditures of the 81 closed districts, WISTAX found infrastructure costs to be the largest expenditure, accounting for 43.2% of all spending. That percentage varied widely by district, from less than 10% in five to 80% or more in three. Borrowing costs were nearly one-third of total spending. Combined, capital expenditures and the associated borrowing costs averaged 74.7% of all spending.

At just under 15%, subsidies to other TIF districts was the third-largest expenditure. In three districts (two in Janesville and one in Whitewater), subsidies were more than half of total spending. Grants to developers were 2.7% of the total, though only 11 district provided them. However, in those 11 districts, developer grants averaged nearly 20% of expenditures.

For a copy of the WISTAX report, "Tax Incremental Financing in Wisconsin" write: WISTAX, 401 North Lawn Ave., Madison, Wisconsin 53704; e-mail, wistax@wistax.org; or call 608.241.9789. o