News Roundup

Shift Toward TIF Leaves Less for Basic Services

The Kansas City Star
By Yael T. Abouhalkah
April 15, 2009

For years economic development gurus have pumped up tax-increment financing as the savior of Kansas City’s budget.

The mantra went this way: TIF projects will bring in new jobs, stores and tax revenue so the city will be able to spend more money on basic services such as public safety and capital improvements.

However, new information from the city shows this contention isn’t coming true. In fact, a good case can be made that tax-increment financing is killing Kansas City’s budget.

Let’s take a look at one key example.

In the 2009-10 budget starting May 1, the city’s 1-cent sales tax that finances infrastructure repairs is expected to bring in $68 million.

But the city can’t spend that much. First, it has to deduct $15.8 million that will be diverted to more than four dozen retail and business TIF developments.

That leaves $52.2 million for fixing infrastructure.

In other words, a whopping 23 percent of every sales-tax dollar has to be forked over to pay for roads, sewers, office buildings, retail shops and other parts of TIF developments.

That’s bad enough news, but it’s only half the story. The city actually had more money to spend from this tax just three years ago.

In the 2006-07 fiscal year, the city took in $66.5 million from the 1-cent sales tax, with TIF projects soaking up $7.2 million. That left $59.3 million for public infrastructure repairs.

So even as more TIF development occurred in the last three years, the amount of public funds available for capital improvements actually fell by $7 million.

Here’s another quick example:

More and more of the city’s restaurant sales tax is being diverted to TIF developments, leaving less to pay off millions in Bartle Hall debt. Right now, 30 percent of every restaurant sales-tax dollar goes to TIF projects, up from only 5 percent three years ago.

As the city dips into its general fund to make Bartle’s debt payments, less money is left for basic services.

So why is this happening?

Page 62 of this year’s budget overview has a good answer. Frankly, I was surprised but pleased to see such an honest assessment of TIF’s problems in a city document.

It points out that taxes diverted to TIF projects will rise by millions of dollars in the 2009-10 budget.

“These redirected taxes are increasing more rapidly than total taxes because of the negative effect of ‘displacement’ or ‘substitution.’ Displacement occurs when customers’ destinations for shopping and/or dining shift from a non-TIF area to a TIF district, a result of the interest generated by the new attractions.”

Here’s a real-world example.

A lot of people are eating at restaurants in the publicly subsidized Power & Light District, which uses 100 percent of its sales, earnings and utility taxes to pay for the project. But fewer people are eating at restaurants that still pay 100 percent of their taxes to the city.

Plus, some of those older, 100 percent tax-paying restaurants are going out of business trying to compete with the newer, subsidized restaurants.

The city’s budget book continued: “Displacement also results from existing businesses expanding or relocating to a TIF development area and discontinuing business in a non-TIF location.”

For instance, two years ago Wal-Mart closed a large store in the Benjamin Plaza shopping area in south Kansas City and opened a smaller store on the old Blue Ridge Mall site. The old store paid full taxes to the city. The new one pays only 50 percent of its taxes to the city, with the rest being plowed back into the project.

Kansas City’s excessive use of tax-increment financing in the past will have negative effects on budgets — and on services received by residents — for many years to come.