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Report

Tax Increment Financing in the Kansas City and St. Louis Metropolitan Areas

Tom Luce

Executive Summary

Tax increment finance (TIF) is a popular and potentially powerful tool for places that need
economic development the most yet have the least to spend. By allowing jurisdictions to use
portions of their tax base to secure public-sector bonds, the mechanism allows fiscally strapped
localities to finance site improvements or other investments so as to “level the playing field” in
economic development.

However, poorly designed TIF programs can cause problems. Not only can they increase
the incentives for localities to engage in inefficient, zero-sum competition for tax base with their
neighbors. Also, lax TIF rules may promote sprawl by reducing the costs of greenfield development
at the urban fringe. It is therefore critical that state legislatures design TIF rules well.

In view of this, an analysis of the way TIF is designed and utilized in Missouri shows that:

  • Missouri law creates the potential for overuse and abuse of TIF. Vague definitions of
    the allowable use of TIF permit almost any municipality, including those market forces
    already favor, to use it. Weak limits on its use for inefficient inter-local competition for tax
    base touch off struggles between localities. And the inclusion of sales tax base in the
    program tilts it toward lower-wage jobs and retail projects, which rarely bring new economic
    activity into a region.

  • Thanks to these flaws, TIF is used extensively in high-tax-base Missouri suburban
    areas with little need for assistance in the competition for tax base.
    This is especially
    true in the St. Louis metropolitan area. There, TIF money very frequently flows to purposes
    other than combating “blight” in disadvantaged communities’ its classic purpose. In fact,
    less than half of the 21 St. Louis-area cities that were using TIF in 2001 were disadvantaged
    or “at-risk” when evaluated on four indicaters of distress. On another measure, just seven of
    the 20 suburban areas using TIF fell into the “at-risk” category.

  • TIF is also frequently being used in the outer parts of regions’ particularly in the St.
    Louis area.
    Most notably, only nine of the St. Louis region’s 33 TIF districts lie in the
    region’s core. Conversely, 14 of the region’s 38 TIF districts lie west of the region’s major
    ring road (I-270). These districts, moreover, contain 57 percent of the TIF-captured property
    tax base in the region. By contrast, the Kansas City region shows a pattern more consistent
    with the revitalization goals of TIF. The vast majority of the districts lie in the region’s center
    city, though the huge size of the city means many are still geographically far-flung.

In sum, poorly designed TIF laws are being misused at a time when state and local fiscal
pressures require every dollar be spent prudently. As a result, a potentially dynamic tool for
reinvestment in Missouri’s most disadvantaged communities threatens to become an engine of
sprawl as it is abused by high-tax-base suburban areas that do not need public subsidies.

For these reasons, Missouri would be well-served by significant reforms in the laws
governing TIF:

  • The allowable purposes for TIF should be more strictly defined to target its use to
    places with the most need for economic development.

  • Higher level review of local determinations that TIF subsidies will support net
    contributions to the regional or state economy (the “but-for” requirement) should be
    implemented.

  • Local TIF administrators should be required to show that TIF subsidies are consistent
    with land-use and economic development needs both locally and in nearby areas.

Author

If such reforms were put in place, TIF could be returned to its attractive main purpose: that of
providing resources that would not otherwise be available to localities that badly need them to
promote needed economic development and redevelopment.

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