Welcome to the deep end of the pool.
Let’s start with the idea that Chicago has two areas. One has TIF districts and is generating about one third of the tax revenues. The other two-thirds of the revenue comes from the remainder of the city.
This is in fact about what is happening. About a third of the city has TIFs and they generate about a third of the property taxes. The other two-thirds of the city generates the other two-thirds of property taxes.
The other assumption is that we only have three budgets: Schools, city and county government. In our example each is spending $300 million a year. It is five years till the TIFs start. The other assumption we’ll use is that the three governments are able to limit service increases to five percent of the budget each year.
So that in year -4 the budgets for each of the governments is now $315 million. ($300 + 5%). The future TIF contributes $100 million in tax revenues in year -5. The other two-thirds of the city contribute $200 million in year -5.
When the TIF starts, the revenues from that district are frozen for each of the three governments. The increase in property tax revenue over the base established in year zero is paid to the TIFs instead of to the taxing bodies. Taxes increase within the TIF district at the same rate as they do outside the district. And because there is a five percent growth in expenditures each year, the taxes are growing by at least that much.
At year 24 the TIF expires and all the tax revenues again return to the three tax districts.
The first chart is based on an illustration by Rachel Weber of UIC, showing how the tax revenues for the TIF increase, but the revenues within the TIF do not grow for the taxing bodies. It is a simple chart based on a five percent annual increase in taxes in all parts of the community.
TIF Revenues grow while tax revenues for taxing bodies are capped during the TIF within the TIF district
So far, so good? Okay, but what is happening to the other two-thirds of the city? That part of the city has to meet the continued demands of the taxing districts for a five percent annual increase for all parts of the city. In other words, they are covering the tax increases needed for the TIF districts and for themselves.
To put it another way, let’s look at what happened to our TIF that now is 16-years old. Under our assumption, the TIF is generating $127.63 million for each of the city, the school and the county.
When the TIF was started that amounted to one-third of the tax revenues for each taxing body. However, their needs have grown in 16 years and they now require $835.8 million to operate. The two-thirds of the city without the TIF should be paying 2/3′s of the tax, or about $557.2 million.
However, the TIF is forcing the increases on the two-thirds without a TIF. They have to pay $708.17 million an additional $ 150.97 million in taxes.
The blue line represents taxes with a TIF, the red line taxes in the same municipality without a TIF.
The taxpayers in the TIF of course are matching the increases in taxes outside the TIF. Their only benefit is their supposed control over the TIF funds and their proximity to the improvements in the TIF district.
The TIF itself, which had been benefiting from a five percent increase in taxes each year is doing very well, because taxes are increasing at more than five percent due to the need of the local governments to balance their books.
The total tax revenue for citizens outside the district rises greater than the taxing district's expenditure growth. Once the TIF is closed, tax rates should show a marked decrease.
Patrick asked me to add this small clarification:
When a TIF district is started, it is not the revenues that are frozen but the EAV, or Equalized Assessed Valuation, for the properties that lie within the TIF district. As property values increase, the increment between the initial EAV and the present day market value is set aside into the TIF.
If these amounts were truly incremental, the use of TIFs may not have racked up such a notorious reputation but the crazy escalations in property values over the past two decades turned the increments into godzilla-sized pots of money that would have otherwise been counted towards general revenue.
As more and more tax revenue is siphoned off into TIF accounts, it’s no wonder the city’s budget comes up short, even with the new revenue generated by TIF-sponsored development. To cover the shortfalls, the city has a narrow set of options: raise the absolute rate of tax, tweek the multiplier, reduce the value of credits, or sell/lease public goods. Each of these responses affect all tax payers; not just those living in or outside of TIF districts.