MODERN TIMES

by Art Hobson

NWA Times 22 Jan 2005

Downtown Blight And The Arkansas Tif Law

It's clear by now that the Arkansas Tax Increment Financing (TIF) law, authorized by popular vote in 2000 as Amendment 78 to the state constitution and subsequently enacted by the legislature into law, was poorly conceived.

There are at least two things wrong with it:First, although originally proposed as a way to revitalize blighted sites such as Fayetteville's Mountain Inn, it has been invoked to promote more and faster growth in undeveloped "greenfields" such as the I-540 corridor where growth should be inhibited, not encouraged.Second, it now appears that TIF districts must devote 25 mills of property taxes to statewide schools under a 1998 educational equity amendment, leaving too few mills to finance much of anything.

Although you've probably read previous explanations of the TIF law, let me spell it out once more as it applies to Fayetteville.TIF generates revenue for specific projects, such as the blighted zone around the Mountain Inn, by redistributing property tax between the project and the school district.Fayetteville's total property tax rate is 53 mills (one mill equals one-tenth of a cent) per dollar of assessed value; the "assessed value" of a property is 20 percent of its actual appraised value.For example, if Jane's home is appraised at $50,000, it will be assessed at $10,000 and taxed at $530.These 53 mills go to various city and state purposes, primarily 24 mills to the Fayetteville School District for debt service, and 25 mills for statewide education equalization under a 1998 constitutional amendment.

When a TIF project is established, the current assessed value of property within its boundary is set as a base value and taxing entities such as schools continue receiving revenue at that level for the life of the TIF.As property values and taxes then rise above that level, this additional "increment" of property taxes is used to help finance the project.TIF is an inexpensive way to raise blighted sites by their own bootstraps, because without the TIF such sites would rise only slightly above their current assessed values, whereas after TIF upgrading, such sites will rise far above their current values.After the TIF financing period runs out (perhaps 25 years), property taxes revert back to the original taxing agencies, mainly schools.Since these taxes will be far higher than they would have been without the TIF, the schools come out far ahead in the long run.Everybody wins.

The problem is that the TIF law requires Fayetteville to continue remitting 24 mills of the increment to Fayetteville schools for debt service, and now the Attorney General has stated that cities must also continue remitting 25 mills to the state for education equalization.This leaves only about 4 of the original 53 mills, or $40 of the $530 tax on Jane's home, to go into financing the revitalization project.

I'm not an economics expert, but it seems to me that there should be a way to fix this.First, the law needs to be redrawn to include only blighted zones and strictly exclude "greenfield" sites such as the I-540 corridor.For any proposed site such as the Mountain Inn, an assessment should be made of the expected rise in future assessed values in the absence of TIF support, and that estimate (rather than the current value) should be used as the "base value."Then the "increment" above this base could be fairly allotted entirely to the project, since without the TIF there would have been no increment at all.In Fayetteville, all 53 mills of this newly-defined increment could fairly go to the project.

All of this would probably require yet another amendment to Arkansas' baroque and rickety constitution, which might not be feasible.But the fact is that American cities need some method such as TIF to bring life back to their inner cores.

Another method is "site value taxation."Here's how it works:

By assessing blighted or underused downtown properties at a low value, present property tax policy lets owners of such properties shirk their civic responsibility.Sites such as the Mountain Inn are a dangerous affront to any city.It should be costly for owners to maintain such blighted structures.Owners should be hit with high taxes or a fine for continuing such conditions, in order to encourage them to either renovate their site or sell it quickly to somebody else who will renovate it.

One way to do this is to tax downtown sites partly or entirely on the value of their land, rather than on the value of the structure that is erected on the land.Such site value taxation is used in several U.S. cities with good results.It encourages high-value uses such as hotels, shops and decked parking, while discouraging low-value uses such as blighted buildings and flat parking lots.You can read about it in, for example, James Kunstler's book "Home From Nowhere," pages 199-206; this is the upbeat sequel to Kunstler's 1993 classic "The Geography of Nowhere: The Rise and Decline of America's Man-Made Landscape."

One way or another, Arkansas needs to find a way to restore its decaying inner cities.If the TIF law cannot be repaired, then the legislature needs to replace it with some other law to encourage or force the renovation of sites such as the Mountain Inn.Cities should not have to pay for the negligence of the owners of blighted properties.