Who will pay for Hertz’s TIF reform? You will.

Tax increment financing is a policy driver that incentivizes private developers to develop in areas they would not otherwise develop, e.g., 100-year-old vacant blighted structures full of contaminants on rural Main Streets. 

Why? They can’t cash flow them. They can’t maximize their profits. It is cheaper to buy ag lands and green lands outside of the city boundaries where they don’t have to hassle with city codes, costly permits and government delays.

But guess what typically happens after folks develop on the outskirts of town? They call the cities and demand to be annexed so they can access city services. They want better water and sewer, some fiber optics, security lighting, paved roads and parking lots, and more timely emergency response. This land-use pattern, called urban sprawl is what led to the creation of tax increment financing back in the 1960s because it was nearly bankrupting local governments.

Think about it, folks. What happens when properties are vacant and fall into a state of disrepair? They get more expensive to fix. They attract crime, vagrants, drugs, vandalism, homelessness, poverty and all those conditions of despair that accompany them. As property values decline, the values of the structures around them decline. Those with the means to do so, flee to the fringes of the city. Businesses follow.

Meanwhile, the city’s tax revenues plummet and the demand for essential services skyrockets with increased police, fire and ambulance calls; vandalized street, traffic and security lights; crumbling curbs, gutters, sidewalks and potholed streets; broken water mains and sewage contamination, and more. This is the physical evidence of market failure. And Sen. Greg Hertz’s reform offers no remedy for it. Rather, it hamstrings every local government’s ability to address it without shifting it all on to you.

Tax increment financing is the policy driver that incentivizes private developers to partner with local governments to pay for these public improvements. But it takes money to make money. Private developers must pay for all of the private development costs associated with these properties. When they do that, their property values increase. This is new taxable value. When their property value increases, their tax bill increases. The increased amount of taxes that they pay is the tax increment. The tax increment is what the local governments use to pay for the public improvements (lighting, sidewalks, water mains, sewer lines). 

Guess who pays for those public improvements when there is no tax increment for the city to use? You do.

It usually takes about five to seven years before private investments in a TIF district generate a tax increment — longer in rural communities. So, cities will use tax increment revenue bonds and development agreements to incentivize private developers to pay for all the public improvements upfront until enough tax increment is generated to pay them back. 

Guess who pays for those public improvements when cities resort to general obligation bonds instead of tax increment revenue bonds? You do.

General obligation bonds are backed by the full faith and credit of the local government (all taxpayers) and TIF revenue bonds are backed by the projected new taxable value created by private investment. By taking away new taxable value, Hertz’s reform takes away the ability to use TIF revenue bonds. Sure, local governments will still be able to create TIF districts but why in the world would they? It won’t work.

Do you prefer to pay a portion of public improvement costs (through the use of TIF) or do you prefer to pay for all of them (through Hertz’s reform)?

Who will pay for Hertz’s reform? Most assuredly, dear reader, you will.

Sara Hudson is executive director of Snow Mountain Development, a nonprofit organization to build community and economic capital in Fergus, Judith Basin, Wheatland, Petroleum, Musselshell and Golden Valley counties. She lives in Lewistown.