Conservative Hypocrisy?

September 30th, 2010 - by Quincy

Last week I attended a political meeting about local economic issues. Those present were predominantly right-leaning in their views and probably would identify themselves as conservatives or republicans. Consequently, I was surprised to learn that one of the items on the agenda was a proposal to entice a business into the city by using tax increment financing. Tax increment financing involves manipulating property taxes.

Property taxes are calculated as a percentage of the assessed value of the property. For example, if your property is worth $100,000 and your property taxes are 5%, then you have to pay $5,000 in property taxes each year. Normally, as the assessed value of a piece of property increases, the property taxes increase as well. So, if the value of your property increases to $200,000, then you would have to pay $10,000—assuming taxes stay at 5%.

Property taxes go into a pool of money which the city council then divides up among various local government services. These services include schools, police departments, fire departments, road maintenance, city government, and so on. Since no one likes to pay taxes, there is a natural tension between the desire for more of these services and the desire to lower property taxes. Consequently, city councils are limited in what they can afford to do. A city council that chose to raise taxes to build a new building for Walmart, for example, would probably become unpopular very quickly. The people’s natural aversion to being plundered helps restrain local government power. But like weeds growing up through the cracks in the sidewalk, creative government employees have found ways around this restraint. One of these is tax increment financing. Tax increment financing gives the city council significant power to influence development and business within the city.

Despite its technical-sounding name, tax increment financing is quite simple. It is just a way for the city council to spend future property tax revenue to promote or pay for present development projects. Usually, when property is developed, its assessed value increases. Normally, this would mean that the owner of the newly developed property would owe higher property taxes, which would help fund local government services. But tax increment financing changes this. Instead of going into the general city fund, the additional tax money is earmarked to pay for the development itself. Usually this means that the city borrows the money to pay for the development up front and then slowly pays off the loan with the additional property taxes from the developed property. Alternatively, the developer fronts the costs of the development and the city freezes the property taxes at the pre-development level for a time so that the developer can recoup development costs in the form of lower taxes. Either way, property taxes that would otherwise go into the general fund to pay for local government services are instead set aside to pay for the development.

Advocates of tax increment financing argue that it is a win-win situation for the city because it doesn’t use any money from the pre-existing tax revenue, and because, in the end, the city’s tax income will be higher than it was before the project. But even if true, these assertions don’t address the consequences to the rest of the city outside of the project area or the consequences to the rest of the economy.

City councils like tax increment financing because it expands their power; it allows them to pay businesses to relocate within city limits without having to raise property taxes. But when a city council uses tax increment financing to pay for an incoming business’ property development expenses, all other businesses are suddenly placed at a disadvantage. Essentially they must compete with a business whose real estate expenses are paid by the city government. Obviously any business in direct competition with the subsidized business will suffer, but other businesses will suffer as well as they compete—at a disadvantage—for high quality human capital and other scarce resources.

Other businesses aren’t the only ones negatively affected; all consumers of city services suffer. When a new business moves into the city, it uses city resources in the form of increased traffic, demand for police and fire department protection, parking, and general wear and tear. But if a new business moves in under the protection of tax increment financing, it doesn’t pay for these services through its property taxes. Consequently, other property owners must either pay more taxes or the city will have to divert funds from other areas.

But the most serious problem, in my opinion, is that tax increment financing gives the city council power to intervene in the city’s economic development. This increases the likelihood of malinvestment by distorting the market forces that prevent inefficient companies from consuming resources that they cannot afford, and it opens the door to corruption.

Conservatives across America are furious about bailouts and stimulus packages originating in Washington D.C.—as they should be. But to me it seems terribly inconsistent to rail against the D.C. bureaucrats for their intervention in economic affairs and yet support local politicians who intervene in fundamentally the same way on a much smaller scale. If we believe in economic liberty, then let’s apply it consistently.

4 Responses to “Conservative Hypocrisy?”

  1. Jamie says:

    So I’m curious as to how you responded in the meeting. Did you incur the wrath of your fellow conservatives by speaking up, or go home and brew on it? Also, this sounds like the kind of thing that would be virtually invisible to the citizen not in attendance. How does the normal everyday person stay on top of this kind of thing?

    I find myself wishing that there was a place (I’m sure there is) where I could go to glean local political information in a substantive way. Local politics seems harder to get into for some reason, or just boring. Local politics almost seems analogous to local news; I don’t have time to hear Joe Broadcaster talk about how local citizens are coping with the winter weather. I know there are important political issues locally, but it just doesn’t come across that way.

    Love the posts.

  2. El Berto (Azerbaijanian for The Berto) says:

    @ Jamie

    I was at the same meeting with Quincy and he did indeed speak up. It caught most of the fellas there off guard. It was quite entertaining to see these other guys have a blank stare and no answer to Quincy’s questions which espoused the principles these individuals claimed to have.

    Quincy would know this but if you are in the area mentioned, you are free to come drop by when this group meets. It’s an open invite.

    Local politics are indeed hard to get into and not all of them are as volatile as the city that Quincy mentions. Usually, you have to attend a council meeting and then try and determine which of the council members thinks somewhat like you do. Also, listening to the public comments and finding individuals that think like you is also a way to get into the rigmaroles of local politics. Heaven knows, everyone has a group that they get together with and the council members or people attending the meeting will be able to tell you.

    Nice post. I’m only disappointed that you don’t talk me up since, as of Saturday, I’m trying to work on pride and I now have to solicit others to boast about me.

  3. Quincy says:

    Actually, I didn’t understand Tax Increment Financing until I researched it after the meeting. My brother-in-law spoke up first, and I followed up by objecting generally to government intervention in the economy. But since I didn’t know the details about how TIF worked, I wasn’t very effective. I think I’m ready for the next round though.

    As to how a normal citizen can stay on top of local politics, I don’t know of a good central source. City council meetings are a good place to start, but often there are organizations of private citizens that meet to discuss items posted on the city council agenda and decide which ones to support. My brother-in-law has been quite involved, and he is the one who invited me to the meeting I mentioned in the post. Otherwise I wouldn’t have known of it.

    Despite the fact that local politics doesn’t get much media coverage, many of the most egregious government abuses are at the local level. Kick-backs, cartels, fraud, and corruption are at least as common at the city and county level as they are at the state and federal level. Furthermore, local governments have quite a bit of power; they control many day-to-day issues like property taxes, zoning, business licensing, construction standards, and so on.

    Here are a few examples I pulled from the Institute for Justice website:

    “On December 1, 2009, the Lake Elmo City Council declared that it would begin enforcing a law that forbids farmers from selling products from their own land unless they were grown inside city limits.”

    ***

    “The city of Dallas, Texas, changed its laws in 2008 to ban virtually all business window signage.”

    ***

    “Effective in October 2008, tour guides in Philadelphia will be subject to hundreds of dollars in fines for engaging in unauthorized talking. A law enacted April 2008 will make it illegal for anyone to give a tour of much of the city’s downtown area without first getting the government’s permission to speak.”

    ***

    “[I]n San Juan County, Wash., … the County council passed a law … at the behest of politically connected brick-and-mortar businesses, [that] required vendors to obtain a government permit and pay $50 per day for the right to earn their living. Were that not bad enough, to obtain the permit, vendors were required to receive the consent of competing brick-and-mortar businesses. In other words, the ordinance gave business owners the right to veto their competition.”

    ***

    “Under the [New York City public transportation unions’] influence, the New York City Council from 1994 to 1997 vetoed 98 percent of all new van licenses, keeping competition for commuters to a minimum. And for the lucky few with licenses, arbitrary regulations forbid vans from operating on the same streets as any New York City bus and from picking up passengers except by ‘pre-arrangement.’”

    ***

    “The City of Red Wing, Minn., has unconstitutionally turned its local government into a special interest protected from competition. On August 28, 2006, the City Council adopted an ordinance that forces all private commercial trash haulers to use the City incinerator for 10 years, effective January 1, 2007, as a condition of doing business in Red Wing. The incinerator has been burning up taxpayer money since its inception and the ordinance is nothing more than an unconstitutional attempt to prevent the inefficient government boondoggle from facing much-needed competition.”

  4. Adam says:

    Thanks for explaining tax increment financing. I had previously come across the concept of tax holidays, where the government will offer zero or reduced tax for a number of years as an incentive for businesses to relocate or expand. The two concepts, tax holidays and tax increment both seem to “increase the likelihood of malinvestment by distorting . . . market forces.”

    Offering tax holidays to businesses seems kind of like a “race to the bottom,” where governments compete with each other to attract businesses by offering financial incentives. All else equal, the government that “wins” is the one that gives up the most in the form of tax subsidies.

    All else equal, the business will locate in the area which will provide the greatest financial incentives. If no government offered financial incentives, businesses would make decisions such as where to build a new factory based on how the amount of profit the company will realize by building the factory in proposed locations. With incentives such as tax holidays, a business will locate in an area where it will make less money from operations as long as it can make up the difference in tax subsidies. Thus, these tax subsidies distort market forces and practically guarantee inefficient economic decisions.

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