On Tuesday’s St. Louis on the Air, we turned our attention to the use of tax increment financing (TIF) and tax abatement as an economic development tool. Is it used too much in St. Louis? Is it used in the best way possible?
We spoke with two people who have different perspectives on the subject.
Molly Metzger is an assistant professor at the Brown School of Social Work at Washington University. She’s also a member of Team TIF. Team TIF was started to improve transparency and racial equity in St. Louis through how tax incentives are used.
Otis Williams is the director of the St. Louis Development Corporation. SLDC is the economic development arm of the City of St. Louis, which oversees TIF and tax abatement implementation.
Defining TIF and tax abatement
First, a definition: Tax increment financing is used all over the country. Generally speaking, it is a public financing method used as a subsidy for redevelopment, infrastructure and other projects.
The City of St. Louis defines a TIF as “a development tool designed to help finance certain eligible improvements to property in designated redevelopment areas (TIF Districts) by utilizing the new, or incremental, tax revenues generated by the project after completion.”
With a TIF, property taxes within a TIF District are frozen for 23 years and the property owners make tax payments instead into a special allocation fund which, in the City of St. Louis, is managed by the comptroller. Fifty percent of local Economic Activity Taxes (local sales, earnings and payroll taxes) also go into that allocation fund.
“For example, if there’s a project and the tax on that property is currently $100 but once that building is built, taxes increase to $1000, that increase goes into the allocation fund, in this case, $900.”
Developers are then reimbursed for “eligible” project costs from that fund, such as surrounding infrastructure, or to pay back debt. Williams said, in St. Louis, no more than 15% of a proposed project’s cost should come from the allocation fund.
It takes four to six months to apply for TIF and requires legislation from the City of St. Louis’ Board of Alderman.
Tax abatement is different from this process. In the City of St. Louis, tax abatement occurs when, for a period of time passed by law through the Board of Aldermen, taxes are frozen at the level they currently are when a project is proposed in either a commercial or residential development. In the $100 analogy, if a person or property is paying $100 in taxes, only that $100 continues to be paid, “abating the increase” in taxes. There’s no special allocation fund for the increase in taxes that would come about with increased property value. After the specified period is up, the developer or homeowner goes back to paying full taxes.
Where philosophies differ
TIF and tax abatement are generally used as a way to incentivize development in the city when no other development would likely take place without the incentive. Williams said that these incentives are offered city-wide for any project that would be TIF or tax abatement-appropriate. In the case of TIF, that generally means for projects with a cost north of $1 million.
“Many times the size of the investment dictates whether you want to go through the expense of doing it, because there is a cost,” Williams said, in reference to TIF in particular. “The tool is available. You have to have a project in order to incentivize it. If we had large projects available in north St. Louis, we would incentivize them for sure.”
Williams said that by using TIF in the central corridor (the area of St. Louis leading from downtown to Forest Park), St. Louis is “setting the stage” for desire to start development there and move north or south.
But that’s not happening very often.
“The logic is: if [TIFs/tax abatements] are being used, it is to build housing or economic development that would not otherwise happen,” Metzger said in response. “The question we’re trying to raise is: Is that the case in the Central West End or Lafayette Square where we have stronger markets now?”
Metzger, whose organization Team TIF STL advocates for racial equity and transparency in the TIF and tax abatement process, said that 84 percent of TIF dollars and 70 percent of tax abatement dollars go to that central corridor area.
“That’s a significant percentage of hundreds of millions of dollars,” Metzger said.
She said that in St. Louis and around the country, historically, public policies have created and perpetuated segregation and that Team TIF is trying to bring to the conversation about how public policy could be crafted more judiciously to make sure that isn’t happening with how TIF and tax abatement are applied in St. Louis.
Williams said that the St. Louis Development Corporation is concerned about inclusion too. In meetings held by the Board of Alderman to determine the use of TIF and tax abatement, he said that “we want to be sure that the increment being earned includes a way to provide some of that increment to lesser neighborhoods. One way to do that is through community benefit agreements and other tools. We’re not there yet, but we’re working on it.”
Metzger applauded this approach by the city but said that there were other elements of public policy that would need revising. For one, the City of St. Louis’ Comprehensive Plan, which falls under the St. Louis Development Corporation, has not been revised since 1947. It should be noted that other plans, such as the Strategic Land Use Plan, which falls under St. Louis’ Planning and Urban Design Agency and notes plans for block-by-block, have been written more recently.
“This puts us in a reactive mode, beholden to developers where we have to respond to what comes to us,” Metzger said. “Other cities, like Charlotte, have plans that show what incentives are allowed here versus there. Right now, we’re treating proposals on a case-by-case basis and that means you can see what areas see development and what do not.”
Williams said the city has a desire to implement such a new Comprehensive Plan.
“We need the dollars to get that plan done and we’re seeking those dollars,” Williams said. “I agree with Molly, we need a framework and a plan; that’s number one in our hit parade. Probably by early spring or summer we hope to see a planning effort going.”
Metzger believes that such tax incentives are keeping property owners from developing their vacant lots, in some cases.
“With some areas of the city, we see if a vacant lot lays dormant, there may be no interest in developing that lot or that lot is being held out by a private owner who is holding out for the best possible price. That person is a speculator, essentially. And the assumption is that these incentives will be available to meet that price.”
Are TIF and tax abatement worth it?
Some have criticized the use of TIF and tax abatement as giving incentives to wealthy developers by taking away much-needed tax dollars for education and public safety. Is St. Louis giving away too much for the sake of investment?
Metzger argues, yes, especially because 72 percent of tax abatements have gone to the central corridor.
Williams, on the other hand, said that tax abatement and TIF are a big part of why you see a more developed and dense central corridor today versus 15 years ago.
“The reason we have a viable central corridor today is because of the early investment in the area,” Williams said. “If you go back to the roughly 200 acres of Cortex, and look at the improvement there, it would not have happened without the TIF instrument that is used there. We’re also looking at building density there. As we look back and we see where we are today we say ‘no, you shouldn’t have, 15 years ago, invested there,’ but it is because of that investment that we have the Central Corridor we have today.”
Metzger praised the previous use of TIF and tax abatement but added: “The question now is: Can we enjoy the benefits of that? Now that we’ve kicked off that development, can we expect the market to take it from here in certain areas and we can focus more north and south?”
She said that it is not just a question of if a specific development project would have happened if TIF or tax abatement was not offered but, would some other development have happened?
“Any developer will say they need this incentive to do the project, of course they are — they’re trying to make a profit — that’s the argument they will make,” Metzger said. “Maybe it is true that they won’t come without the incentive but if it is a prime piece of real estate, maybe that developer would walk away, but if this is a 15 year abatement can we assume nothing else will happen for 15 years? In some parts of the city, it is possible that will happen, but in the Central West End, in the Loop? Probably not.”
Williams said that even in high-density places like the Central West End, you’ll most often find that investments still have not occurred even if 10-15 years have gone by with a vacant lot sitting there, prime for development.
“The only way it will happen is with the incentive,” Williams said.
He pointed to the example of downtown St. Louis which, in 2001, had 150 buildings that were vacant. After using a number of TIF and tax abatement ordinances to combat that, downtown St. Louis is now down to fewer than 24 vacant buildings.
“It changes the blight, occupancy and residential component of downtown and makes it more walkable,” Williams said. “But we’re also looking at what should we be doing in the future.”
Williams said projects and properties have to prove the benefit they will have to various taxing districts, including St. Louis Public Schools. In the evaluation, he said, they ask “does [the development] injure the city’s general revenue?”
“We want to make sure it is revenue neutral or a benefit to the city but want to make sure it benefits the district,” Williams said.
Metzger said other cities have taken a more proactive approach to protecting school funding. In Kansas City, for example, tax abatement is capped at 75 percent of the tax. In St. Louis, developers can get 100 percent abatement.
From 2000-2015, the City of St. Louis gave away $401.6 million in TIF and $307.5 million in tax abatement, according to the city’s economic incentives report released in May 2016.
“The amount of investment that’s comparable to that, we’re talking billions of investment,” Williams said.
Metzger said the report did not fully parse out the economic benefit to St. Louis in exchange for those incentives.
In the past session, five TIF projects and 88 tax abatement projects were approved in the City of St. Louis.
St. Louis on the Air brings you the stories of St. Louis and the people who live, work and create in our region. St. Louis on the Air host Don Marsh and producers Mary Edwards, Alex Heuer and Kelly Moffitt give you the information you need to make informed decisions and stay in touch with our diverse and vibrant St. Louis region.