The legislature should fix the complex process that benefits developers and politicians at the expense of taxpayers

By RICHARD ESENBERG for the Spring Issue of Diggings

Tax incremental financing might seem to be a dry and technical subject. The details are real green-eyeshade stuff. But their impact on the political process teaches us a tantalizing lesson: Tax incremental financing is an occasion of sin.

There are two problems — one related to the obscure and difficult to understand nature of tax incremental districts (TIDs) and the other related to the simple way in which politicians can sell them. In other words, what we can’t see is critical and what we do see can be misleading.

Let’s start with the fuzzy stuff. The idea behind tax incremental financing (TIF) is that a subsidy to a developer is necessary to cause the development to happen. Because the subsidy is “paid for” from the taxes levied on new development that would not otherwise occur, the creation of a TID is supposedly a win-win. But determining whether the conditions for the creation of a TID and whether the subsidized development would not otherwise occur is a complicated inquiry.

It can involve inscrutable financial calculations and often faith-based economic predictions. It requires concluding that the development subsidized by taxpayers would not be replaced by something different in the absence of a tax incremental district.

The process of making this determination is likely to be dominated by the highly interested persons with the most to gain. Because any individual taxpayer will not be much affected by the revenue improperly diverted to the developer should the requisites for TIF not be met, the public is much less motivated to wade into the morass.

When political processes are obscure and of much greater import to a few well-heeled interests than the public at large, there is a substantial risk that they will be “captured” by those with the most to gain.

But it gets worse. Politicians who create TIDs can claim that they have delivered something — a shiny new development — without costing taxpayers a dime. TIF combines a complicated process dominated by people with an ox to gore, presided over by politicians given the chance to promise something for nothing. What could go wrong?

A prime example is the use of a tax incremental district to help finance the Milwaukee streetcar. The relevant district consists of two very expensive skyscrapers. One was already under construction, and the other already had been announced. Whatever you think of spending this money on the streetcar, it was most decidedly not “free.”

Of course, the Legislature knew of these risks, and so it attempted in various ways to restrict the use of TIDs. Here, we learn a second lesson about the risks presented by courts that are overly quick to defer to politicians. Restrictions on the use of TIF are not self-executing. If politicians ignore them, it takes litigation — and courts — to enforce them.

Rendering of Eau Claire's Confluence Project by Holzman Moss Bottimo Architecture / Strang ArchitectsIn Voters With Facts v. City of Eau Claire, my colleagues and I at the Wisconsin Institute for Law & Liberty represent a group of taxpayers who believe that these requirements have not been met in connection with two tax incremental districts associated with the Confluence Project in downtown Eau Claire. In particular, it was necessary for the city to determine that the affected area was blighted (i.e., “slum-like) and that the subsidized development would not happen “but for” creation of the districts.

Our clients believe that neither of these conditions are true and want a chance to prove it in court. Although its decision is a bit unclear, the Wisconsin Court of Appeals held that the conditions need not be true. Although they might seem to be preconditions to TIF, they need not actually be present. It is enough for the city and, in the case of the “but for” determination, a joint review board to say that they are.

The case is pending before the Wisconsin Supreme Court, with a decision expected in late spring or early summer. If the Court of Appeals is right, tax incremental financing can more or less be used whenever politicians want to give away money.

Some see little problem with that. If voters allow their local politicians to divert tax money to private interests, they deserve what they get.

But there are at least two problems. The first is that state law protects all taxpayers from the unnecessary diversion of public funds. This includes the minority who might oppose an improperly created tax incremental district as well as the majority who might be willing to tolerate it. The second is that, as we have seen, the process by which these districts are created is subject to distortion by interested developers and politicians who cannot resist seeming to provide a free lunch.

While courts have a role in reining in TIF, the principal responsibility lies with the Legislature. A hard-to-decipher process that yields huge benefits to a few and opportunities for politicians to pose for holy pictures calls for change.

One of the more positive aspects of the populist turn in our politics is that it has highlighted the ways in which government is used to distort markets and reward political cronies. From our nation’s founding, we have understood that limiting the power of government to dispense favors and impose burdens is the best way to address this.

The Legislature has created a vehicle for abuse. It needs to fix this.

Rick Esenberg is the President of the Wisconsin Institute for Law & Liberty. This appeared in the Spring issue of Diggings, a publication of the Badger Institute.