My wife and I have often talked about a small addition that would extend the back porch the full width of the house and let us have a bigger kitchen.
It would be nice if the government would give us the money to do this. The value of the house would increase and so would our taxes. The higher taxes would pay the government back eventually, so it wouldn’t cost taxpayers anything.
Given our finances right now, we wouldn’t do it without help from somewhere. Therefore, any higher taxes we would pay certainly would not appear in government coffers without the government helping us.
It seems like a great idea, but for some reason the government is not willing to step up to our plate. We threatened to move to Portland or Charlotte if we don’t get help, but officials just laughed. Somehow, our project is not as important as a new stadium.
Our proposal does, however, illustrate how tax increment financing is supposed to work. Introduced more than two decades ago, TIF has become a legal mechanism for subsidizing everything from corporate headquarters to sports stadiums.
The idea is that certain construction projects will not be built without government action. If they are not built, government will not get tax revenues these projects would generate. Therefore, government should fund their construction and use tax revenues generated by the project to pay back the initial government subsidy.
Economists, trained to look at costs and benefits to society as a whole from any policy or action, generally see TIF as, at best, a futile exercise that distorts market incentives and leaves society no better off. They are entirely correct.
Citizens, however, don’t expect local and state government officials to worry about society as a whole. Officials are elected to advance the interests of their specific state, county or city. They like TIF because gleaming new stores, offices and sports facilities eventually stand where only weeds or obsolete buildings stood before.
People work in the new facilities, earning and spending money that might not flow through the community otherwise. Officials see TIF as a crucial tool without which their communities would be worse off. They are correct in a narrow and myopic sense.
The logic of TIF rests on what philosophers call “the fallacy of composition,” or the mistaken belief that what is true for an individual is necessarily true for an entire group. If I stand up during a crucial play at a hockey game, I can see better. Therefore, if everyone in the arena would stand up, everyone should see better. Our community is better off because we used TIF to bring in a factory. Therefore, if every community used TIF to lure a factory, every community should be better off.
The erroneous assumption is that if certain resources, public or private, are not spent on a specific facility, they will never be used in any other productive way. That clearly is false. Such resources usually find equally productive uses somewhere else without action by government.
Exempting selected new facilities from taxation means that the burden of paying for public services will be paid by those businesses or households not so favored. Non-subsidized businesses tend to be smaller and without the political clout to extort large subsidies for new investments.
The higher taxes paid by these unsubsidized players will reduce their investment or consumption. That reduced investment and consumption, dispersed throughout society, offsets all or more of the increased activity attributed to the subsidized facility. The added economic activity associated with shiny new corporate headquarters is canceled out by tens of thousands of small declines in activity elsewhere.
Government should act, of course, to build projects that are true “public goods.” Free markets will not spontaneously generate fire stations and tornado sirens. And there is some element of a public good in having the Twins and Vikings in Minnesota. I doubt, however, that it is more than a fraction of the hundreds of millions of dollars or more that taxpayers will pony up to build two new stadiums.
There also is some economic benefit to Minnesota and the metro area from having these teams. If the Twins moved to Paducah, the well-being of the nation would not change, but Paducah’s economy might be better off and that of the Twin Cities worse off.
The economic reality is that once many states and cities began to play the public subsidy game for sports facilities or large factories — whether using TIF or some other mechanism — the remainder of such units of government were caught in a bind. We fashioned the barrel over which professional sports teams now have us spread-eagled.
In the absence of national legislation reducing the power state and local governments handed over to teams and corporations, we will pay some economic and cultural price if we do not play the game.
Gov. Tim Pawlenty and St. Paul Mayor Randy Kelly know all of this. Both are intelligent and conscientious public officials struggling to find an acceptable public response to blatant extortion.
Pawlenty’s stadium plan is about as fair and politically feasible as one could get. Regardless of whether stadium funding gets on local ballots, citizens now have to make their voices heard. But let’s not kid ourselves that there are any significant revenues that would not otherwise occur in all of this. Remember, there is no free lunch.
© 2004 Edward Lotterman
Chanarambie Consulting, Inc.