Editor’s note: This is an abbreviated version of a column that ran in its entirety in Indiana Policy Review.

Research published previously in this journal found Indiana’s tax-increment finance (TIF) mechanism worked in a curious way, one at variance with its central concept.

That concept, the “hold-harmless” assurance, maintains that local government bodies will not lose any of their existing tax base when a TIF is established. At the same time, they are unable to share in any new, incremental tax revenue produced by subsequent private investment within the TIF area.

The article found the hold-harmless assurance to be hollow. The convoluted mathematics of TIF under Indiana law disguised substantial erosion of local government’s pre-TIF tax base. This is the same base that is “frozen,” if you believe the downtown Indianapolis law firms that market TIFs to local governments across the state.

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That erosion translates into budgetary challenges and higher property-tax rates for cities, counties, schools, townships and libraries as it eats away at their pre-TIF tax base.

Meanwhile, through a series of opaque steps, the TIF mechanism harvests for itself what its math erodes from others, burdening local taxpayers with making up for the tax base and revenue lost by county and city government, schools and libraries. TIF, as practiced in Indiana, is a “heads I win, tails you lose” situation.

False aura of success

This follow-on paper identifies two factors that together reveal as hollow the claims of TIF success. They expose as false that: a) TIF never erodes the pre-TIF tax base for local taxing jurisdictions; and b) it is an essential tool to stimulate economic development and attract new business investment.

A sobering example of how TIF has not worked as we were told it would is the experience of Bartholomew County since 2005. That was when the City of Columbus formed a Redevelopment Commission to establish and oversee the city’s three TIFs. The subsequent history illustrates how TIF, twisted and torqued from its central principle, has functioned as a money-harvesting device for an appointed board that is largely independent of elected local government bodies.

Since its TIF district was established, the Woodside Industrial Park in Columbus has seen little new business investment. Yet, that TIF produces over $2.5 million annually for redevelopment coffers.

The “success” of the Woodside TIF lies in redirecting money eroded from the pre-TIF tax base, money that had benefited the county, the city, the schools, library and township. Woodside’s tax base eroded by two-thirds since its TIF was created.

The earlier article found that in the first seven years of the three Columbus TIF districts, the supposedly frozen pre-TIF tax base declined by 43 percent. The Woodside TIF showed the greatest decline.

This erosion from tax base of the three TIFs has directly benefited the TIF incremental Assessed Value (AV), the “captured increment.” That now is a pot holding $220 million in AV and producing $6 million revenue annually, money exclusively for the local redevelopment commission.

Meanwhile, local property tax rates increased by 28 percent. The county’s tax rate alone rose 39 percent.

Woodside Industrial Park

Platted in the late 1970s, Woodside Industrial Park was developed in three waves during the 1980s and 1990s when Japanese firms and related automotive-industry supply firms located there. Approximately a quarter billion dollars of plant investment occurred there from 1989 through 2004.

But the park wasn‘t established as a TIF district until early 2005. And unfortunately, the Great Recession soon washed across the American economic landscape and construction of new facilities slowed markedly.

Nonetheless, the Woodside industrial TIF district from its formation displayed an impressive rise in “Captured Increment” and corresponding TIF revenues. In fact, the industrial park now produces about $2.5 million annually for deposit into the redevelopment commission account.

Understand that this does not owe to any success in attracting significant new industrial investment. There were only $21 million in construction permits issued to a sample of 20 parcels in Woodside since the advent of its TIF. This sample covers 87 percent of the Woodside TIF’s taxable property.

All of which begs a question: Given Woodside’s inability to replicate its success in the 1980s and 1990s in attracting new industrial development, how is it possible that its TIF can produce millions of dollars annually for the Columbus Redevelopment Commission?

The answer lies with a “but for.” That is jargon trotted out by economic-development champions whenever they advocate forming a TIF — as in “but for this proposed TIF, there is no prospect for market-based investment that could bring new jobs, new income and higher property values.”

Ironically, the “but for” associated with the Woodside TIF is that the TIF district would not be able to pump millions a year into redevelopment bank accounts but for the existence of two curiosities in TIF accounting — secrets, if you will.

Secret 1: Capturing previously granted abatements

Either through confusion or intent, the math of Indiana’s TIF mechanism enables the Woodside TIF district to capture — when existing property-tax abatements rollback into taxable status — the increase in taxable assessed value of facilities constructed in years prior to formation of the TIF. This is referred to here as “reach-back” because those abatements a) preceded creation of the TIF and b) were not granted by its redevelopment commission.

This lassoed $32 million in added AV for the Woodside TIF. That represents tax base that arguably should belong to local taxing districts who surrender, with each abatement granted, several years of property-tax receipts.

Reach-back produces $500,000 additional revenue annually for the local redevelopment commission account. It is likely this same reach-back phenomenon is at work in TIFs elsewhere in Indiana.

Secret 2: Exploitive “Contested Assessments”

For the Woodside TIF, a total of $66 million in “contested assessments” were entered in the TIF’s annual filings to the DLGF, an amount representing about half the TIF’s initial base AV.

The math in the DLGF annual filing works to flow this $66 million of “contested assessments” directly out of the base and into the increment, pumping an extra $1.7 million annually into the Columbus redevelopment bank account.

These “contested assessments,” because of their scale, played a pernicious role in pumping ever more of Woodside TIF’s base AV — and thus annual property taxes — away from local taxing districts and to the favor of the redevelopment commission.

In 2010 alone, a $36,576,800 figure was entered as “contested assessments” for the properties within the Woodside TIF. (The Bartholomew County assessor assures me he has no knowledge of this beyond what I’ve informed him was uncovered in the DLGF filing.)

Columbus resident Tom Heller, an adjunct scholar of the Indiana Police Review Foundation, earned his bachelor’s degree in economics at the Wharton School and a master’s degree in regional science, both from the University of Pennsylvania. His specialties include public finance, land economics and transportation. Contact him at regional.analytic@gmail.com.