New report examines tax incremental financing

A study from the Wisconsin Policy Forum finds Milwaukee has upped its usage of tax incremental financing to drive private investment in new developments.

Between 1999 and 2018, the report shows the city’s share of property in tax incremental districts grew from 1.9 percent to 6.4 percent, only hitting the statewide average for the first time in 2018.

But since 1999, Milwaukee use of tax incremental financing has grown nearly twice as fast as the statewide average.

Compared to other large cities in Wisconsin, Milwaukee leans on TIF more than Madison, Racine and Eau Claire, which all have 3 percent or less of property in TIDs. Kenosha uses TIF the most, with 10.4 percent. Importantly, this report does not include the major TIF investment in Racine County for Foxconn.

In general, smaller cities and villages in the state tend to use TIF at higher rates, the report shows.

Wisconsin’s TIF law was first enacted in 1975, allowing municipalities to lean on future increases in property tax revenue within a designated district to make public investments, with a goal of boosting private development.

That works by first determining the base value of taxable property within a new tax incremental district, according to the report. Taxing authorities that cover the district keep collecting taxes on that fixed base value for the life of the TID. As property value in the district goes up due to public and private investments, the increased tax revenue — or tax increment — on private development is used to repay project costs.

As Milwaukee’s share of property value in TIDs more than tripled, the report shows the number of TIDs in the city rose from 28 to 48.

Report authors attribute the growth of the city’s property value in those districts to the growing tax increment. They also provide an example which illustrates this trend.

In 2013, Milwaukee made its largest TIF investment in Northwestern Mutual’s new downtown office tower. By the end of 2017, the value of that district had increased by $193 million, now accounting for more than 10 percent of the city’s TID value increment of $1.81 billion.

On a statewide basis, Wisconsin municipalities used $4.1 billion in new property tax revenues from TIDs to drive public investment between 2007 and 2017. About $472 million of that was in 2017 alone, up 25 percent from 2007.

In 2017, the state had 1,245 active TIDs. That’s gone up steadily since 1975, with some plateaus following recessions. The max lifetime of these districts ranges from 20 to 27 years, depending on the specific designation. And they can be extended by up to four years under certain circumstances.

While many municipalities in the state use TIF, the degree of risk can vary widely. Report authors note that municipalities, when paying for upfront TIF project costs, can spend up to 100 percent of the incremental tax revenue projected to be generated in that district during its lifetime. Municipalities often have to borrow money to cover those costs.

Since municipalities take on this debt and pay for project costs before any increment exists, they risk new developments lagging behind expected timelines. In those cases, municipalities often have to use general funds to repay project costs.

As a general rule, the higher the project costs are relative to the amount of tax increment the district is expected to bring in, the more risky it is for the municipality.

Still, report authors say “higher risk can lead to higher reward.” If the increment comes as expected, the municipality can repay project costs and close the TID ahead of schedule in some cases, “at which point the reward kicks in as the tax base begins contributing to all taxing jurisdictions.”

See the full report here: