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Cleaning Up Tax Increment Financing
Every year, $500 million worth of property tax revenue collected in Chicago flows into funding pools shielded from public scrutiny and democratic control—the bank accounts of the city’s Tax-Increment Financing (TIF) districts. That money—10 percent of Chicago’s annual property tax revenue—is intended to promote development in struggling areas of the city, but the fashion in which it has been handled in the past—without full transparency, democratic oversight, or accountability for the recipients of funds—has opened the door to misuse of public money.
Chicago has 163 TIF districts, or areas in which a portion of tax revenue is set aside into special accounts. The revenue collected by those districts is spent outside ordinary city budget processes, allowing for unsupervised spending, political horse-trading, and a concentration of spending authority in the mayor’s office.
Mayor Rahm Emanuel has vowed to reform the city’s TIF process, and convened a reform panel to recommend improvements. The reform panel’s recommendations point in the right direction, but would not correct the fundamental problems with Chicago’s TIF program. City leaders should adopt the reform panel’s proposals and then go further—taking the steps necessary to rein in overuse of TIF, prevent TIF districts from becoming a piggy bank for projects unrelated to their original purpose, and provide transparency and accountability in the TIF process.
Chicago’s TIF process is in need of reform. TIF spending takes place without full public transparency, making it hard for residents to determine how their tax dollars are being used. Residents cannot, for instance, find information about TIF spending in a convenient form online.
• TIF spending takes place outside of the city’s budget process, making it hard to consider TIF expenditures in the context of the city’s overall development needs and undermining democratic control. Even aldermen have been denied access to the city’s overall TIF budget.
• TIF districts—which in theory offer “free money” for development by triggering growth and then capturing the revenue that results from that growth—can end up taking money away from other purposes by diverting tax revenue that would otherwise have flowed into general tax funds from inflation or ongoing growth.
• TIF districts often operate without a clearly defined plan, spinning off money that becomes the basis for a “shadow budget” under the mayor’s control. In the past, aldermen have reported that the mayor’s office used the promise of new TIF spending in their districts as leverage to win their votes in the City Council.
• Developers who receive TIF subsidies are not always held accountable for delivering the benefits promised. When Republic Window and Door closed its Chicago plant in 2008, for instance, the city had no way to reclaim a share of the subsidies the company had received, which were intended to support jobs through 2019.
Vowing to reform Chicago’s TIF process, Mayor Rahm Emanuel created a panel of TIF experts to review the city’s policies and historical use of TIF and recommend improvements. Mayor Emanuel’s TIF commission has proposed reforms that would move the city in the right direction, but more needs to be done. The mayor and the City Council should:
• Adopt the commission’s proposal to include TIF spending in overall city budgets, which would place TIF spending under more democratic control.
• Adopt the commission’s proposal to measure the performance of TIF districts and projects, and hold developers accountable for providing agreed-upon benefits by including provisions in subsidy contracts that call for repayment of subsidies if targets are not met.
• Adopt the commission’s proposal to strengthen the scrutiny given to proposed development projects, reducing the chance of needlessly spending public funds on subsidizing projects that would be built without taxpayer support.
• Build on the initial steps towards greater transparency in TIF spending taken after passage of a 2009 TIF Sunshine Law by adopting “Transparency 2.0” best practices that allow residents to easily monitor city spending online.
• Limit the creation of TIF districts in areas that don’t need public investment by setting a higher standard for the creation of new TIF districts.
• Close TIF districts once they fulfill their initial redevelopment plan, or require reauthorization if they are to continue with a new redevelopment plan. Districts should not continue diverting money once the purpose for which they were created has been achieved.
After years in which Chicago’s TIF program was allowed to grow into an unaccountable, unsupervised program accounting for 10 percent of the city’s revenue, the city government is beginning to take steps to return TIF to its originally intended uses. Further action and long-term commitment from city leaders will be required, however, if the city is to transform the TIF program from an overgrown shadow budget into an effective and targeted tool for promoting development.
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