Some $39 million of state and local government funds are needed to support plans for the $82m Downtown Hotel and Conference Center (DHCC) project in Frederick. Developer Plamondon Hospitality Partners is committed to putting up $43m which pays for the hotel portion of the project. Other costs are the Conference Center $13 million, Parking Deck Six $16m, and land, utilities, roads and sundry items $10m. Capital costs are proposed to be split investors 52.5% and governments 47.5%. Government funding is proposed to be split State $16m, City $16m, County $6m (all $s rounded to nearest million.)
Most of the state funding is to come from a state agency Maryland Stadium Authority, the City money from borrowing against parking revenues and potential property taxes. The County contribution is expected from a hike in the hotel tax county-wide, and potential property taxes.
Sketchy ‘tax increment financing’
The financing leverages these various forecast revenue streams by the planned sale of revenue bonds of different kinds. Revenue bonds are secured against the forecast revenue streams which are used to pay the interest and amortize or pay off the debt. There is as yet no detailed financial plan despite the MOU. For example it is as yet unclear what future revenue stream the Maryland Stadium Authority would use to fund the near $15m it is expected to raise according to the City’s MOU. Outside Parking Deck Six’s use of the City’s parking fund to borrow another $13m, the City and County propose to use tax increment financing (TIF) – borrowing $5m based on the dedication of the estimated future increments or increases in property tax from the DHCC site. Another source of public funding thrown into the mix is an increase from 3% to 5% in the county hotel tax, estimated to yield over $4m. There are several other 6-figure or sub-$million fundings listed in the MOU recently approved by the City.
“No impact on taxpayers” – insupportable claim
City officials say repeatedly that the government funding won’t impact taxpayers. For example the MOU executive summary states “The proposal calls for the facility to be privately owned and operated with no impact to resident taxes and no on-going subsidies….” (p10 of the Executive Summary to the MOU with the last clause bolded in the original)
Unfortunately this is untrue. There are several impacts on resident taxes, and they grow over time.
Tax Increment Financing (TIF) freezes the tax on any property going to the general fund of the City and County at the pre-development amount, dedicating the increase (or ‘increment’) of property tax to service the TIF debt. Since tax for the general fund from the property within the designated TIF district is frozen at pre-development dollar levels other taxpayers will have to carry more of the burden of supporting city and county services. The cost of these services will usually go up because of inflation, or population growth, or political pressure to do more. The hotel development itself may generate extra demand for local government services – for policing, trash collection, street maintenance etc. Year by year the TIF district or districts will pay less of their share of overall city and county taxation – as all the increase in TIF district property tax is legally dedicated to service and pay off the TIF debt.
Hotel tax to be jumped two-thirds
The DHCC scheme also envisages increasing the County’s tax on hotel stays. These are to be jumped by two-thirds – going from 3% to 5%. Anything which raises the cost of hotel stays in the County raises the cost of visiting, and makes us less competitive with other jurisdictions. If our elected officials were serious about encouraging tourism and visitors they’d be working to lower the hotel tax to help make our hotels more attractive to use, rather than raising their costs.
Further what’s the justice of adding to the costs of all the established hotels, many of them economy hotels for people paying their own expenses, in order to subsidize the new swanky high priced hotel and conference center for people on corporate or government expense accounts? Hit up the regulars staying at the economy motels off the interstate to support the corporate and upper income establishment in the fancy downtown is the essence of the DHCC’s proposed financing.
Any scheme to subsidize one selected business project to the tune of 47.5% of its capital cost has several consequences:
- it hugely advantages the chosen business relative to competitors
- competitors lose business, lay off staff, and may even close
- others want similar tax arrangements and so the diverted increment in taxes grows, squeezing the general fund forcing extra taxation on those without TIF
Supporting non-viable projects has consequences
Since government is supporting a non-viable business, one which cannot otherwise cover costs with revenues it misallocates resources away from efficient business toward less efficient business and reduces overall productivity and real incomes. That is basic economics.
Economists in Chicago systematically studied these effects under TIF and concluded: “In summary, the empirical evidence suggests that TIF adoption has a real cost for (overall) municipal growth rates. Municipalities that elect to adopt TIF stimulate the growth of (TIF) areas at the expense of the larger town. We doubt that most municipal decision-makers are aware of this tradeoff or that they would willingly sacrifice significant municipal growth to create TIF districts. Our results present an opportunity to ponder the issue of whether, and how much, overall municipal growth should be sacrificed to encourage the development of (TIF) areas.” (Richard Dye & David Merriman. The Effects of Tax Increment Financing on Economic Development. Journal of Urban Economics #47, 2000.)
Daniel McGaw wrote of TIFs “…the burden of paying for (local government) services will be shifted to other taxpayers. Adding insult to injury, those taxpayers may include small businesses facing competition from well-connected chains that enjoy TIF-related tax breaks. In effect, a TIF subsidizes big businesses at the expense of less politically influential competitors and ordinary citizens.” (Tax Increment Financing: A Bad Bargain for Taxpayers, by Daniel McGraw. Reason Magazine, January 2006)
The Me-too effect
Once one business gets TIF assistance others naturally want it too.
“It’s only fair if Marriott gets TIF funding then Holiday Inn should get the same,” Holiday Inn will say. And Hilton, Hampton Inn, Best Western etc. And why just hotels? Why not condos, retail, or factory modernization? So TIFs tend to spread, especially when they are falsely presented as costless to taxpayers and as a boon to development.
Who but a miserable grinch could possibly object to a government program that stimulated development and was costless to taxpayers?
If TIF works for a downtown hotel/conference center in Frederick why not for the stalled Galleria condo project across the canal, or the equally long discussed McCutcheon development over East Street, or… where do you stop in taking future tax revenue from the general fund for loans now to favored business developments.
Of course it is NOT costless. Far from it.
The ruinous history of TIF
Just look at its history. TIF was invented in California and first used in the mid-1950s. For several decades its use was confined to ‘urban renewal projects’ – ‘redevelopment’ or rehab of blighted buildings. Gradually it was stretched and in the last quarter century TIF became commonplace for literally all kinds of development, most of them so-called greenfields construction. California has more TIF districts than the rest of America combined.
A prominent early promoter of them in the Bay Area was then Oakland Mayor Jerry Brown. Across the Bay from San Francisco Brown pioneered TIFs for urban renewal but they have spread across the state and into ‘economic development.’ By the turn of the century they were being used for all kinds of so-called public-private partnerships for office buildings, stadiums, casinos, shopping malls, housing, roads, housing, power, conference and convention centers, so-called smart growth developments etc. In 2000 a bipartisan Commission on Local Governance for the 21st Century, chaired by San Diego Mayor Susan Golding in its report, Growth Within Bounds (Sacramento, 2000) wrote of TIFs: “this financing tool has steadily eaten into local property tax allocations that could otherwise be used for general governmental services, such as policy and fire protection and parks” (p111). This was an early warning of what was to become a full blown fiscal disaster.
Scott Beyer in Forbes wrote: “At first glance, (TIF) subsidies don’t seem like handouts, since they supposedly pay for themselves through increased revenue from new projects. But it is (always) unclear whether revenues truly increase because of these projects, or from inflation. And the money that pays for them would otherwise fund core services, causing misplaced priorities in many cities.”
Beyer cites the trendy grocer Whole Foods as receiving tens of millions in public (TIF) money to locate stores in Chicago and Detroit, at the very time these city governments were struggling to afford adequate policing and to handle past debt. Chicago has used TIF to get a new a Walmart and a Marriott Hotel. (Tax increment financing is the new urban renewal, by Scott Beyer, Forbes magazine, May 11, 2015. see
Randal O’Toole urban affairs economist in Oregon writes bluntly of the result of TIF: “TIF takes money from schools, fire departments, libraries, and other urban services funded by property taxes. By eliminating TIF, state legislatures can help close current budget gaps and prevent cities from taking even more money from these urban services in the future.” (Crony Capitalism and Social Engineering: The Case against Tax-Increment Financing, Randal O’Toole, Policy Analysis #676, May 2011 see http://object.cato.org/sites/cato.org/files/pubs/pdf/PA676.pdf .)
In California the TIF wheel has turned full circle. Since 2011 as state governor Jerry Brown, the very man who championed TIFs from City Hall in Oakland now denounces them as ruinous.
In the state’s first 20th century decade Gov Arnold Schwarzenegger struggled with the state’s collapsing municipal finances trying to use suasion to limit TIF. He left an emergency to his successor as governor, Jerry Brown. Brown said a large part of the crisis was attributable to the proliferation of TIF through the generically named redevelopment agencies or RDAs which were unaccountable to local elected officials. After dramatically suspending TIF in an ‘Emergency Proclamation’ Gov Brown got through the state legislature laws (AB26/AB27) disbanding of most of the TIF-issuing RDAs.
It had become understood TIF had grown into a deadly threat to the solvency of state and local governments, draining away an ever increasing proportion of tax revenues. The only way to credibly address the state and local budgetary crises and restore fiscal credibility of California was to act dramatically and decisively against the TIF agencies.
Widely derided there as an unaccountable shadow government secretly channeling money to rich and powerful businesses and for often flashy extravagances at the expense of basic schools, police and fire service, RDAs had become a huge political liability.
In 2014 Brown did agree to limited reinstatement of TIF through a law permitting so-called Infrastructure Financing Districts but these strictly limit the purposes for which TIF is permissible to infrastructure. And, most important, TIF initiatives now require 55% local voter approval. Since TIF has grown so unpopular in the very state that hatched this financing scheme and saw it grow into a monster, the financing mode is clearly in serious decline.
At heart of Chicago corruption
TIF has also been large in Chicago, where the proliferation of the financing tool was associated with endemic cronyism and corruption. The Chicago Reader reported: “TIFs aren’t just a tool for economic development. They’re a tool for consolidating power. At least half a dozen aldermen have told us that mayoral aides pressure them on key votes . . . by either promising to give their wards more TIF dollars or threatening to take TIF dollars away.” (Ben Joravsky and Mick Dumke, Shedding Light on the Shadow Budget, Chicago Reader, December 10, 2009 cited by O’Toole p15.) “They also become a tool for political fundraising since the power to grant or deny TIF districting gives officials huge leverage over property owners.”
As in California Chicago’s perpetual fiscal crises are attributed in considerable part at least to the fact that TIF districts now cover close to a third of the City, forcing the remaining two-thirds to bear the full tax burden for basic services.
BOTTOM LINE: TIF could be labeled a kind of fascist finance. It uses demagoguery to sell the worst of socialism’s bureaucratic planning with pandering to weaker capitalists’ instinct to disadvantage competitors and corner a market by tapping governmental favors.
Note again, I write all this as a supporter of a hotel (and hotels) downtown. The developers and their architect Peter Fillat have, in my opinion, done a nice job of hotel design that fits the historic district. For the hotel proper anyway, not the conference center portion of the project which sits atop the footprint of the old Birely Tannery building – setting up a fight to fully demolish the Birely that the developers cannot, and I think, should not, win. An admirable hotel-only project is jeopardized by indefensible use of future taxes and government favors, and the ill-advised addition to the hotel of a sure loser of a conference center. The conference center portion is the loser financially, and will almost certainly lose the fight with historic preservation.
- editor 2015-12-18
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