St. Paul’s new public subsidy won’t bring new development

On August 25, the St. Paul city council voted to add 10 years to a Tax Increment Finance (TIF) District –– a public subsidy that is geared towards incentivizing real estate investment around Allianz Field.

The new district named ‘Snelling Midway Redevelopment Tax Increment Financing District’ replaces the ‘Renewal and Renovation’ TIF which was approved last November and was approved for 16 years. The expanded TIF district will run for 26 years.

What is tax increment financing?

Typically, new projects –– especially in underdeveloped areas –– increase property values which increases property tax revenues. A TIF captures those gains in tax revenues that result from a rise in property values due to new development and diverts those funds into subsidizing new development. These subsidies usually show themselves through a reduction in future tax payments after development is done.

In this case,

During the course of 26 years, the TIF district would allow developers to effectively avoid $67.9 million in city property taxes that would otherwise be generated by future property improvements, as well as $65.9 million in taxes otherwise due to Ramsey County and $54.9 million from the St. Paul School District. In exchange, the city would benefit from jobs, housing and major redevelopment of the blighted super block that might not otherwise move forward without tax relief.

Wasteful and ineffective

While it is commendable to want to address the affordable housing shortage, TIFs, like other public subsidies have proven ineffective as a way to induce development. American Experiment research shows that TIFs are problematic in so many ways.

For one, TIFs in essence shifts the tax burden or cost of development from developers to taxpayers. TIFs may also potentially capture some natural growth in property values and take credit for them, essentially diverting property tax revenues from other public services. Sometimes, TIFs may simply underperform, failing to induce economic activity or raise property values. But more importantly, like most tax incentives, TIFs may go to projects that were going to be built anyway.

In St. Louis for example, the $709 million that the city has spent on TIF and tax abatements the past 15 years has “not created jobs, revitalized neighborhoods, or increased long-term tax revenues.” Similar results have been found in other places like Kansas City.

According to the Congressional Budget Office (CBO), “subsidized housing largely replaces other housing that would have been available through the private, unsubsidized housing market.”

It is highly unlikely that this TIF district will incentivize new development in St Paul. The TIF will merely divert funds –– to developers –– that could be used to fund school districts and other things.