Tuesday 16 November 2010

Tax Increment Financing: the good, the bad and the ugly

Notwithstanding the statement in the White Paper, Local Growth: Realising Every Place’s Potential, that the government’s proposed introduction of Tax Increment Financing will require legislative amendment, TIF in the UK currently appears a simple case of robbing Peter to pay Paul.

The TIF model, as widely deployed in many American cities, finances the regeneration of ‘blighted’ communities. It funds, from future tax revenues, the development of shopping malls, offices and other supporting commercial infrastructure. The resulting increases in employment, spending and property valuation deliver an enhanced tax yield which pays down the investment over time.

Large businesses and city administrators are keen to publicise the success of TIF, yet there is growing community resentment that funds are poorly targeted, wealthy areas benefit most and local government cronyism is rife. The chorus of dissent continues to rise.

Here in the UK, we have much to learn from America’s experience of TIF. 3 areas of contention warrant further consideration:
1)      Our existing tax legislation prescribes business rates as a zero-sum game, meaning that the tax yield is essentially fixed. Therefore, where one community benefits from increased collections, others inevitably lose out. A change to this basic premise would require significant legislative amendment. 
2)      Borrowing against future rates income is akin to spending tomorrow’s predicted tax yield today. Just as Crossrail has committed future generations of London ratepayers to the Business Rate Supplement, TIF will commit local communities for the foreseeable future.
3)      On the surface, the American experience of TIF has been good. However, as more information comes to light regarding how funds are targeted, questions are being asked about transparency, cronyism and undue influence. In the UK, officials must recognise, and prepare for these inevitabilities.

With the tacit approval of Downing Street, local government officers are preparing to deploy TIF to make local decisions which directly benefit local businesses and local people. Yet, there is good reason for central government to demand the final say. In America, the TIF model has moved too far from its original goal of aiding the regeneration of blighted communities. Inequalities have crept into their system and already prosperous districts appear to be benefiting most.

In the UK, the same question of equalisation remains unanswered. The regional inequalities which schemes such as TIF precipitate may further polarise our communities. Before a single TIF is approved in England, the government must make clear how it plans to maintain the fairness, equality and predictability of our non-domestic rating system.

Hopefully, the Local Government Resource Review, planned to commence in January, will face-up to the issues and respond to these genuine and warranted concerns.

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