Chicago TIFs are a lesson for UK councils

The pressure is clearly building on the leaders of Chicago’s city administration to come clean on the question of Tax Increment Financing. The TIF model of infrastructure financing has been welcomed across much of the US in recent years as local politicians seek to access new sources of development funding. The Chicago experience is regularly cited by TIF proponents here in the UK because some of Chicago’s 160 TIF districts have clearly breathed new life into previously blighted communities. I have no doubt we can put TIF to similarly good use here.

Yet, Chicago’s voracious appetite for the TIF model, as exposed by local newspaper The Chicago Reader, provides a foretaste of what can happen when the advantage of focused and autonomous local decision-making collapses under the weight of commercial interest and partisan political influence. Not only have there been accusations of goalposts being moved, funds being diverted and the poor getting poorer, but the suggestion of a ‘slush fund’ at City Hall sounds ominous, and has raised the political stakes considerably.

It all seems a far cry from the way we do business in the UK, yet we cannot afford to avert our eyes. TIF is not a panacea. Hard-pushed business ratepayers deserve protection from local government decision-makers who may come to view TIF and the non-domestic rates levy as a bottomless pit of cash.

Councillor maintains rates localisation pressure

Is Councillor Colin Barrow, Leader of Westminster City Council alone amongst councillors in his view that councils should be given the power to retain a greater share of the business rates which they collect from local businesses? I suspect not. Having written eloquently on this subject in our current issue of Rating in Brief, the Councillor continues to present his case in public.

Most other councils have remained silent on the issue, perhaps for fear of rocking the boat at a time when public sector employment levels are in the spotlight. This, in spite of the fact that the coalition government is positively encouraging the presentation of new ideas.

There is clearly a debate to be had on the question of non-domestic rates localisation. Whether one agrees or disagrees with his views, the Councillor is doing all of us a favour by presenting an opinion on a divisive topic, and being prepared to stand by that opinion in public.

We need to hear the views of more councillors, not just those from inner city councils who many suspect stand to gain most from rates localisation, but also from councillors representing rural England.

And what about our business leaders? Around the time of Sir Michael Lyons’ ‘place-shaping’ review of local government finance in 2007, representatives of the business community queued-up to argue the case for the status quo. The place-shaping agenda was quietly shelved…… until now.

Let the debate commence!

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.

The argument for localisation

I think it is important to point out from the outset that not everyone is against some form of localisation, and the arguments in favour are compelling. Take the following excerpt from an article written by the Leader of Westminster City Council, and published in our current issue of Rating in Brief:

“We would like to see ministers go a step further and give local authorities the freedom to adjust business rates, creating for the first time real competition amongst councils, and instilling a more pro-business, pro-development and pro-growth attitude in councillors around the country. The prospect of locally elected politicians and council officers falling over themselves to promote their areas as the ideal location for enterprise, or even particular sectors, should be a tantalising prospect for the Chancellor, George Osborne.”

This really touches the heart of the issue. Businesses have been used to, and therefore tend to favour a centralised approach in which rates levies are determined by central government and are therefore perceived to be fair, predictable and relatively equitable. As an occupier, you know where you stand, can predict future changes with reasonable accuracy and can therefore plan for them.

As can be seen from the above extract, a fully localised process of rating could introduce an element of competition between local authorities as they strive to attract businesses and persuade them to locate within their boundaries. This could result in different local authorities setting substantially different levels of rates liability.

The question is, would a wholesale change from centralised to localised rating be good for enterprise and the UK economy? More to the point, is there a middle ground which suits the needs of business, yet allows local authorities to vary the level of rates paid by occupiers, enabling them to re-invest locally-collected funds and therefore have greater influence over the character of their local commercial environments?

What do you think?

An introduction to business rates localisation

Welcome to our blog on non-domestic rates localisation. If you are the occupier of commercial property in the UK, your business is almost certain to be paying the business rates levy. And whether your business is small, large, single site, multi-site, office, retail unit or factory-based, you will find this blog of interest.

During the coming weeks and months, the government will finally get to grips with the whole question of rates localisation, ie the possible transference of at least some responsibility for the setting of your rates bill from central government to your local authority.

  

What does this mean for you, and why should you care? Well, I have re-printed below an article I published in our rating newsletter, Rating in Brief, in July 2007. Looking back now, the article was strangely prophetic.

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After 3 years of research, analysis, review, revision, postponement and delay, the Lyons Report into Local Government was finally published in March[2007]. Earth-shattering it is not, appearing to confirm all of our suspicions: with an incoming Prime Minister[Gordon Brown] cuddling up to big business and also keen not to upset the electorate, very few of the options for the reform of Local Government finance, as described by Lyons, appear palatable to the ruling party at this time.

As the report essentially focuses on grasping the nettle of a long-delayed residential property revaluation, the question of local versus centrally levied business rates has been sidelined….for the time being. A success of sorts for the many business leaders, industry associations and correspondents, including contributors to Rating in Brief, who have lobbied tirelessly for the non-domestic rating status quo.

However, for all the delays and the years of lingering uncertainty which the Lyons Report brought about, Sir Michael may have successfully uncorked the ‘place-shaping’ bottle. I fear the genie of business rates localisation will surface again at some point in the future. I, for one, will be waiting and watching.

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True to our word, we have been waiting and watching, and I now get the feeling that our new Prime Minister’s focus on the Big Society is about to breathe new life into Sir Michael Lyons’ place-shaping agenda.

The question for all of us is, how far does the government intend to move towards locally variable business rates, who will win, and who will lose out? Most important of all, does localisation spell the end of the road for the three key tenets of centralised rates administration: fairness, equality and predictability.