A New Framework for Understanding Tax-Increment Financing

As many municipalities grapple with ever-tightening budgets, city leaders are perpetually looking for effective ways to get the most value out of every public dollar. In this context, new research from Bridget Fisher, Flavia Leite, and Rachel Weber in their article "Value Creation, Capture, and Destruction: Hudson Yards and the False Promise of Self-Financing Mega-Projects" (Journal of the American Planning Association, Vol. 89, No. 1) offers an important new lens for assessing a popular financing mechanism: tax-increment financing (TIF).

TIF Distorts Property Value Dynamics

Using the recent case of Hudson Yards in New York City, the authors explore how property values are malleable and can be shaped over the life of a project to maximize private gain, leaving cities to pay more out of pocket than anticipated.

The appeal of TIF is that it is said to enable public investments to be self-financing. This is achieved by diverting increases in property tax revenue in the project's surrounding area, sparked by the new investment, to pay for the project costs (often fronted by proceeds from bond sales).

Furthermore, the burden of paying for the new infrastructure is supposed to fall to those who benefit from it most. However, the authors argue that property values are too often thought of as intrinsic when they are shaped by politics and negotiation.

When a local government designates a TIF district, it has a strong interest in seeing property values rise there. At the same time, private developers are incentivized to extract maximum profit from their investments. Table 1 articulates some of the ways that value creation, capture, and destruction occur through the intersection of these overlapping interests.

Figure 1. How value is created, captured, and destroyed in TIF districts.

TIF Financing for Hudson Yards Scrutinized

Hudson Yards in New York City is one of the most prominent and expensive TIF projects in the U.S. To foster development over active railyards on Manhattan's West Side, the city used a TIF-type mechanism to finance $3.5 billion worth of infrastructure investments, including an extension of the subway line.

Property values did increase substantially in the district after TIF designation, for both new development and existing properties in the area. However, the authors found that New York City was forced to channel additional citywide funds several times to cover bond debt when revenues from within the TIF district fell short of expectations.

The luxury developments of Hudson Yards ultimately generated above-market returns for investors thanks to public improvements to the area, contradicting their successful argument that long-term property tax abatements were necessary to make the project feasible. The authors point to these findings, among others, as instances of value capture and destruction on the part of private actors, who greatly benefited from the dynamics of the TIF structure.

Cities' resources are precious and limited. As a planning student, I've had opportunities to begin to grapple with the fine lines between using public dollars to spur much-needed development and giving away too much for too little public gain. This framework is a valuable lens for thinking more deeply about how we approach the costs versus benefits calculation and the many unexpected ways that public value can be captured for private gain.

Top image: View of the New York City skyline from New Jersey with the skyscrapers of the Hudson Yards district. iStock/Getty Images Plus - 2d illustrations and photos.