First Statewide TIF Report Shows $1.4 Billion in New Property Value Dedicated to Paying Developers’ Costs

Last year Governor Dennis Daugaard said he wanted a statewide review of tax increment financing. Last week, the Department of Revenue delivered a useful document toward that purpose, the first statewide catalog of every active TIF district in the state.

To understand what this report tells us, we must understand how tax increment financing works. In theory, local governments use tax increment financing to spur development in a neighborhood where the free market isn’t making development happen. It could be a neighborhood where all the houses are in such bad shape that no one will buy, move in, and renovate because it’s not worth investing in a house whose value will be sandbagged by all the shabby surrounding houses. It could be a pasture next to town that would be a great site for an industrial park but which needs some water, sewer, and access roads. Whatever the need, the local government loans the developer money for the project, then uses the additional property tax revenue generated by the newly developed property and all other property in the TIF district to pay off that loan. Once that development loan is paid off, the additional property tax revenue goes back on the books for the city, county, school district, and other taxing jurisdictions in which the TIF district was located.

According to the 2017 Tax Increment Financing Annual Report, 39 cities and 22 counties have 190 active TIF districts. A quick scan of the report shows 191 entries, but Spearfish TIF District #4 appears to be listed twice. Note also that this report does not include recently approved TIF districts like Aberdeen’s proposed “Ringneck Ridge” TIF approved in May and Hamlin County’s TIF for Agropur’s cheese plant expansion approved in February.

The report’s data, supplied by local officials, has some gaps. But in the listed active TIF districts, tax increment financing has incentivized at least $918 million worth of projects that have added $1.413 billion in taxable value to property that was worth $327 million pre-development.

That $1.413 billion in new taxable value won’t go on the tax rolls until the new taxes from those many improved properties have paid off the developers’ costs. The report doesn’t tell us how much actual tax revenue those TIF properties could generate, and it doesn’t break down clearly how much of each TIF district is residential and how much commercial, but if we spitball this year’s mill levies calculating state aid to education of $3.383 for residential property and $7.001 for commercial property, I estimate that that $1.413 billion in TIFfed off-the-books property value produces over $8 million that goes to cover developers’ costs instead of paying for teachers, books, and classrooms in at least 46 affected school districts. Cities and counties are also waiting for their additional shares of that TIF revenue.

TIFs in general look pretty good on paper. Among the TIFs reporting full data, every dollar of project cost is producing $2.74 of additional property value. Only two TIFs are losing money for their counties: Minnehaha County TIF #2 for the SDN communications facility has lost 23% of its pre-TIF base value, and Rapid City TIF #75 for the St. Joseph Street apartment project has lost 51% of its pre-TIF base value.

The statewide TIF report attempts to capture job creation data, but this reporting suffers from greater inconsistency. Only 54 of the 190 records include any estimate of job creation. Economic developers could argue that residential TIFs create ongoing homebuilding jobs, but most districts ignore residential projects in job estimates. Exceptions: Harrisburg claims 145 jobs from two housing development TIFs; Yankton claims 90 jobs from three residential TIFs.

But for what this inconsistent reporting may be worth, local governments claim that 54 TIF projects have created 6,050 jobs. (That total includes Spearfish TIF #3, which claims an anomalously high 1,440 jobs created from 10 affordable housing lots and a new Prairie Hills Transit Center, authorized in 2008. I’m checking on that.) Further restricting the data to TIF reports that include job and dollar data, it appears to take $73,178 in project costs to create job. And while I’m not sure what this next figure tells us, each job reported corresponds with an average increment in property value of $77,945.

Rapid City leads the state in number and increased value of TIFs. Rapid City’s 23 active TIF districts are producing $482 million in new property value just waiting to be placed back on the books for the city, county, and school district. Aberdeen and Mitchell both have 18 active TIF districts, but they are producing “only” $88 million and $55 million, respectively, in increased property value. Sioux Falls is using 14 TIF districts to add $130 million in taxable property value.

The 2017 statewide TIF report offers lots of interesting numbers. Unfortunately, it offers no numbers on the increased property values and jobs produced by past TIF districts. The Department of Revenue says it is compiling this historical information and will include it in future annual reports.

Also glaringly absent is a narrative to explain the numbers. Many of the projects lack a description, so readers can’t tell what the TIF dollars built or what benefit the public derived from those improvements. Nor does the report explain how far along each TIF is in paying itself off and adding the tax increment to the public tax rolls. Most importantly, this report does not tell us the information that policymakers could find most useful: was each TIF district necessary? How much of that added property value accrued due to the TIF development itself? How much came from other factors? How many of these TIF efforts are questionable, like the Lake County and Rapid City TIFs spotlighted in an issue memorandum from the Legislative Research Council last fall? And how many of these TIFs support projects that were already underway before local governments spotted them TIF dollars, like the Agropur expansion in Lake Norden, or otherwise would have been built with or without this government subsidy?

Some of the above questions may be unanswerable or may require economic analysis beyond what the Department of Revenue can muster. But at least we have some numbers, which the department will keep improving, to inform our questions about tax increment financing across South Dakota.