City Club Missoula explores pros, cons of tax increment financing

Tax increment financing has created 15 miles of sidewalks in Missoula, 10 miles of streets and brought a number of new businesses to the city, making it a valuable tool for completing public infrastructure and boosting economic development.

But nuances of the program, including the language that authorizes it under state law – along with the appointed board that oversees the allocation of funds in Missoula – continues to rankle opponents.

City Club Missoula took on the hefty and often misunderstood topic of tax increment financing on Monday, pitting Missoula Mayor John Engen, who supports the program, against real estate developer Adam Hertz, who remains one the program’s outspoken critics.

While the two agreed on many points and support the program’s larger economic goals, they disagreed on a number of underlying issues.

“I don’t disagree with some of the points Mayor Engen made about appropriate use of TIF,” Hertz said. “I’m not seeking the pure abolition of TIF. I’m seeking the elimination of what I see as TIF abuse. I just think there are some minor reforms that need to take place.”

The program has been in place in Missoula since the 1970s, when the Missoula Redevelopment Agency established the city’s first urban renewal district downtown after the opening of Southgate Mall.

As businesses fled the city center for the new suburban hub, MRA invested roughly $20 million in tax increment into the downtown district. Over the district’s life, that initial investment leveraged $200 million in outside funding, helping transform downtown Missoula into the center it is today.

Engen said tax increment financing remains one of the only tools the state of Montana allows local governments to incentivize outside investment and make community improvements.

“There aren’t many opportunities for subsidy or incentives in Montana for local jurisdictions, and TIF really ends up being one of the most powerful – and frankly – only tools to provide incentives for business development and real estate investment,” Engen said.

While the program exists in all but one state and under different forms, in Montana it’s authorized to eliminate blight. Each city applies the program differently and in Missoula, it’s largely used to complete public infrastructure alongside redevelopment or new projects.

Missoula County uses the program as well.

Over the years, Engen said, tax increment has created 15 miles of sidewalks, nine bridges, miles of new trail, parks and parking structures. It has paid for water and sewer extensions, affordable housing and new business development.

But in 2016, the local program gained its share of critics when tax increment went to fund the deconstruction of the old Mercantile, clearing the way for the Marriott hotel in downtown Missoula.

The project resulted in nearly 100 jobs, along with new sidewalks and street lights. It also helped preserve history and transform a dilapidated city block that had sat empty for years. But it also opened the window to opposition.

“We believe that project, but for TIF, likely would have happened at a smaller scale, if at all,” Engen said. “The investment there was in infrastructure around the hotel, not the bricks and mortar that built the hotel. I believe that TIF is an investment in the future. That increment at the end of the life of the district goes back to the tax base.”

Hertz didn’t disagree with the program’s designed intent, though he believes that cities have abused the program and found ways to skirt state statute. He cited Southgate Mall as an example, saying it wasn’t considered blighted until it announced its plans for expansion.

Only then, Hertz said, did the Missoula Redevelopment Agency add the mall to Urban Renewal District III, qualifying it for tax increment financing.

“The mall had announced their intent to do a very large project,” said Hertz. “They had been excluded from URD III when it was created, because there were no findings of blight at the mall. When they began to announce their projects, MRA saw an opportunity to capture some of that new increment that otherwise would have gone to the taxing jurisdictions as it normally should.”

Hertz disagreed with Engen and the “but for” argument – that being that certain projects wouldn’t occur but for tax increment financing. He said it’s hard to prove, but there’s a lingering sentiment that some businesses use the program to pad profits and not necessarily need it to bring a project to fruition.

Critics also say the program diverts tax revenue from the city’s general fund, forcing other taxing jurisdictions, such as schools and county government, to raise taxes. Supporters counter by saying the diversion from the general fund is only temporary and that the program helps create jobs and attract new development, which in turn boosts the general fund down the road.

Pippa Browde, a professor of tax policy at the University of Montana, said all states but Arizona allow for tax increment financing. The program has been around for decades and is used as a tax policy tool to subsidize the costs of redevelopment and new projects.

When an urban renewal district is created, the tax value of existing properties are locked at their current rate, and those base values continue to feed a city’s general fund. Any increases in property values resulting from new construction or redevelopment are set aside as tax increment, helping finance other redevelopment projects.

Opponents, including Hertz, feel that’s detrimental to taxing jurisdictions, as the base can’t compensate for the cost of inflation, which all local governments experience, whether it’s the rising cost of asphalt or rising wages.

“The problem that exists with TIF districts is that local government, be it the county, the city or schools, can’t provide the services they need to provide without increasing taxes,” Hertz said. “Inflation exists, yet the base is capped and that’s all they have to pull from, and it requires them to find revenue elsewhere.”

Engen said the program is often misunderstood and isn’t as “black and white” as some make it out to be. The benefits of today’s investments will be realized over the long term, he added, and that has wider community benefits.

“As each of these TIF districts settle over time, or sunset, we’ll see a tremendous boon to the tax base,” he said. “We’ll see public infrastructure that’s in place that might have long languished or never have gotten completed, all of which adds to the quality of life in the community, the value of the community. I’d very much hate to see this tool go away because it’s worked here very well, and it’s worked elsewhere very well.”