Wisconsin's Tax Incremental Finance Law:

Lending a Hand to Blighted Areas of Turning Cornfields into Parking Lots?

1000 Friends of Wisconsin
October 1999

Summary

Main points of this report:

• Forty-five percent of tax incremental financing districts (TID) have been used to develop open space land.

• Approximately 30,000 acres of open space have been developed using tax incremental financing (TIF) subsidies.

• Large corporations and big box retailers are often beneficiaries of public subsidies using TIF.

• Four of ten communities are in violation of TIF limits under Wisconsin law.

• TIF needs to be refocused on its original intent of helping the redevelopment of blighted urban areas.

Wisconsin enacted its Tax Incremental Finance (TIF) law in 1975 (s.66.46, Wis. Stats.). Since then, cities and villages throughout the state have created 849 tax incremental finance districts (TIDs). As of November 1998, there were 661 active TIF districts. The original intent of the TIF law was to create incentives for cities and villages (towns cannot use TIF) to finance urban redevelopment and blight elimination projects and to promote industry. However, state data show that many of these districts are created using open space land on the edges of cities and villages. As a result, TIF is often subsidizing sprawl rather than promoting the redevelopment of urban areas.

1000 Friends of Wisconsin conducted research in January 1999 to discover how much open space land has been developed using TIF. Research findings indicate that nearly half (302 of 661) of active TIF districts were originally created using some portion of open space land. We estimate that 30,000 acres of Wisconsin's open space land has been developed using TIF in these 302 districts.

TIF Law and Procedures

Under TIF, cities and villages pay for infrastructure improvements and then they are paid back with the tax proceeds of the new development. The property tax proceeds are calculated by figuring the difference between the base value of the property before improvements and the value after improvement and development (the tax increment). The city or village keeps all of the increment until the improvements are paid off. Other taxing jurisdictions (school districts, counties and technical colleges) receive taxes only on the original base value until the TIF is paid off and retired.

TIF is administered at the state level by the Wisconsin Department of Revenue. The agency monitors the technical and procedural requirements in establishing TIDs although the agency cannot review or evaluate substantive documentation. A TID is developed through the following steps: 1) The city plan commission creates the project plan, holds a public hearing on it and recommends the district boundaries to the city council or village board; 2) The council/board reviews the plan and formally creates the district. In doing so, it must find that 50% or more of the real property in the district is blighted, in need of rehabilitation or conservation or is suitable and zoned for industrial use, and the project should enhance the value of all other property in the district; 3) Finally, a joint review board is created. In order to approve the district, the board must find: a) The development would not have occurred without the district; b) The economic benefits of the district are sufficient to compensate for the costs of the improvements; c) The benefits outweigh the tax increments to be paid by the taxpayers.

After the TID has been created the Department of Revenue calculates the "tax increment base value" of the TID. This is the equalized value of all the taxable property at the time the TID is created. If the development occurring in the TID increases the value of the property above the TID base level the difference between the new value and the base value is the tax increment. This tax increment is used to pay back the costs associated with initiating the tax incremental district incurred by the municipality. These municipal investments might include sewers, streets, lighting systems, financing costs, site preparation and professional service costs.

Land Value After Development

- Land Value at Time of TID Creation

_________________________________

= Tax Increment

The Department of Revenue permits the allocation of tax increments until the TID terminates OR 23 years (in certain cases, 27 years) after the TID is created, whichever is sooner. A TID is required to terminate once the costs incurred by the municipality are paid back, 16 years or 20 years after the last expenditure identified in the project plan is made or when the municipality dissolves the TID, whichever happens first.

Forty-Five Percent of TIDs Used to Develop Open Space

In early 1999, 1000 Friends of Wisconsin reviewed the Department of Revenue active TIF project files to determine the portion of TIDs that were originally created using open space land. When they submit project packages to the DOR, local governments must identify the value and acres in categories of land within the project area. 1000 Friends counted the number of districts that included open space land. It was found that out of the 661 active districts, 302 were developed using some portion of land classified as "agricultural", "forest" or "swamp" land. These 302 districts included a total of about 30,000 acres of open space land The vast majority was classified as agricultural land.

Forty-Two Percent of Municipalities Exceed TIF Limits

In examining information at the Department of Revenue, 1000 Friends found that 146 out of 347 (42%) municipalities with at least one TID are in violation of statutory limits on the value of TIDs as a percentage of total property values. These limits were put in place to protect taxpayers and other taxing jurisdictions from over-use of TIF.

State law sets caps on the overall value of TIDs in a municipality as follows:

1. Base value of proposed TID plus the current value of existing TIDs in the municipality must be 7% or less of the municipality's TOTAL EQUALIZED VALUE

Base Value Proposed TID

+ Current Value of Existing TIDs

____________________________________

7% or less of Municipality's Total Equalized Value

2. The base value of the proposed TID and the increment of existing TIDs is 5% or less of the municipality's total value.

Base Value Proposed TID

+ Increment Values of Existing TIDs

___________________________________

5% or less of Municipality's Total Equalized Value

One hundred and forty-seven municipalities were above both the 5% and 7% statutory limits. Under state law, no more TIDs or TID expansions should occur until values fall below these limits. However, no state agency is charged with enforcing these limits.

Four Brief Case Studies

TIF At Its Best: Redeveloping A Blighted Urban Area

Milwaukee: King Drive

Created in mid-1990, this district provided a $400,000 loan to assist converting a long-vacant property located at North King Drive and West Garfield Street into 41 apartments for low and moderate income families, as well as 14,000 square feet of office and commercial space. All apartments and commercial units have been leased. It is expected that the district will be closed out by 2011.

"This project managed to save buildings for an important social purpose. It might have been more economical to have torn them down. However, a new building probably would have never had the same richness, sense of quality and sense of place that this project has." Jury Comment, "The Wisconsin Architect", 1998

TIF At Its Worst: Subsidies For Big Box Retailers

Oconomowoc: Target Warehouse

In 1990 Oconomowoc’s TID #2, near the intersection of Highway 67 and Interstate 94, was authorized. The estimated cost for project improvements was $19,956,275. The improvements made by the city to encourage development in this area included site grading, interceptor sewer, water main and well, storm sewer, streets and amenities, electric, development incentives, administrative costs, and relocation costs. This TID is still active, with an estimated close out year of 2005, fifteen years after authorization according to the original project plan.

Since authorization, TID #2 is now home to the following businesses: Fashion Bug, M&I Bank, Super Subs, Cost Cutters, and, the primary reason for creation of the district, a Target Distribution Center. The Target warehouse was highly controversial at the time of its development with much of the community opposed to its construction on the basis of truck traffic, community character and increased development pressure which they believed would accompany the development.

A question can be raised about Target’s need for a public subsidy. According to the corporation’s website, it is a division of Dayton Hudson Corporation, "one of the nation’s largest general merchandise retailers". The website reports that Dayton Hudson operates nearly 1,200 stores in 44 states and that corporate 1998 revenue was $30.95 billion.

Now, Oconomowoc is considering expanding TID 2 to include development of part of the historic 1,500 acre Pabst Farms across Highway 67. This TID expansion would subsidize WISPARK, a division of the WEPCO utility and one of Wisconsin’s largest corporations.

The City of Oconomowoc’s project plan promises: "The city intends that TIF will be used to assure only high quality corporate management, industrial, distribution and related private development locates in this section. High quality means aesthetically pleasing, long-lasting structures. The goal is to provide and preserve middle and upper income employment for the city. Without TIF the anticipated development in the area would be fast food and other travel related establishments."

Madison: Woodmans Warehouse Food Chain

Madison’s TID #11 on Gammon Road was created in 1983. The project plan objectives were to "enhance the promotion of efficient and economic use of the land". In order to achieve this, infrastructure improvements including street improvement, water main, storm and sanitary sewer improvements, and sidewalk improvements were made to the Gammon Road area in preparation for construction of a Woodman's Supermarket. The estimated cost for improvements was $1,152,153. This district has already closed out.

Residents of the surrounding area noted that within the period since this warehouse food chain store opened, 10 small to mid-sized grocery stores have closed on Madison’s west side. Small grocery stores already face price competition from large retailers. A public subsidy for building only increases the competitive advantages for large retailers.

Baraboo: Wal-Mart Super Store

Baraboo’s new TID # 6 was approved by the city and the joint review board in the summer of 1999. Final approval is pending review by the DOR. The district is located near the intersection of Highway 12 and County W. Wal-Mart and a Slumberland Distribution Center are the two major projected occupants for this development. A cornfield and old apple orchard are the current occupants. The estimated TIF project cost is $5,768,000. These costs include detention basin and water tower construction, interior roads, connection to water main, and Highway 12 improvements among others.

What makes this project controversial is that Wal-Mart already has a store in Baraboo and is looking to construct a brand new Wal-Mart Superstore (supermarket and discount department store) at this new location approximately two miles from the current store and close the current location. Additionally, the Wal-Mart project would have occurred without TIF, according to a letter written by Wal-Mart's Corporate Real Estate Manager. (see addenda) State law requires that the joint review board make a finding that the project would not have happened without the TIF subsidy.

Again, a serious question can be raised about Wal-Mart’s need for a public subsidy. The corporation’s website boasts in part, "Wal-Mart has just completed its best year ever, with sales of over $137 billion, which is almost $20 billion more than last year. More importantly, earnings per share increased by 27%… and the company paid dividends of almost $700 million."

This orchard in Baraboo will be developed into a Wal-Mart Super Store using TIF; a subsidy even Wal-Mart concedes they don’t need.

The Root of the Problem

In his message upon signing the law (Chapter 105, 1975), Governor Patrick Lucey wrote that, "The intention of the bill as it was introduced was to provide an additional means of redeveloping areas which are primarily urban in character." However, the law contains a loophole which allows its use virtually anywhere. Section 66.46 allows TIF to be used if at least 50% of the area to be included in a TID is blighted, in need of rehabilitation or suitable for industrial sites. This last provision, "suitable for industrial sites", makes TIF usable for the development of any open space land where services can be provided. To redirect the law to its original purpose, policy makers might consider eliminating this phrase from the law.

Sources

1000 Friends of Wisconsin. "Tax Incremental Financing."

Department of City Development, "City of Milwaukee Annual TIF Report" City of Milwaukee: Milwaukee, 1999

Target website at www.target.com reviewed on October 19, 1999.

Wal-Mart website at www.wal-mart.com reviewed on October 19, 1999.

"Wisconsin Architect," 69:4, AIA Wisconsin, Madison, 1998.

Wisconsin Department of Revenue. "Statement of Changes in TID Value." Bureau of Equalization: Madison, 1998 & 1999

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