The city of Houston is being carved into special taxing districts, promising windfalls for some, financial burdens for others

To be sure, tax-increment reinvestment is mind-numbingly dull and complex, which might explain why elected officials have so readily embraced its use without knowing all that much about it. Equally certain is that tax-increment financing is not your parents' public spending, which is rooted in the ideal that taxes are collected for the benefit of everyone, not just those who pay them.

That ideal is a myth, of course, particularly in Houston, which suffered years of decay as its property tax base migrated to the suburbs and unincorporated areas of Harris County. Meanwhile, federal economic development dollars became almost nonexistent, further decimating inner-city neighborhoods and industries. Moreover, the traditional method local governments use to raise capital for large-scale public improvements — multimillion-dollar bond referendums — is hugely unpopular with voters, which means it is only selectively supported by politicians and rarely to fund inner-city redevelopment.

Bob Litke, city planning department director, has been a powerful advocate of tax-increment reinvestment as an economic development tool.
Phillippe Diederich
Bob Litke, city planning department director, has been a powerful advocate of tax-increment reinvestment as an economic development tool.

Enter tax-increment reinvestment, which was hatched almost 50 years ago in California so cities could match the funding offered through state and federal programs. Now 43 states have laws authorizing local governments to pledge tomorrow's tax revenues to carry out today's public works. While each state has its own guidelines for using tax-increment reinvestment, the principle is the same everywhere: Publicly funded improvements will draw private investment to an area that wouldn't otherwise be attractive to developers.

The bottom-line question, of course, is do they work? In Houston, at least, no one yet knows. According to city records, only two TIRZs — Lamar Terrace and Midtown, the first two created — have seen any increase in property values within the zone. Most of the 17 existing zones were approved in the the last two or three years and are just getting off the ground.

However, proponents of tax-increment financing say the concept is infallible. Indeed, the presumption is that a TIRZ project pays for itself by creating taxable value where none existed before. And because TIRZ improvements are funded solely through increases in property tax revenue within the zone, the worst that happens if redevelopment fails to materialize is that there are no increments and nothing changes.

Hundreds, if not thousands, of tax-increment zones have been created around the country, yet there have been relatively few attempts to analyze their costs and benefits. The best information comes from California and Illinois, where the concept has been used longer and more extensively than anywhere else. While these studies don't explicitly recommend or discourage tax-increment reinvestment, they make one thing quite clear: The more it's used, the more controversy it generates.

Ed Gilliland of the Council for Urban Economic Development, a Washington, D.C., group that advises the nonprofit sector on development issues, says tax-increment reinvestment has experienced something of a backlash the past few years.

"It's a circular debate," Gilliland says. "If you do a zone and the revenues increase, the money is not going back to the city, but to the zone. So, you could say that it's limiting money to the city treasury, or you could say it's money they wouldn't have had anyway. How do you make an argument either way?"

In Houston, the person responsible for brokering that argument is city planning department director Bob Litke, who has been a powerful advocate for the aggressive use of TIRZs to spur economic growth. Litke evaluates the merits of each proposed TIRZ using the all-important "but for" test — that is, but for the TIRZ, redevelopment would not occur.

"We take a look at whether or not development has taken place, and if so, what kind of development," Litke says. "We also consider what kind of market analysis there is that suggests the potential is there, but something just isn't right because it isn't happening. Our final decision is based on a strong judgment factor that this is an area that if we did have public intervention, it's likely that it would force development."

In other words, the "but for" standard is really nothing more than good old-fashioned real estate speculation. Is that something city government should be involved in? Not according to Barry Klein, president of the Houston Property Rights Association and a private consultant who specializes in tax-related issues.

"The city's own studies show that the demand for development was there well before they started using this incentive," says Klein, who points to the most recent property tax revenues, which according to the Harris County tax-assessor collector exceeded $1.4 billion in 1998, a $95 million increase over the previous year.

Klein has long been critical of the city's TIRZ policy, arguing that it doesn't encourage new development but simply moves it from one area to another. David Merriman, an economics professor at Loyola University of Chicago, agrees. Merriman and a colleague studied TIRZ activity in Chicago dating back to 1984. Their conclusion? "We found no evidence that tax-increment zones actually stimulate new development in the Chicago metropolitan area," says Merriman.

To the contrary, Merriman says, cities that use tax-increment financing may actually stunt the growth of the whole city. The reason is that a TIRZ makes little or no contribution to the economy beyond the borders of the zone, says Steven Craig, a professor of economics at the University of Houston.

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