Benefits and Dangers of TIF 

The vast majority of Nebraska’s counties (67 out of 93, covering 136 cities and towns) use TIF for various purposes, with varying types of projects and degrees of success. Some of them have been able to pay off TIF loans early, creating more property tax revenue more quickly than expected. Many have been glad to see the improvements in their communities, bringing formerly barren buildings or land brought to life, and more attainable jobs and housing. Others wonder, however, if TIF is being abused, and what negative impacts it might have. Both sides of the controversy are clearly shown in Omaha, which has greatly increased its use of TIF, so we will use it as an example here—but voters are encouraged to examine the use of TIF in their areas and see if it aligns with their view of their communities’ needs. 

What qualifies a project for TIF funds? 

Much of the controversy surrounding TIF is based the question “What is the purpose of TIF?” That is the issue we will focus on. Is it to be a limited tool, meant to help low and middle-income citizens improve their community and chances for employment? Or is it to build overall economic growth—“momentum,” as Mayor Jean Stothert says—by improving the city to increase the overall productivity and attractiveness of Omaha to its own citizens and beyond? 

From state to state and from locality to locality, the way TIF is implemented varies depending on the area’s answer to that question. The answer affects how blight and the “but for” qualifications are defined, how much input taxpayers have, and how much accountability is built in. All of these factors affect how much TIF is used and what kinds of projects are approved.  

University of Nebraska at Omaha’s report states, “Nebraska’s approach has faced some critiques, including concerns about the lack of specificity in the blight designation and the ambiguities surrounding the ‘but for’ demonstration … Nonetheless, Nebraska’s overall process aligns with those in other states, offering meaningful opportunities for consultation and oversight while promoting transparency and community engagement in redevelopment efforts.”  

The Definition of Blight and “But For” 

One of the requirements for a TIF project is that it must be revitalizing a blighted area, one that is hurting the city, businesses, and/or residents economically. And it must be used for projects that would not happen but for TIF. But what do blight and but for mean? 

To review from our last post: among other criteria, the Nebraska legislature has defined a blighted/substandard area in the following ways, among others (see link for a complete list): 

• The area is either mostly undeveloped or doesn’t have many “new and growing business enterprises.” 

• The area “lack[s] . . . sufficient economic growth.” (“sufficient” is not defined.) 

• The buildings are in extreme disrepair, or there is a lack of infrastructure. 

• Low- to moderate-income families struggle to find housing in the area due to unsafe or unsanitary structures, low pay, low job growth, or low population growth. 

• The land is not used at “their highest and best uses in comparison to other areas” in the municipality, or the properties are not on the tax rolls at high enough levels. 

So, depending on how one interprets the definition, blight could mean an area that is ugly, unsafe, useless, or dilapidated. A broader interpretation is that a blighted or sub-standard area is a part of the city that hasn’t been built on yet or is not as productive as the city would like it to be. Nebraska’s law explicitly encourages municipalities to interpret it broadly. 

Those favoring the narrower definition are concerned that the broad definition of blight invites abuse. If TIF can be used for nearly anything, then lower-income citizens become a smaller priority. How can lower-income areas compete with “better” areas of the city that are more likely to invite investment? TIF proponents point out that this goal is exactly why TIF is needed—that investors would not build in these areas “but for” TIF due to the extra risk.  

Those who prefer the broader definition appreciate the flexibility that the law gives them. If areas that could be better or attract more people can be considered blighted, they can qualify for TIF—leading to projects like luxury apartments and new skyscrapers in downtown areas. These projects contribute to more investment, providing living space, economic opportunities for both out-of-state and Nebraska workers, and an impressive, modern city environment.  

 One example of a project using the broader definition of blight is the Omaha Streetcar. The controversy surrounding the Streetcar itself goes beyond the scope of this blog, but, as a TIF project that affects a large part of Omaha, it is spurring more TIF projects. Because it will provide opportunities for growth as part of the “Urban Core Housing and Mobility Redevelopment Plan,” already-defined areas within a certain number of blocks could be considered “Outdated subdivision plans that impede current development standards.” (Such “outdated plans” are one qualifier for a TIF project, according to a UNO summary of Omaha’s use of TIF.)  

According to Omaha’s 2023 TIF report, the Streetcar is part of a city revitalization plan, and other TIF projects are expected to arise—and are arising—within its reach; the income from these TIF projects is intended to be part of the funding for the Streetcar. One example is Mutual of Omaha, which is building a new skyscraper downtown, with a projected cost of $600 million. The project has been approved for $60 million of TIF funding. It will change Omaha’s skyline, becoming the tallest building in Nebraska.  

If one holds the broader definition of blight, this project is an appropriate use of TIF; it is part of a re-shaping of downtown Omaha that will attract residents and investment, enhance Omaha’s skyline, and beautify the city. Helping a well-known Omaha-based business improve itself can also be seen as a benefit to Omaha.  

For who have a narrower definition of blight, the Mutual of Omaha project looks like an abuse of TIF. The site is at the entrance to the newly renovated Gene Leahy Mall park to the east, and the Omaha State Office Building to the south. Several thriving businesses and restaurants are in the area. To this group, it is odd to consider such areas blighted, when Omaha has neighborhoods with poorer infrastructure, less development, dilapidated structures, struggling businesses, and lower-income residences. If TIF is supposed to be used sparingly, should it not be more focused on areas and organizations with higher need? 

It is important to note that the legislature has imposed a limit on how much of an area can be designated as “blighted,” which provides a helpful check on the overuse of TIF. Large metropolitan areas can use the “blighted” designation for up to 35% of its area; smaller cities “of the second class” have a cap of 50%; and villages may designate 100%. As of December of 2023, Omaha has 21.8%  percent of its area designated as “blighted,” still leaving room for the sort of TIF development that those with a limited definition of blight would prefer. 

Another component of TIF is that it may only be used when the development would not happen “but for” TIF assistance. Per Nebraska law, developers must submit plans showing not only the benefit of their project, but also the reasons why they would not be able to do the project without TIF funding. For Nebraska, both developers and municipalities have the obligation to determine whether a TIF project passes the “but for” test. 

However, similarly to the issues raised with blight, controversy arises if the “but for” clause is not clearly defined in the state’s legislation or city policy. The disagreement comes from the same question: What is the purpose of TIF? Developers give a variety of reasons, as discussed in a report analyzing TIF’s pros and cons and how to make it work best (which can be downloaded for free here). Reasons could range from “unusual circumstances ma[king] the project too expensive to develop otherwise” to “the development would be bigger or better with TIF assistance” to “a company threatened to go elsewhere if it did not get TIF assistance.”  

Which reasons developers in Nebraska are giving would vary by project and by municipality, and it is beyond the scope of this blog to identify all of them. Voters may wish to research the projects in their area to see where and how TIF is being used, how their area is defining blight and but for, and whether the use of TIF fits their priorities for their communities. 

Beneficial or Detrimental to Taxpayers? 

Property taxes are an obvious issue connected to TIF. Beliefs vary widely as to whether TIF benefits or hurts the property tax system. Since property taxes are so high in Nebraska, with property owners, legislators, and Governor Pillen all wanting reform to lower property taxes, exploring the impact of TIF on property taxes is important. 

Proponents of TIF point out that its use avoids the necessity for raising taxes or levies, so it is a “free” way for the city to use public funds to support private companies in the interest of overall economic development. They also rightly state that TIF increases the tax base by taking areas of the city with no structures and add properties which will then be paying property tax. It also increases tax collections by taking low-value, dilapidated structures and revitalizing them, raising their value so that more property tax can be collected on them as well.  

Indeed, Omaha’s 2023 report on its use of TIF examines the benefit of 16 TIF projects that have reached their 15-year maturity and are now contributing all of their property tax to the traditional taxing entities. Omaha calculated that, had the TIF projects not been done, property taxes for the area would have increased 35% just by normal economic progressions, which would equate to $75,000. However, because the areas had been redeveloped with TIF, property taxes increased by 1057%, meaning that now, $2.2 million is being collected.  

In other words, the public works typically supported by property taxes gave up a few tens of thousands of dollars for 15 years, but now are receiving $2.2 million instead, with one year alone making up for the property tax funds they had not collected.  

That’s an impressive return on investment. 

With that increase, one might think that TIF could contribute to lowering property tax rates! If the city’s revenue is growing 1000% due to TIF, should that not allow them to reduce rates, especially as more and more projects reach maturity?  

However, as legislators look at ways to lower property tax, such as reducing levies, they are met with opposition by TIF users and proponents. Why? Because of current TIF projects, of which Omaha reported 261 in its 2023 report. If levies are reduced, less property tax will be generated within current TIF districts, meaning those developers will not be producing the amount projected, and therefore may not be able to cover their loans. In other words, the more TIF is used, the more important it is to maintain the property tax rates that determined the loan amount, based on projected growth in property value. The more a community relies on TIF, the more current property tax percentages need to be maintained—not only for the sake of individual developers and their projects, but for the economic development of that community as a whole. 

All this occurs while property owners on residential and commercial properties that are not part of the TIF projects, but are within the district, see their property values grow. On one hand, having property increase in value means the owners’ investment in that property is paying off—even though the higher values mean owners are paying more property tax. Property owners who can afford the tax increase may be eager to see their property’s value increase and appreciate the improvements in their neighborhoods. On the other hand, residents or business owners who cannot pay the higher taxes may find themselves priced out of the area. One critique of TIF is that it can cause gentrification—meaning that as the neighborhood improves, low-income people are forced out while higher earners move in. Whether or not gentrification occurs may depend on the type of TIF project, however; TIF is often sought by those who wish to build affordable housing.  

As more and more TIF projects are completed, it appears from Omaha’s results that they will increase public funding exponentially. With such growth, perhaps a municipality could find creative solutions that would allow them to both lower property taxes overall and support the private investments of current TIF projects. Would they do so? And if so, might these solutions bring their own concerns about public/private partnerships? It remains to be seen. 

Conclusion 

These issues are only the tip of the iceberg when it comes to effects of TIF on taxpayers, both positive and negative. Nebraska law allows for a period of public comment when a TIF project is being considered for approval. Hopefully, this allowance gives property owners in a proposed TIF district adequate opportunity to make their needs and desires known. For this reason, voters may benefit from an awareness of possible developments in their communities and get involved in local decisions. In any area using TIF, voters can advocate for themselves with their local governments—both by interacting with their representatives, and with their decisions at the ballot box. 

 

Research and writing by Vickie Hecker. Vickie is a state employee, but her postings on this site do not speak for the views of the state, its customers, clients, suppliers, or employees. Any links to state sites are provided for informational purposes only.