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LOTTERMAN: My tiff with TIF: It's misleading Page I of2 TwinCities.c:om Posted on Thu, Mar. 18, 2004 LOTTERMAN: My tiff with TIF: It's misleading BY EDWARD LOTTERMAN Columnist REAL WORLD ECONOMICS My wife and I have often talked about a small addition that would extend the back porch the full width of the house and let us have a bigger kitchen. It would be nice if the government would give us the money to do this. The value of the house would increase and so would our taxes. The higher taxes would pay the government back eventually, so it wouldn't cost taxpayers anything. Given our finances right now, we wouldn't do it without help from somewhere. Therefore, any higher taxes we would pay certainly would not appear in government coffers without the government helping us. It seems like a great idea, but for some reason the government is not willing to step up to our plate. We threatened to move to Portland or Charlotte if we don't get help, but officials just laughed. Somehow, our project is not as important as a new stadium. Our proposal does, however, illustrate how tax increment financing is supposed to work. Introduced more than two decades ago, TIF has become a legal mechanism for subsidizing everything from corporate headquarters to sports stadiums. The idea is that certain construction projects will not be built without government action. If they are not built, government will not get tax revenues these projects would generate. Therefore, government should fund their construction and use tax revenues generated by the project to pay back the initial government subsidy. Economists, trained to look at costs and benefits to society as a whole from any policy or action, generally see TIF as, at best, a futile exercise that distorts market incentives and leaves society no better off. They are entirely correct. Citizens, however, don't expect local and state government officials to worry about society as a whole. Officials are elected to advance the interests of their specific state, county or city. They like TIF because gleaming new stores, offices and sports facilities eventually stand where only weeds or obsolete buildings stood before. People work in the new facilities, earning and spending money that might not flow through the community otherwise. Officials see TIF as a crucial tool without which their communities would be worse off. They are correct in a narrow and myopic sense. The logic of TIF rests on what philosophers call "the fallacy of composition," or the mistaken belief that what is true for an individual is necessarily true for an entire group. If! stand up during a crucial play at a hockey game, I can see better. Therefore, if everyone in the arena would stand up, everyone should see better. Our community is better off because we used TIF to bring in a factory. Therefore, if every community used TIF to lure a factory, every community should be better off. The erroneous assumption is that if certain resources, public or private, are not spent on a specific facility, they will never be used in any other productive way. That clearly is false. Such resources usually find equally productive uses somewhere else without action by government. http://www.twincities.comlmld/twincities/business/columnists/edward _lotterman/821160... 03/19/2004