The Stillwater City Council recently approved a $275,000 (RE)Investment Plan payment to assist with the development of a taproom for Stonecloud Brewing Company in downtown Stillwater. According to the Stillwater NewsPress, the building chosen for renovation (the old Mistletoe Express warehouse) has been vacant for over 40 years. Cory T. Williams, the former state representative for District 34 (Stillwater), owns the property development company that applied for the funding. The (RE)Investment Plan funding for this project comes from TIF district #3, which encompasses the downtown area and much of the area adjacent to the Oklahoma State campus.

So, what is a TIF district? TIF, which stands for Tax Increment Financing, is basically a geographically defined area within the boundaries of a larger taxing jurisdiction (like a city). Upon the creation of a TIF district, tax revenues for taxing entities (such as the city, county, or school district) are frozen at a specific base level. After that date, those entities continue to receive revenue at the frozen level, while any revenue growth collected above that is raked off and given back to the TIF. Those funds are used for any number of things, including infrastructure, rehabilitation and remodeling, new construction, environmental cleanup, or even new private investment (an in-depth explanation of TIFs can be found here).

It is pretty easy to understand why city leaders love TIFs. They can sell them to the public (taxpayers) as a way to revitalize or redevelop certain areas of a city without taking money from existing public funds (although this is debatable) and without creating any new taxes. Sounds like a win-win, right? Unfortunately, it’s not that simple.

First, while there may be an argument (a fairly good one) for municipalities to have some control of local property taxes, municipalities do not have property tax authority under current Oklahoma law. They neither set the rates nor collect the taxes, and they are not allowed to control how property tax revenue is spent. In fact, they can only use property taxes to pay bonded indebtedness approved by voters. However, the way the TIF plan in Stillwater is structured, the City is controlling property taxes. The TIF uses ad valorem (property) taxes as a funding mechanism. In addition, the board which makes all final decisions regarding funding applications – the trustees of Stillwater Economic Development Authority (SEDA) – is simply composed of the members of the Stillwater City Council. As a result, the City of Stillwater is effectively controlling property tax revenue. The way the TIF is structured is just a clever way for an entity that does not have property tax authority (the city) to capture property taxes.

Second, the entire state is subsidizing the TIF through the school funding formula. Think of it this way: disregarding federal funding, schools in Oklahoma receive funding from two sources – property taxes and state allocation. Let’s say that the total amount of funding a district is entitled to is represented by a cup, and the two sources of funding are used to fill the cup – starting with the property tax money first. Once the property tax money has been poured in, the state allocation is poured in to make up the difference. Therefore, if a school district is receiving a fixed property tax amount, and the TIF is raking off anything above that, the state will have to pour more money in to make up the difference than it otherwise would have absent the TIF. Money that could have been allocated to other school districts across the state is now going to the school district that contains the TIF. In other words, the entire state is subsidizing the TIF district.

Finally, TIFs are simply inequitable. A TIF is yet another example of government inserting itself into the free market, picking winners and losers, and generally distorting market decisions. For example, any business or property owner within a TIF has a competitive advantage over those outside the TIF. In addition, TIFs do not encourage new development as much as they redistribute it. Is it fair or just for government to choose one area or business as worthy of reinvestment over another?

Bottom line, TIFs are not as great as advertised. They allow cities to control revenue streams that they shouldn’t, the entire state bears the burden, and they are inequitable. Absent changes to city taxing power or the school funding formula, or the creation of tiny tax districts across the entire city (i.e., “everyone gets a TIF”), the best solution is a complete repeal of Oklahoma’s TIF laws.

Tyler Williamson is a Research Associate at 1889 Institute and can be reached at [email protected].

The opinions expressed in this blog are those of the author, and do not necessarily reflect the official position of 1889 Institute.