TIFs have little impact on benefitting society as a whole

Dave Swenson, Associate Scientist, Department of Economics from Iowa State University recently did a presentation to Bon Homme County about TIFs. Through his research, Swenson has become critical of TIFs because he has found little to no benefit to society from TIFs.

FULL DOC: TIFs-SD

Important Slides from the presentation;

Here is a recent letter Swenson sent former Senator Kloucek on the matter;

Frank,

Economics says that we don’t interfere in normal market decisions unless we can demonstrate that we are improving the welfare of society at large.  We do that, for example, by reducing impediments to production or impediments to running a household.  When we do that, by timely investment in critical infrastructure that is widely beneficial to commerce and individuals, for example, we improve aggregate living standards.  If, on the other hand, we are providing public assistance for the purpose of enticing economic development.  Unless the region is suffering from chronic and high unemployment there is no justification in economics for the decision.  The only justification is political.  And society is not better off, at large, just the primary beneficiaries.

You cannot explain this to a typical government official, however.  That person usually does not understand economics or the relationship between government decisions and area commercial activity.  They think they do but they don’t.

There is a standard test that is often used: “but for” the activity of the government body, this commercial development would not have occurred.  Very good research has demonstrated that as many as four in five instances of government assistance to firms would have resulted in the firm developing there nonetheless.  That means that the government assistance was only locationally instrumental in 1/5^th of the instances.

Assistance for housing, if it is targeted to low income and moderate income households can make sense if affordability is an issue in an area or there is an undeveloped housing market.  Politicians think, however, that “if we build it, they will come” in that housing stimulates other economic growth.  That is almost always a fallacy: houses are bought (apartments are rented) with income made from working – that’s the demand variable.  It has been our experience in Iowa that small and struggling communities have used TIFs for new housing and for apartments, but growth in those areas is usually meager.  The rest of the regional economy is contracting and is not able to employ enough people to maintain housing demand.  The other extreme is that suburbs of metros use housing development subsidies as a way to speed up growth as compared to other suburbs.  Here the subsidy is awarding the economy (developers) for doing what they would have done nonetheless because metropolitan economic and demographic forces would have yielded that demand nonetheless.

In my professional opinion, nearly all public subsidies for businesses or for housing are unnecessary, and it is very rare that the public gets paid back in the form of net fiscal growth sufficient to cover the initial subsidy.  That is not the way politicians look at it, but it is the way that economists look at it.

Put differently, the only way you can justify these things is by not asking an economist.

Dave Swenson