Lawmakers debate if they should rein in this redevelopment tool, or use it to create affordable housing

Carmel Mayor Jim Brainard used TIF to develop City Center, shown here. (Credit: Provided by the city of Carmel)

Before Carmel Mayor Jim Brainard took office more than two dozen years ago, the now-booming, wealthy suburban city was home to roughly 35,000 people. 

Under Brainard, Carmel’s population has almost tripled in size. What was primarily farmland and a mostly vacant strip center is now the site of a ritzy multi-story downtown residential and commercial destination known as City Center, home to the Palladium and Hotel Carmichael. Nearby, a former industrial area of the city now houses the popular Sun King Brewery and the outdoor Midtown Plaza, complete with a large TV and ping pong tables. 

In Brainard’s eyes, his city’s growth stems from being able to use a redevelopment tool known as tax increment financing, or TIF. The complicated mechanism, which he used for both City Center and Midtown Plaza, allows communities to issue bonds in order to redevelop an area, later relying on whatever new property taxes are generated from the project to pay back the debt. Other overlapping taxing units don’t see a drop of that new property tax money. 

Since Indiana lawmakers allowed local governments to create TIF districts decades ago, they have exploded across the state. Now there are more than 1,100 such districts.

These special districts are one of the most commonly used economic tools in the country and can drive redevelopment, say proponents, who add that they also divert money away from schools and increase the tax burden on Hoosiers.

That matters in a year in which homeowners can expect major increases in their property tax bills, and schools say they’re already grappling with inflationary costs. Today nearly 10% of the state’s total assessed value sits in TIF districts. 

Perhaps nothing illustrates the disparities in how well the tool is used than this: Multiple bills are moving in the Indiana Statehouse that seek to address the use of TIF districts, but lawmakers can’t seem to agree whether TIFs are a boon or a detriment to the communities they’re used in. 

“The TIF conversation is very nuanced and difficult,” said House Speaker Todd Huston, R-Fishers, “and we have a lot of array of opinions across our caucus on that topic.”

The Senate passed Senate Bill 300 earlier this month, making it easier to use TIF districts for primarily residential purposes, in an effort to spur more housing construction.

Meanwhile, the House seems to be moving in the opposite direction by advancing House Bill 1085 out of the influential House Ways and Means committee, requiring communities to set aside a portion of excess new tax dollars generated in future TIF districts for schools, fire and police-related expenses. The bill also requires there to be a voting school board-appointed member on the redevelopment commissions tasked with approving TIFs. 

A separate House committee also passed a more watered-down version of Senate Bill 300. 

So which is it, a tool that can solve Indiana’s so-called housing crisis, or one that’s already out of control? It depends on who you ask.

“It seems crazy that there would be two such competing bills in the House and Senate,” said Michael Hicks, an economist from Ball State University. “But, there are places in Indiana where TIF is a wonderful budget management tool for helping fund innovative infrastructure and programming, and there’s other places where it’s an unforgivably thoughtless subsidy to a private sector firm.”

TIF use varies greatly across the state. In Tippecanoe County, almost 20% of the county’s assessed value is located in TIF districts, while other communities, such as Switzerland, haven’t touched the tool. 

The more assessed value a county has sitting in a TIF district, the more the cost of the local governments’ remaining budgets is passed onto the remaining taxpayers.(Credit: Brittney Phan for State Affairs)

How TIF districts are supposed to be used

When TIF is used correctly, it drives redevelopment that wouldn’t have happened without the district in place.

In theory, that means without that TIF district, there wouldn’t be new property tax dollars generated for any local units, which means entities, such as schools and libraries, aren’t missing out on any property tax dollars because of the creation of these districts.

But Hicks called such an idea an “absolute fantasy.” He said at least some economic growth would happen without TIF. For example, maybe a city used a TIF district to build a multi-story development in an area. A smaller structure might have been built in that spot without any incentives. 

With the TIF district in place, other local units miss out on any increased assessed value for decades, but still have to pay for services in those areas, such as for fire, police or school buses. If you think of taxes as a river, cities are building a TIF dam at the top in order to claim more water for themselves, impacting those downstream.

A study from Hicks found that while assessed value inside of TIF districts grew exponentially between 2003-2012, the assessed value in non-TIF districts decreased. That leads to higher tax rates, and triggers the property tax caps more often, causing other local governments to lose out on money. Rep. Bob Cherry, a Greenfield Republican carrying House Bill 1085, said $947 million worth of property taxes, or 11% of the total amount, were collected within TIF districts in the past year. 

Larry DeBoer, a Purdue University economics professor, pointed to a study that found that projects that use TIF would advance even without the TIF at least 75% of the time. 

“If cities are going in and recognizing an area where there is going to be some growth and saying, ‘Hey, let us grab that money,’ ” DeBoer said, “then yes, that actually does cost the taxpayers [money], or the schools and other overlapping units lost revenue.”

It’s worth noting that schools that have passed separate operating referendums still get to collect those dollars from TIF districts, which results in more money for schools if the development increases the assessed value of those areas. Schools also would still get money from the state for each student taught in their district, if the redevelopment leads to more families, proponents of TIF often point out. 

Regardless, groups representing schools remain opposed to big expansions of the TIF tool and say the amount of money they’re losing to property tax caps is a growing problem as TIF has expanded. 

“School corporations are facing challenges of aging facilities, increased safety concerns, labor shortages and inflation spikes driving up operational costs as a result,” said Terry Spradlin, executive director of the Indiana School Boards Association. “In today’s economic climate, communities benefit from local government collaboration and transparency, communication and most importantly planning on how to achieve community objectives with the limited resources.”

The other issue with TIF can be how the generated money is spent. 

Under House Bill 1085, communities would largely be prohibited from spending TIF money on causes that don’t impact the specific district or create jobs, guardrails that don’t exist under current law. Other taxing units, such as schools, would also be able to recoup some of that extra money not being used for debt payments, under the new guidelines in the bill. 

 “I just think we’ve got a little bit carried away on what we think we ought to spend the money on,” said Cherry. 

Still, both DeBoer and Hicks say TIF can be beneficial. 

“It’s really a budget management tool,” Hicks said. “If you spend the TIF money on things that benefit the community, then that can be a pretty big benefit that would be greater than the loss of tax dollars to the other taxing unit.”

He pointed to projects where private developers are building sewer or water infrastructure as an example of a typically good use of TIF because the private sector can build those public goods cheaper than the public sector can. 

In Hicks’ eyes, Carmel’s use of TIFs should be placed in the success category: The community has grown and home values have risen. While Brainard has faced criticism over the years, he has managed to stay in office for seven terms — a sign that by and large, people were happy with how he managed their tax dollars.

Brainard said TIF was “clearly the best economic tool.”

“Like anything it has to be done right,” he said. “You can take a hammer and use it to build a beautiful building or use it to hurt somebody.” 

Carmel Clay Public Schools didn’t respond to a request for comment about their view on the city of Carmel’s use of TIF. 

Lawmakers concerned about the use of TIF say they aren’t trying to get rid of the tool completely, but that it’s their job to ensure it’s used properly. 

“I am not against TIF,” said Rep. Ed Clere, a New Albany Republican and coauthor of House Bill 1085.  “I’m against poor fiscal management, and overusing or abusing TIF in a way that drives unnecessary [property tax cap]  losses.”

How residential TIFs could drive housing construction

The Senate, though, views TIF as a potential solution to a housing shortage in Indiana. Senate Bill 300, which passed out of the chamber on Feb. 2, would make it easier for local communities to use TIF for residential projects. 

According to the Indianapolis Metropolitan Area Housing Affordability Report completed by the Common Sense Institute, the housing deficit is so severe in the metropolitan statistical area that 11,050 to 19,301 new housing units would need to be completed each year until 2028 in order to close the gap. Meanwhile, Hoosier incomes haven’t kept up with housing costs, the report found. 

When lawmakers passed a law enabling TIFs for primarily residential areas in 2019, they put in place stringent guardrails. Senate Bill 300 would nix the provision requiring school boards to sign off on any residential TIFs, and enable all communities to use residential TIFs, regardless of how many new homes had been built in recent years. 

The idea is that communities could use these residential TIFs in order to pay for basic infrastructure in new neighborhoods, incentivizing local developers to build there. 

“[Builders] don’t build for the fun of it,” Rick Wajda, chief executive of the Indiana Builders Association said. “Government is in the business of incentivizing manufacturer, companies to come to their communities. We know we now need incentives for housing.” 

The requirements in place today are just too narrow, proponents of Senate Bill 300 say. One mayor, for example, said a local school district in his community wouldn’t approve a residential TIF, unless they used part of the money to install new turf at the school’s football field.

“We’re a community that needs to grow and housing is critical to that,” said Brad Crain, mayor of Covington. 

Under the current TIF program, only 13 residential TIFs have been approved since the law passed. 

But, the same concerns about misuse and abuse that exist surrounding regular TIF exist when it comes to residential TIF. Senate Bill 300 doesn’t specify how the money collected in residential TIF districts can be used, nor does it directly call for affordable housing to be built. 

“We have workforce housing issues, we certainly understand that,” said Dave Bottorff, executive director of the Association of Indiana Counties. “But we feel like we probably need some other guardrails, or the incentive will be that all new neighborhoods will be TIFed, and the people that live in those neighborhoods are obviously going to want services.”

Republican lawmakers weren’t all on the same page in the Senate. The bill passed by a 28-19 vote, with 10 Republicans joining Democrats in the chamber in opposing the bill. 

The bill could face a challenge in the House as well, if House Bill 1085 is any indication. 

“I understand the desire to expand TIF for housing, but if we do that we need to make sure we don’t allow TIF to continue to be undermined at the local level by abuse and misuse,” Clere said. 

There could still be changes to both bills. House Bill 1085 will be up for a vote on the House floor next week, while Senate Bill 300 still has to be considered by the House before session ends in April. 

Contact Kaitlin Lange on Twitter @kaitlin_lange or email her at [email protected]

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Header image: Carmel Mayor Jim Brainard used TIF to develop City Center, shown above. (Credit: Provided by the City of Carmel)