Intro to Tax Increment Districts
You can’t fully understand what condition a village is in financially unless you have a basic understanding of Tax Increment Districts (TIDs). The state legislation defining how they work is long and complex, but here’s a simplified version. Caledonia has five active TIDs which I will analyze in subsequent posts. But first …
What is a Tax Increment District, or TID?
TIDs are used for commercial development, but let me use a residential development example with made-up numbers to make it simple:
You buy land to build a house. The current tax bill on the land is $100.
The nearest road needs to be extended to get to your house and will cost the village $50,000.
You won't build the house unless the Village agrees to build the road. (This part is important.)
You and the Village enter into a TID agreement. The "district" is the boundary of your parcel.
The Village agrees to borrow money to pay for the $50k road.
You agree to build a $500k house within the next year. The house will produce $5000 in tax revenue per year.
Now here's the TID part:
The "tax increment" is the new tax revenue ($5000) minus the original tax revenue ($100), or $4900.
The $100 keeps going to the Village general fund.
The $4900 though goes toward paying off the $50k road expense.
When enough years have passed for the $50k village loan to be paid off, all future tax dollars go into the village general fund.
What can go wrong?
You never build your house. Now the village has the road debt and no revenue to cover it.
You build a smaller house than you promised, generating only $2500 in taxes and it takes 2x as long for your tax payments to pay off the road debt.
It takes longer than planned to build your house. Your tax dollars start flowing in later and thus finish paying the $50k road debt later than planned.
Other little fun facts
While your tax increment is paying off that road debt, you still draw on village services -- e.g. the fire dept will still come out to get your cat out of the tree
It's not "free money." It's just an accounting trick, a separate set of books so you can see if the original promises and plans are delivered. If anyone tells you TIDs are free money, you should instantly distrust them.
Statute requires you and the Village to attest that "but for the TID, we wouldn't do this" and guess what? Villages and developers always find a way to convince themselves of that.
The Village can give you a little something extra for your efforts and call it a developer incentive. If you want to know why Oak Creek has so much development, go looking for the developer incentives in their TIDs. The Drexel Town Square TID e.g. gave the developer $40M+ in 'incentives' to build it. Of course, the developer will show you all kinds of fancy spreadsheets that prove they need the incentive to be profitable. In case it's not obvious, those incentives are paid for by the taxpayers. They are just buried in the financial statements so they aren't obvious.
TIDs are usually very long-running. It can take 20+ years for tax revenue from the TID to finish paying off the infrastructure debt and start flowing into the general fund. In the meantime, the Village provides services to the buildings in the TID, with the rest of the taxpayer base picking up the tab.
How do you know if a TID is successful or not?
Compare it to the initial proposal. Is it generating the revenue we thought, on the timeline we thought? Were the village's expenses as expected? Some variation is expected, but lots is bad. If roads were built and tax revenue isn't materializing, the village can be "under water" with payments on debt exceeding the revenue from the TID.
You could also look at it like a banker. Would a banker have loaned you the $50k for the road given how long it is taking to get the tax money back.
To extrapolate this to the commercial development reality, just make the parcel bigger, the developer richer, the number of buildings greater, the public infrastructure (roads, sewer, water) more expensive. Throw in some expense account lunches and some ribbon cutting and voila, you have a TID.
In its worst form, TIDs are a form of corporate welfare where everyone convinces themselves that subsidizing development with taxpayer dollars is for the good of the taxpayers.
In its best form, it's a way to encourage development with commitments from developer and village and with contractual protection for taxpayers.
Clear as mud?
That is the "simple" picture. There are some shenanigans with TIDs with respect to property taxes, but that comes in the advanced course.