Subsidizing Sprawl: How Economic Development Programs are Going Awry

by Greg LeRoy

Deer Creek, in northern Allegheny County, Pennsylvania, is one of the few remaining trout streams close to Pittsburgh. It runs through a rugged, wooded valley and a park before flowing into the Allegheny River. But now the creek's lower end is endangered by a proposed mall that would be subsidized by a tax increment financing (TIF) district.

"The TIF was approved long before anyone knew about the project," says Arlene Mercurio, a long-time area resident, small-business owner and parent. "There was no advertising about this project, that's for sure."

Arlene's husband, Joe, is a trout fisher and member of the Tri-County Trout Club, the creek's unofficial guardian.

The Mercurios were shocked to learn one day in 1999 that the Allegheny County Board of Commissioners had voted to designate the 245-acre site a TIF district, which would provide taxpayer dollars to blast down one of the valley's hillsides, re-channel the creek, fill in wetlands and flatten the site to make way for a big box shopping development.

Today, the Mercurios await court decisions on a lawsuit they and others filed to block the Deer Creek TIF. The suit alleges procedural errors and environmental flaws in how the county commission originally enacted the deal.

But the real issue is government secrecy and the public's right to know and participate. "The TIF act explicitly provides for a public hearing where citizens can express their opinions, but in this case, citizens were denied that right," says Jody Rosenberg, an attorney for Penn Future, an environmental group that is spearheading the litigation. "Now we are asking the court to restore that right to them."

Sadly, the Deer Creek story is not unusual. In many states besides Pennsylvania, economic development programs that were originally intended to revitalize older urban areas are being perverted into subsidies for suburban sprawl. Wal-Mart and other big box retailers are getting subsidies to build stores that simply pirate sales from existing stores. Upscale residential and even golf course projects are getting subsidies from programs originally intended to help depressed areas.

As if suburban sprawl were not bad enough already, now taxpayers are subsidizing it -- in the name of economic development.

Sprawl and Its Discontents

"Suburban sprawl" usually refers to development patterns with low density and a lack of mixed-use (for example, no apartments above stores), a lack of transportation options (forcing everyone to drive to work), strict separation of residential from non-residential property, and job growth in newer suburbs with job decline in older areas (both the core city and older suburbs).

Sprawl causes increased dependence on automobiles and longer average commuting times, deteriorating air quality, and rapid consumption of open space in outlying areas. It also causes disinvestment of central city infrastructure and services, and strains city budgets at the core (due to a declining tax base) and in some suburbs (because of hyper-growth at the edge).

The decentralization of jobs in manufacturing, wholesale and retail means work becomes scarce for low-skilled workers who are concentrated at the core. Since the suburbs lack affordable housing (often due to exclusionary zoning) and public transit fails to reach many suburban jobs, sprawl effectively cuts central city residents off from regional labor markets. That means greater concentrations of poverty for residents of core areas, who are disproportionately people of color.

The numbers are shocking. Every day, the United States loses 3,000 acres of productive farmland to sprawling development -- the equivalent of Delaware every year. And according to a recent Brookings Institution study, between 1982 and 1997, the U.S. population grew by 17 percent, but the urbanized land area increased 47 percent. In areas with stagnant population growth, the disparities are much worse. The Detroit metro area gained only 6 percent in population between 1970 and 2000, but its urbanized land area grew by 67 percent -- 11 times faster.

What causes sprawl? Urban experts cite numerous contributing factors, many of which also involve taxpayer dollars or public policies, including: some people's preference for low-density housing; white flight; lack of effective regional planning; cities competing for jobs and tax base instead of cooperating; "redlining," or geographic and racial discrimination against older areas by banks and insurance companies; crime and perceptions of crime; declining quality of central city schools; contaminated land or "brownfields;" exclusionary suburban zoning that blocks apartment construction; federal capital gains rules that used to encourage people to buy ever-larger homes; the historically low price of gasoline; and federal highway spending dominating that for public transportation.

But an additional and often important factor is economic development subsidies like TIF that have gone awry and are being abused in ways their creators never intended. Strategically, these subsidies provide a sharp new tool to the so-called "smart growth" movement. Sharp because they provide specific, tangible evidence of sprawl happening -- they involve specific names and places -- and because they can easily be reformed to become part of the smart growth solution. TIF is the most common offender.

TIF: Sprawl Subsidy #1

Originally conceived to help revitalize depressed inner-city areas, TIF allows a city to designate a small TIF district and say: this area will get redeveloped, and when it does, property values will go up and therefore property taxes will also rise. When that happens, the tax revenue will be split into two streams. The first stream, set at the "base value" before redevelopment, will continue to go where it always has: to schools, police, fire and other public services. The second stream -- made up of all the increase or "tax increment" -- will be diverted back into the TIF district to subsidize the redevelopment.

This diversion can last 15, 23, even 40 years, depending on each state's rules, which also control how the money can be used. It usually goes for infrastructure or other public improvements, but in some states, it may also be directly paid to developers towards private construction costs.

TIF is now allowed in 47 states and Washington, D.C. As originally enacted in most states, it was restricted to areas that were truly needy, as measured by high rates of blight or distress such as property abandonment, building code violations, or poverty. But over the years, about a third of the states have loosened their TIF eligibility rules, often so that even affluent areas qualify. The wealthy Chicago suburb of Lake Forest, for example, has a TIF district -- as well as a Ferrari dealership. Other states, including Pennsylvania and Missouri, have always had loose rules. Pennsylvania's TIF statute allows the Deer Creek valley to be TIFed, for example, because the land has "economically or socially undesirable land uses" and "faulty street or lot layout." (Apparently, Arlene Mercurio notes, Deer Creek was not generating enough tax revenue.)

Equally troublesome, a few states allow the sales tax increment, in addition to the property tax increment, to be "TIFed." That is, all of the increase in sales tax revenues can be diverted to redevelopment costs. Obviously, if the project site is a cornfield with no retail sales before the redevelopment, all of the new sales tax revenue is incremental. That's a very powerful incentive to build more retail -- actually to overbuild -- since regional markets are usually already saturated with retail space.

The National Trust for Historic Preservation's Main Street Center has helped downtown retailers in hundreds of cities fight against big box super centers such as Wal-Mart. The program's director, Kennedy Smith, points out in testimony that cities absorbing too much retail space suffer all kinds of hidden costs (in addition to whatever subsidies they grant the big box). The losses caused by just one vacant main street store, with two floors of 2,000 square feet each, total almost $250,000 a year, including losses in property taxes, wages, bank deposits and loans, rent, sales and profits, she argues.

It's not just downtown retail areas that are suffering: older malls are also getting cannibalized. Indeed, a 2001 study by PriceWaterhouseCoopers about "greyfields" -- the euphemism for dead malls -- found that 7 percent of regional malls were already greyfields and another 12 percent are "potentially moving towards greyfield status in the next five years." That would be 389 dead malls.

Missouri, which allows sales tax TIF, is learning this lesson the hard way. The state has had a raging four-year debate about how to reform its TIF program before it subsidizes any more unnecessary new stores. The debate has brought together a motley, bi-partisan coalition of existing retailers, small business groups, the United Food & Commercial Workers union, planning bodies and elected officials.

State Senator Wayne Goode, D-St. Louis County, is the primary sponsor of a reform bill. "Putting public money into retail in a big metropolitan area doesn't make any sense at all," Goode says. "It just moves retail sales around." About one third of the 90-odd municipalities in St. Louis County collect "point of sale" sales tax, he explains. That is, they get to keep a portion of the sales tax if a purchase happens within their borders. The other two thirds of cities in the county pool their revenue. So the one third fight each other for sales -- and pirate sales from the two thirds -- often using TIF. Area developers go to great lengths to block reforms because the TIF is so lucrative.

St. Charles County Executive Joe Ortwerth, a self-described "Reagan Republican," is equally incensed about the situation. He is suing to end TIF, based on the Missouri state constitution's ban on the use of public money for private interests. His county is growing rapidly as people move out from St. Louis, and it has no quantifiable measure of blight, he argues. Premier malls are getting TIF dollars just to get spruced up, he says.

As for claims that new retail outlets generate higher sales tax revenues, that is just a "total ruse," Ortwerth says. "It is just a change in the point of sale." Indeed, he argues that because of the taxes diverted into TIF, there is actually a net revenue loss. Job creation claims are just as bogus, he says. O'Fallon is the county's fastest-growing city; it also has a long-standing True Value hardware store that has laid off workers since Home Depot and Lowe's arrived, he observes.

In a remarkable letter endorsing Senator Goode's bill, Craig Schnuck, the CEO of Schnuck's, a major grocery chain in Missouri, said: "Over time, the definition of ëblight' has become more or less meaningless. Ö TIF has in many cases become just a subsidy offered to entice a developer for the benefit of enhancing a municipality's sales tax base." Acknowledging that his company has accepted TIF in the past, Schnuck concludes that "TIF has distorted the free market," and urges reform.

As the St. Louis Post-Dispatch editorialized: "With towns handing out TIF like bubble gum, St. Louis may be getting over-stored, while developments are under-taxed. Projects that make no sense get built because of tax breaks."

Subsidizing new retail is almost always bad economics, and terrible public policy. It's not just the traffic congestion and air-quality problems. Arlene Mercurio, the Deer Creek resident, says it well: "Retail is not economic development. Retail does not create jobs. There is a finite amount of disposable income people have to spend. It's not like manufacturing. It's not like research. It's not like high tech. Retail simply moves money around, so other stores shut down."

Retail packs a lousy bang for the buck compared to manufacturing or almost any other activity. The "upstream" inputs do little for the local economy (think of all those goods from China at K-Mart and Target), and the "downstream" ripple effects are terrible because retail jobs are overwhelmingly part-time and poverty-wage, with no health care. That means retail workers have very small disposable incomes with which to stimulate the local economy.

Suburban areas with the greatest numbers of high-income households will always have plenty of shopping opportunities. Supply will chase demand. The only situation where retail can be legitimately called economic development -- and therefore maybe deserving of a subsidy -- is an older, disinvested neighborhood that is demonstrably underserved, lacking basic amenities such as a grocery store and a drug store.

That's the kind of project for which TIF was originally created. But after 30 years' experience in some states, TIF has strayed far from its good intentions. As the Kansas City Star once moaned: "Created to combat sprawl, tax breaks now subsidize it."

It's not only retail sprawl that TIF subsidizes.

In the mid-to-late 1990s, the distant Minneapolis suburb of Anoka TIFed a 300-acre industrial park and offered free land to light manufacturing companies that would relocate there. The offer was so sweet, Anoka turned down five-sixths of the applicants, landing 29 companies and about 1,600 jobs. All of the companies came from the Twin Cities region, especially from Minneapolis and old, inner-ring suburbs on its northern edge. The net effect of the relocations was to move jobs away from the region's poorest neighborhoods, and away from people of color. Jobs also moved away from areas with the greatest number of households dependent on public assistance -- even as "welfare reform" was pushing many people into "work first," take-any-job routines. Low-wage workers without a car also lost opportunity: before the relocations, 70 percent of the jobs had been accessible by public transit, but in Anoka they are not.

The Anoka story begs the issue: since sprawl already gives newer suburbs so many advantages, should any development subsidies be allowed there? Or as one Twin Cities civic wag put it: "Subsidizing economic development in the suburbs is like paying teenagers to think about sex."

Enterprise Zones: Sprawl Subsidy #2

While TIF is the most problematic subsidy when it comes to sprawl, it is hardly the only one. Enterprise zones, another geographically targeted program originally intended to help distressed inner-city areas, have also been weakened in some states so that affluent areas get multiple subsidies that come with zone status. New York, for example, allows zones to be gerrymandered non-contiguously.

Buffalo's two enterprise zones have morphed into more than 130 non-contiguous areas, raising questions about favoritism. A scathing Buffalo News investigative series found that "[t]he program, crafted to create business in distressed areas and jobs for the down-and-out, has transmuted here into a subsidy program for the up-and-in" -- including even downtown law firms.

Ohio also has an enormous number of enterprise zones and a long history of controversy to go with them. A forthcoming study from Policy Matters Ohio finds that "the very areas [that zones were] initially designed to help are now disadvantaged by the program. An aging infrastructure, a low tax base, weak education systems, and numerous costly social challenges place poor urban areas in a weak position relative to their wealthier suburban neighbors. Ohio's [zone program] has succeeded in making the playing field even more tilted against urban areas by extending to wealthier suburbs an additional fiscal tool with which to compete for firms."

$49 Billion Missing the Bus

TIF and enterprise zones deserve special scrutiny, because they are supposed to be geographically targeted against poverty. But they are just the tip of the iceberg when it comes to explaining how badly economic development programs miss the bus on helping the truly needy. The average state today has about 30 economic development subsidy programs, so the states together have roughly 1,500. As of 1996, total state and local spending for economic development was estimated at $49 billion and it is surely higher today.

Despite all those programs and dollars, a new Good Jobs First report, Missing the Bus, will reveal that not one of those state subsidies requires -- or even encourages -- a company getting a subsidy in a metro area to locate the jobs at a site served by public transportation.

Of course, no subsidy programs used to require companies to pay a good wage or provide health care, but many do now. None used to have money-back job guarantee "clawbacks," but now some do. No deal's costs and benefits used to be disclosed every year, but now some are. So subsidies can be reformed to curb sprawl, too.

After all, "God's not making any more land," says Arlene Mercurio. "We are running out of really valuable land."

Greg LeRoy directs Good Jobs First, a national resource center for corporate and government accountability in economic development www.goodjobsfirst.org.