To Divert or Not To Divert: The Impact of TIFs on Chicago Public Schools

State and local governments are being forced to strike a difficult balance between generating revenue, spurring economic growth, and spending money on essential government programs. In the City of Chicago, where the public school system and other taxing jurisdictions are coping with large budget deficits, much attention and criticism has been focused on a particular economic development tool: tax increment financing (TIF). A December 2011 report by the University of Illinois Labor Education Program, “Tax Increment Financing and Chicago Public Schools: A New Approach to Comprehending a Complex Relationship” addresses the intensified debate on this polarizing topic.

When a TIF is established, the City creates a “baseline” property value: property taxes on this baseline amount continue accruing to the City while taxes on increases in property values above the baseline go to the TIF district to fund economic development and the elimination of blight.

Because of this devotion of a portion of property taxes to TIF districts, TIFs have increasingly come under attack by the Chicago Teachers Union for, allegedly, sucking money away from schools, which also rely on property taxes. Authors Robert Bruno and Alison Dickson Quesada set out to determine whether TIF districts “take money away from Chicago Public Schools… [or have] had no or limited financial impact on the school district.”

In the end, the authors reject these conflicting arguments in favor of an alternative, middle-of-the-road response.

Bruno and Quesada present three points which purportedly show that TIF districts divert money away from public schools.

First, in the 162 TIF districts in Chicago, $510 million was collected in the 2010 tax year. This compares to the $700 million shortfall in the budget of Chicago Public Schools (CPS). However, the authors note that if the CPS had been able to extend its financing to the growth of property values within TIF districts, it would have collected only $267 million extra in 2010. Second, local taxing districts lose revenue because Chicago does not adjust baseline values for inflation. Finally, they argue that much of the economic development within Chicago TIF districts, particularly in the Loop, would have occurred even without the TIF subsidy. Thus, TIF funds might have been better utilized plugging the CPS budget deficit.

However, tax increment financing is not all bad for Chicago Public Schools. The report shows that TIFs provided more than $813 million for CPS capital improvement projects. The authors also note that CPS’s ability to raise revenue might be limited by law. Additionally, “studies have shown that state aid appears to equalize CPS for their loss in property tax revenues due to TIF.”

The report concludes with a discussion of best practices for tax increment financing. For example, Bruno and Quesada note that 11 states allow overlapping jurisdictions the power to opt out of TIF districts and retain some percentage of otherwise “lost” taxes for themselves. Finally, the report suggests that new construction within TIF districts should be calculated and publicized for transparency.

For a school system with a $700 million budget deficit, any lost revenue is important. While TIF districts don’t “take” money away from CPS, they do divert some funds from the system.