EDGE gave IKEA a PILOT. That’s a lot of acronyms to say a furniture store just got a huge tax break from Memphis and Shelby County. The company won’t pay $9.5M in property taxes for well over a decade. Would they have come here anyway, gracing us with jobs and sales tax revenue and funky light fixtures? Maybe. The question is why the controversial Payment In Lieu of Taxes program seems to be the only public financing tool we reach for.

There’s something else out there called Tax Increment Financing. The preferred incentive of Nashville, Knoxville and countless other municipalities across the nation, TIF gets short shrift here in Memphis. It’s a development tool so cool the state of Tennessee authorized its use not once but four times in separate laws. We in Memphis just picked the wrong one.

Since as early as 1989 Nashville began using TIF to capture the increase in property tax revenue created from development. For example, imagine a parcel assessed at $40,000 generating annual property taxes of $800. If the owner improves that property so it’s assessed at $800,000, then the owner pays annual property taxes of $8000. The difference of $7200 is the tax increment. TIF allows us to set aside that increment to pay off bonds issued for public infrastructure, land acquisition and improvements to the property. The infographic below illustrates this process.

by Urban Land Institute

Nashville and Knoxville have more or less abandoned PILOTs in favor of TIF for several reasons. The city and county continue to receive baseline property taxes during the TIF period, the same amount they would have received but for the development. Government typically receives little or no property tax revenue over the baseline from the property or district during a PILOT period. Developers can borrow on TIF, offsetting their initial capital costs and reducing the annual debt service over the life of the project. Furthermore, TIF can be used for a broad array of development activity including public infrastructure, single and multi-family residential, commercial and industrial whereas typically PILOT is more limited. For example, because the PILOT structure requires the developer to deed the property over to a government agency during the PILOT period, condominiums, single-family and other development involving sales rather than leases are out of reach.

Like the PILOT program, TIF is generally subject to a “but for” test, meaning it’s only available if the development would not go forward without public financing and there is substantial public benefit. Furthermore TIF is available only to help address or prevent the pervasive urban problems of slum and blight. In other words, you generally can’t do a TIF to improve a thriving part of town. So it would seem Memphis is an ideal TIF city. We have lots of urban blight and private development of these areas will not happen without some public assistance. So why aren’t we using this powerful tool?

One reason Memphis has two TIF projects while Nashville has 50 is we picked the wrong law. Tennessee authorizes municipalities to use TIF under four separate statutes. For non-industrial development, we picked the Community Redevelopment Act of 1998, which provides TIF through the creation of a Community Redevelopment Agency (CRA). Basically this means Memphis created a new bureaucracy under the planning office to administer TIF, separate from existing economic development tools like PILOT which are under the administration of EDGE and the Downtown Commission. The result is a cumbersome, costly process for developers to apply for TIF and an underfunded, inadequate staff to administer the program. The statute also excludes the debt-service millage from incremental revenue collection, and the application process itself is costly and time-consuming.

There are other reasons TIF has been largely abandoned by the development community and misunderstood by the public. Some developers believe PILOT is a more effective public financing tool because of Memphis and Shelby County’s depressed property values and tax assessment structure. Significant questions loom about what happens in the event an anticipated increment does not materialize. We need public discussion and testing of these ideas that includes examination of the benefits and risks of each program.

TIF can be used to improve whole neighborhoods. For example, in Binghampton we could capture the property tax increment that’s happening from commercial development along Broad Avenue. Surrounded by High Point, Chickasaw Gardens, Overton Park, Broad and containing vibrant churches and schools, there is no reason Binghampton should be as blighted as it is currently. The neighborhood needs help in the form of public infrastructure improvements, vacant and blighted property acquisition and rehabilitation of existing housing stock to propel it forward, make it safer and improve property values. A properly administered TIF district could be the difference in making private developers able and willing to invest in the neighborhood.

TIF can also be used on specific sites. For example, we’ve all seen the Binghampton Development Corporation raze blighted tenements at the corner of Tillman and Sam Cooper. If BDC can continue the progress and entice a quality grocer to the site, the neighborhood would be so much better for it, and the property value of the site would rise accordingly. A TIF would enable the BDC to use that property tax increment now to build that grocery, a prospect that may not happen otherwise in light of the cost and perceived risk of developing the corner.

There’s never been a better time to explore making TIF a more substantial part of our city’s development toolbox. The Urban Land Institute recently published an article about how cities like Memphis can adapt older TIF models. With a recovering economy and rising property values TIF can make sense. Nashville and Knoxville have provided a roadmap to the sustainable use of this tool, and we’d be wise to get with the program sooner rather than later. Of course TIF is no panacea—it’s not a replacement for PILOT—but it is a powerful development tool for our blighted urban core. Building our city requires all kinds of creative solutions, narrowly tailored to achieve maximum impact. The key is making sure we assess each situation with transparency and fairness, and deploy our limited public resources wisely.