Each of these options - TIFs, enterprise zones, TIEGs and asset-backed borrowing - all come with their strengths and weaknesses. For one, the "self financing" nature of both TIFS and TIEGs make them politically palatable for economic development. In other words, there is no real loss to the community in using the taxes generated by redevelopment to pay for the financing of the project. With the TIEGs approach, however, the private sector developer would take on the risk of the costs of up-front construction. Thus, TIEGs would have limited application in higher-risk areas or in addressing brownfield developments, where the cost of cleaning up contaminated land can be exorbitant. In those cases, it is likely that the TIEG would need to be complemented by a number of tax incentives, such as those used in enterprise zones, to lure private-sector interest.
| U.S. INSTRUMENTS FOR ECONOMIC DEVELOPMENT | |||
| Option | Pros | Cons | Rating |
| Tax-increment Financing | • self-financing • does not necessarily require a direct government subsidy • no recourse to general revenues in the event of default • good candidate for "brownfields" development | • very expensive form of borrowing • may require additional security, such as "full faith and credit" provision • beggar thy neighbour can result • difficult to assess if plan passes the "but for" test • can result in unintended displacement of residents | 3 |
| Enterprise Zones | • can be effective in spurring re-development | • requires large government subsidies • difficult to assess if plan passes the "but for" test • beggar thy neighbour can result • can result in unintended displacement of residents | 2 |
| Tax-increment Equivalent Grants (TIEGS) | • self-financing • private sector takes on risk of up-front development • no recourse to general revenues in the event of default | • not a good candidate for "brownfields" development • beggar thy neighbour can result • difficult to assess if plan passes the "but for" test | 2 |
| Asset-backed Borrowing | • no recourse to general revenues in the event of default • leveraging incremental property values can provide significant proceeds for development | • not a good candidate for "brownfields" development | 3 |
| * Rating is from 0 to 4, where 0 signifies least desirable and 4 signifies most desirable. Source: TD Economics | |||
In contrast, TIFs are better equipped for brownfield developments, since the public sector takes on the investment initiative. Still, financing these instruments through the debt market is expensive - for example, if the TIF obligations are not insured or if the bondholder is not given access to the revenue sources in case of default, a risk premium of a few percentage points in not unheard of. This high price presents a significant roadblock in the way of their near-term use in Canada, where cities have not even taken advantage of low-cost general-obligations borrowing. Moreover, south of the border, the costs of financing TIF districts are kept in check by using TEBs. As noted earlier, we do not support the use of these borrowing instruments in Canada.
Similar to TIEGs, asset-backed loans would not be all that attractive in financing brownfield developments, as there would be significant risk attached to value of the land until clean-up occurs. On the plus side, asset backed loans would likely carry with them lower financing costs than TIF revenue bonds. Moreover, borrowing against assets could also provide the city with significant proceeds for redevelopment, since investors - anticipating some appreciation in the value of the redeveloped land - would likely make available a share of that incremental amount for lending.
Enterprise zones are another tool in the U.S. economic development arsenal. However, these vehicles can prove costly to public coffers, since the revenue loss to government of, say, a corporate tax holiday is high while the incentive to invest is marginal.27 More specifically, businesses have an incentive to invest outside the zone, where they can write-off these investment costs for tax purposes, and shelter the income earned from taxation by reporting profits in their tax-exempt enterprises. Furthermore, enterprise zones, TIFs and TIEGs all run up against another roadblock - the potential for "turf wars" or beggar-thy-neighbour. The incentives put in place may simply draw businesses from other areas adjacent to the zone rather than result in incremental benefits to the region. As a result, each of these need to pass the "but for" test - i.e., areas must show no recent or current growth and no prospect for future growth "but for" the implementation of the economic development tool.
In sum, there is no easy answer to which one of these instruments is most useful in revitalizing a blighted area. It depends on the situation and the accompanying risk involved. But, while Canadian municipal governments should at least be given the flexibility to implement these types of approaches, they in turn must be careful to always weigh the costs against the private and social benefits of redevelopment. There is a good case to be made that many U.S. municipalities have used these incentives in an almost ad-hoc fashion with the lone goal of kick-starting activity. In instances where the risks are particularly high or where there are market failures - such as brownfield developments - Canadian municipal governments will be hard-pressed to tackle challenges on their own. As a result, additional assistance from the federal and provincial governments would be needed in the form of loan guarantees, grants, or the provision of additional tax incentives.