tidds-graphicGetting something for nothing is always an attractive notion. But if the housing bubble and the Bernie Madoff scandal have taught us anything, it is that there are hidden costs to “free” money.

It is particularly disturbing to watch New Mexico fall for the “something for nothing” argument when it comes to Tax Increment Development Districts (TIDDs). Supporters say that a TIDD pays for itself by using future taxes to pay for infrastructure costs today.

But as an Illinois tax official said after realizing that the state’s tax increment financing program was going to lose the state more than $300 million per year: “There is a cost; there is no free lunch… You’re not creating money, you’re devoting money to a particular plan.”

With TIDDs, New Mexico’s current plan is to provide more than $1.5 billion in future state revenue to four new developments — three in Albuquerque and one in Las Cruces.

TIDDs are an economic development scheme that use part of the increased property and/or sales tax revenue generated within a development to pay for that development’s infrastructure. The assumption is that development in that area will result in increased economic activity, which increases tax revenue — and this increase will cover the costs of the infrastructure.

Bonds are issued to finance the infrastructure — in other words, the TIDDs take on debt. Such financing is generally used to incentivize urban redevelopment and is almost always limited to city and county tax revenues. While 49 states use TIDDs, New Mexico is one of just a few that allows state taxes to be used.

TIDDs use state money in a way and on a scale that New Mexico has never seen before. In the past, when development occurred anywhere in the state, it benefited the whole state by generating state gross receipts taxes (GRT). These taxes went into the state general fund, which funds statewide programs such as K-12 education, public safety and health care. GRTs make up more than one-third of general fund revenues — they are a key part of funding for ongoing state programs.

TIDDs create “gated tax communities” in which the majority of new gross receipts taxes are used only to benefit the new development. By diverting future GRT from the general fund, the state is basically creating a steady funding stream for these TIDDs over 25 years or more.

In contrast, most state spending — be it for ongoing programs or one-time building projects — is determined on a year-to-year basis through the annual budgeting and appropriations process.

This is done, in part, so that emerging and unforeseen needs and issues can be taken into account — for example, a sudden decline in state revenue due to the drop in oil and natural gas prices (which is what got us into our current budget crisis). TIDDs circumvent this process, tying up a great deal of money for a very long time, whether or not it’s suddenly needed elsewhere.

One pro-TIDD argument is that these districts will attract new business and residents to New Mexico — that they will, in effect, grow the revenue pie with new economic activity.

Democratic state Sen. Steve Fischmann recently introduced legislation that would allow the TIDDs to capture only the state GRT revenue that comes from new business.

In a radio interview, the senator indicated that if we don’t change the current TIDD law we would be “paying developers from the existing tax base simply to transport businesses from one location to another.”

If developers and legislators are confident that TIDDs will bring in significant new economic activity, they should have no problem with this requirement. However, the most recent TIDD applications tell a different story.

In one case, 90 percent of the industrial activity within the TIDD is expected to relocate from the greater Albuquerque area. Another TIDD shows that only 20 percent of the retail and 25 percent of the office business would be new to New Mexico. This means that TIDDs will be shifting existing sources of revenue out of the general fund and into the TIDD.

TIDDs are not significantly growing the revenue pie, they’re just finding new ways to slice it, making the state’s share smaller.

TIDDs shift the risk and cost for private development onto the public. Because TIDDs pay for “public” infrastructure, many people believe that these are costs the public would pay anyway.

But in most developments, the costs of the public infrastructure are shared between the private developer and the local government.

With TIDDs, most of the costs are picked up by the taxpayer.

And the risk is shifted to the taxpayer as well. TIDDs are political subdivisions of the state and will be taking on the debt in order to repay the developer. If the development doesn’t generate the revenue to cover the bond payments for the next 25 years, the TIDD is on the hook, not the developer.

What’s more, the state is not guaranteed any presence on the TIDD board (pdf), and has no oversight of the use of the GRT funds.

Encouraging businesses to flourish is important to all New Mexicans who want the state and its people to prosper. The state has many relatively targeted economic development incentives designed to encourage businesses to relocate and expand in New Mexico. TIDDs move beyond targeted incentives to specific businesses to providing taxpayer financing for mixed-use commercial and residential developments. These developments may promise economic growth and well-planned communities, but nothing in current law requires that they actually deliver on those promises.

It’s worth noting that tax-increment financing has not always delivered on its promises in other states. Use of TIDDs in the St. Louis, Missouri., region (pdf) over the last 15 years has not resulted in any significant increase in sales tax revenues, and it has cost the taxpayers there $370,370 per job in subsidies. As the city auditor for Kansas City, Mo., discovered, revenue projections for their TIDDs were “consistently overstated,” with the actual economic activity just half of what had been promised.

This kind of tax increment financing has sometimes been called a development credit card because it allows infrastructure to be purchased now and paid for later. As we’ve seen with easy credit nationally, this s0-called free money can be very expensive when the bill comes due.

Anne Stauffer, a research analyst with New Mexico Voices for Children, has served as an assistant division director in the state budget division of the New Mexico Department of Finance and Administration.