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Let's Talk TIFs With A Public Finance Expert

Louisville skyline

Tax increment financing agreements have helped spur the development of more than a dozen projects across Louisville.

The incentive program, commonly called a TIF agreement, rebates a portion of increased taxes back to the developer upon completion of the project to help subsidize the project's cost.

Such incentives are considered instrumental in fueling development, said Mary Ellen Wiederwohl, head of the city's economic development department.

“We believe it is the best tool available to us today," she said.

A Louisville Metro Council committee approved two more proposed TIF agreements earlier this week to help fund planned developments at the former sites of the Phoenix Hill Tavern and Mercy Academy, near the intersection of Baxter Avenue and East Broadway.

To get an idea of why these incentives are so popular, what they mean to taxpayers and why critics sometimes oppose such incentives, we talked to Janet Kelly, executive director of the University of Louisville's Urban Studies Institute.

Kelly's research is focused in public finance policy and economic development. You can listen to the interview in the above audio player.

Say somebody opens up their newspaper and sees the city is approving tax incentives called tax increment financing, what can they make of that?

Tax increment financing has been around for a long time and it's the favorite tool of a lot of urban economic developers. So, if I had a piece of property that I thought needed to be developed, one way to do that without making an immediate investment of city money would be to get a group of investors, or, perhaps, a group of people who were willing to loan you money and tell them that they would receive a return on that investment and that investment would be paid for by how much that property appreciates over the time of the investment. The way it would be paid off is that the property value would appreciate and as the property value appreciates, the property taxes increase and the property taxes -- the increment between the original property taxes and the property tax realized after the improvement -- becomes the source of the financing.

We've seen these pop up in several developments over the past couple of years -- the KFC Yum! Center and University of Louisville Shelbyhurst Campus. Why do we see them becoming so popular for smaller developments now?

They've always been very popular for developments that had a large retail component or tourism component. Now we are seeing them used more often in residential areas that have a lot of potential to become a part of the city's overall urban plan. An area that is likely to be developed, or attractive to developers in the future, if it had the benefit of some immediate investment then that would be a situation where a TIF might work. A TIF is only as good as the likelihood that that particular property is going to increase in value as a result of the investment.

What are some of the fears or apprehensions that experts in the field may have?

Again, the problem with the TIF is that it's only as good as the appreciation in that property after the investment. If the value of the property grows it was a great investment, if the value of the property doesn't, maybe not so much. That's always, with every TIF, that's always the consideration.

Do critics of TIFs have a case to make when they're pushing back against these tax incentives for their potential taking of city tax revenue from government coffers?

Perhaps. If the property was not going to appreciate without the investment, then it's a wash, there would be advantage to using the TIF or not using the TIF. If the property does have the ability to appreciate, some people's concerns about whether or not that property tax revenue should be used for public purposes or should be returned to investors have a legitimate concern. However, if the property doesn't appreciate without the investment, they wouldn't have been better off if the TIF had not been applied.

Jacob Ryan joined LPM in 2014. Ryan is originally from Eddyville, Kentucky. Email Jacob at jryan@lpm.org.