Subsidies Meant for Low-Income Communities Are Paying for Luxury Developments

Tax increment financing, originally meant to spur development of "blighted" neighborhoods, is now being redistributed upwards.
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The Shed cultural space at Hudson Yards in New York.

The Shed cultural space at Hudson Yards in New York.

In New York City last week, anger mounted against the developers and city officials behind the Hudson Yards mega-development who financed the project through an act of what CityLab reporter Kriston Capps described as "creative financial gerrymandering." The state created a map linking low-income public-housing projects to the wealthy West Side neighborhood where Hudson Yards is located, in order to offer foreign investors a discounted visa option designated for those who invest in projects in distressed urban areas.

At the same time, a similar problem came to a head halfway across the country, when two community groups in Chicago filed a lawsuit against the city—the first of its kind in Illinois—for misusing tax incentives to facilitate the massive Lincoln Yards redevelopment project in the city's north side. The groups claim that the city council violated the state's civil rights act when it approved the creation of a subsidized development district in a predominately white area of the city—allegedly the latest instance of Chicago's persistent habit of administering incentives in a "racially and ethnically discriminatory manner."

The incentive in question, Tax Increment Financing, has become a mainstay in the toolbox of developers across the country, and especially in midwestern cities like Chicago and St. Louis, Missouri. Through TIF programs, municipalities can divert future property-tax revenue increases from a designated district toward economic development in that same area. The program is intended to spur growth in underserved communities that developers wouldn't be inclined to build in otherwise—areas designated by the city as "blighted." Developers, essentially, can recapture some of their own tax dollars if they partake in "community development" projects.

But, as with the program that begot Hudson Yards, "blight" is a malleable concept in the hands of developers and the politicians who support them. The area proposed for Lincoln Yards is surrounded by three of the whitest and wealthiest neighborhoods in Chicago, which have, for over a decade, received significantly higher investment in new building growth than the rest of the city. The area sited for Lincoln Yards is itself less developed because it was zoned for manufacturing until 2017, but in the parts that have already been developed, land values are increasing at a rate higher than the rest of the city, according to the lawsuit. The site's plan calls for as much as $1.3 billion in TIF spending. Sterling Bay, the developer, intends to use the money to fill the 52-acre plot with luxury residential and office buildings, and park space (plan-B after Sterling Bay's bid for Amazon's HQ2 was rejected).

According to state law, TIF districts must meet the "but for" test: They must be located in areas where the development would not occur "but for" the incentive. The rule is vulnerable to manipulation, however, when cities rely on a particular developer's bottom line to answer the test question rather than economic indicators for the area as a whole. Yes, perhaps a particular developer would go elsewhere "but for" the subsidy, but that doesn't mean that all other developers would stay away too.

"Chicago has a very long history of misuse of tax increment financing," says Nathan Ryan of Grassroots Collaborative, a coalition of organizations focused on local and statewide policy, and a plaintiff on the lawsuit. "[It] was originally intended to help blighted areas in low-income communities but instead we now see most of the TIF funds being spent in areas with the most development."

Between 2011 and 2015, nearly half of the $1.3 billion in TIF funds allocated by Mayor Rahm Emanuel went to Chicago's central business district—"The Loop"—and surrounding areas, according to an analysis of city records by the Chicago Reader. Fifty-five million dollars of that money was earmarked for the site of a new Marriott hotel near the DePaul basketball arena, and not for those who live in the community. At the same time as Chicago's city council approved the TIF for Lincoln Yards, it approved another TIF district for a downtown project called The 78, the developer of which, Related Companies, is the mastermind behind Hudson Yards.

Alderman Brian Hopkins, who represents the area sited for Lincoln Yards, has consistently championed the proposal. "There are numerous companies interested in moving to Chicago, and all they need is a corporate campus to put those workers on," Hopkins told the Chicago Tribune in February. "If we're not going to support Lincoln Yards, what do we have in its place?"

The plaintiffs' answer is that the city could redirect its support toward predominately African-American and Latino districts that have been repeatedly denied investment. "It is absolutely harmful in a specific case like Lincoln Yards," says Aneel Chablani, chief counsel for the Chicago Lawyers Committee for Civil Rights, which is representing the plaintiffs in the lawsuit. "Overtime it is going to have significant disproportionate impact on areas of the city that are not benefiting from these specialized districts."

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Economic development incentives are certainly not a new phenomenon, but they are on the rise: In 1999, 68 percent of United States cities and states used financial incentives to attract capital; by 2009, that number had risen to a staggering 95 percent, according to Nathan Jensen and Edmund Malesky's 2018 book Incentives to Pander: How Politicians Use Corporate Welfare for Political Gain. And as the profit potential from such incentives has increased, the type of "financial gerrymandering" visible in the Hudson Yards map (which CityLab obtained through a Freedom of Information Act request) has become the norm.

"That's exactly how TIF is used," says David Merriman, a professor at the Institute of Government & Urban Affairs at the University of Illinois. In Chicago, the boundaries of a TIF are set by the city council. But. according to Merriman, developers are almost always in the room. It's hard to tell exactly who draws the boundaries, he says, "But they're basically drawn by the developers' inclinations."

The "odd shape[s]" of many of Chicago's TIF districts, he notes, expose developers' attempts to avoid either high-value parcels that might harm their ability to claim "blight" or low-value parcels that might lose value over time.

The most recent addition to the menu of tax-incentive programs cities have to offer, the Opportunity Zone program, through which developers can defer and reduce capital gains tax payments, already appears to have become a pawn for such cartographic trickery. The program, established through the 2017 tax bill, is intended to target only low-income communities, but, according to research from the Brookings Institution published last year, 22 percent of selections were for areas with relatively low poverty rates, and an additional 19 percent were in already-gentrifying areas. These numbers stem from a set of loopholes readily exploited by states when selecting zones. Both areas adjoining low-income neighborhoods and areas with large student populations (like the wealthy areas surrounding Stanford University or Harvard University) are eligible. And, some states relied on census data dating back to 2011 to determine low-income zones, which could—in the accelerated timeline of gentrification—now be in a radically different stage of development.

The plaintiffs in Chicago identify several potential reforms to the way TIF is currently used in Chicago, including what's been dubbed "Robin-Hood Porting," in which the city would transfer TIF funds from districts with a TIF surplus to districts with less-than-average funding from TIF.

This way, the funds could be put toward, among other things, chipping away at the Chicago public-school system's $8.2 billion in long-term debt. When tax dollars get siphoned into TIF districts, they're removed from the general tax pool that districts with underserved public schools rely on.

"Parents in the city are being told constantly, 'There's not more money for what you want to do in the schools. We just can't have more adults in the schools, we don't have the resources,'" says Joy Clendenning, interim executive director of Raise Your Hand Illinois, a public education advocacy organization serving as one of the plaintiffs for the lawsuit. "It's a matter of saying, there are actually ways to have these resources."

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