8/04/2008

Economic Development: Compete or Stagnate

Mayor Jim Ardis City of Peoria

As Peoria continues to grow, I’m often asked to explain the need for—and mechanics of—various development incentives. Some of the best-known incentives are Tax Increment Financing (TIF) and the Enterprise Zone (EZ). But there are others as well, such as Peoria Promise. The fact is that if Peoria doesn’t use all of the development tools at our disposal to attract new investment and spur redevelopment, we will not be competitive with our peer communities in Illinois and elsewhere. We will lose out on the ongoing quest for added community wealth to support an improved quality of life—a quality of life that comes with a price tag. And that price tag can’t always be borne by additions to real estate and sales taxes.

Let’s face it—if we aren’t competitive, we stagnate and decline as a vibrant, high-quality community. So, how do these incentives work? What value do they contribute to Peoria? The following summarizes our most useful programs.

Tax Increment Financing (TIF). The most important—and at times misunderstood—program for urban redevelopment is Tax Increment Financing, which can help redevelop older neighborhoods. In a TIF district, dollars for improvements are generated by businesses—new and old—attracted by the TIF benefits. Money for infrastructure improvements and other incentives comes from the growth in property tax revenues—the tax increment.

TIF can help cities rebuild and restore their most run-down areas. Governments can make the improvements they need, like new roads or sewers, and provide incentives to attract businesses or help existing businesses expand, without tapping into general funds or raising taxes.

Without the TIF benefits, a declining neighborhood will not improve. Businesses do not invest into decaying areas, and the city cannot afford the needed costly improvements without raising taxes. But in a TIF district, dollars for improvements are generated by businesses—new and old—attracted by the TIF benefits. Specifically, money for infrastructure improvements and other incentives comes from the growth in property tax revenues—the tax increment.

Taxing bodies are often confused about the impact of TIF, but they are not harmed by a properly developed TIF. All taxing bodies continue to get the same tax revenue from the original real estate. Newly increased taxes from new development in the TIF are used to help the project. Eventually, when the TIF is complete, all taxing bodies share in the new revenue.

The City of Peoria has developed nine TIF districts and is considering a tenth. The market value of the TIF areas was very low, with disinvestment. The TIF helped these areas redevelop, and their value has gone up, while nearby areas without the TIF have had little improvement in value. And, of course, the redeveloped areas created jobs and vitality.

Depending on the rate of taxation, taxes paid by the new development may equal more than half of the total investment by the developer. The city can provide some or all of that incentive back to the developer to help make the project a reality.

Enterprise Zones. The City of Peoria Enterprise Zone is a valuable tool for economic development. This zone covers older areas of the Heart of Peoria and selected industrial and commercial areas of the city. Provided the owner fills out the correct paperwork, there is no sales tax on building material, and developers can receive a five-year property tax abatement for certain types of development. The following are among the incentives that are available in an enterprise zone: investment tax credit, construction material sales tax deduction, machinery and equipment sales tax exemption, utility tax exemption, jobs tax credit, tax abatement income tax deduction for financial institutions on loans for development in enterprise zone, and corporate contribution deduction.

Business Development District. A Business Development District can be established for a particular site or series of parcels. The City then implements an additional sales or hotel/motel tax to a maximum of one percent. The proceeds from this new sales tax are applied to the costs of the development of the site. Eligible costs are similar to that of TIF. The City is considering a Business Development District to help our downtown hotels and restaurants improve and compete. Special Service Area or Special Assessment. A Special Service Area or Special Assessment can be used to finance public improvements or services. These programs have become popular in recent years to incent the development of housing. The community publicly finances public infrastructure at a tax-exempt rate and applies an assessment to the property to pay for the improvements.

Low-Interest Loan Programs. The City of Peoria, Peoria County, the EDC, the State of Illinois and the federal government provide a number of low-interest loan programs to help businesses start and expand. The programs include the City Business Development Fund and Peoria County G.A.P. Loan program, which provide low-interest loans for business expansion. They also include industrial revenue bonds and various programs managed by the state and federal government.

Historically Underutilized Business (HUB) Zone. The HUB Zone is an SBA program for companies that operate in the southern parts of the city. The federal government gives contracting preference to HUB Zone-certified small businesses. Major companies such as CAT and John Deere have similar requirements. Businesses can become HUB Zone-certified if they are small businesses, owned entirely by citizens of the United States, maintain their principal office in the HUB Zone, and if 35 percent of the company’s staff resides in a HUB Zone.

Peoria Promise. Perhaps the most powerful long-term development asset is a solid and competitive school system…and motivated, educated youth. That’s a key reason Peoria Promise was created—using private investment in our kid’s continuing education—to enable them to compete for the best jobs and life opportunities. It is clearly demonstrated elsewhere, and certainly taking hold in Peoria as well, that this type of investment in continuing education is a strategic means of attracting new business and expansion of current business. While there are no public monies in the program, the ultimate beneficiary is a growing and economically energetic community. Everyone wins in this—the ultimate development incentive.

The City Council is committed to expanding our local economy to provide good jobs and an attractive quality of life for our citizens. These programs are valuable tools and enable Peoria to compete successfully with similar communities.

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