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One of the many innovations California has given the country is that it was the first to adopt tax increment financing, or TIF. TIF is an extremely popular local subsidy tool that is funded through the anticipated increase in tax revenues (the "tax increment") resulting from a development project. TIF projects sometimes issue revenue bonds against this expected revenue to finance the project, and in some cases projects are financed on a pay-as-you-go basis as the anticipated revenue materialize over the life of a project.

On February 1, however, TIF came to an end in California, 60 years after its introduction there, as legislation abolishing the redevelopment agencies that used TIF came into effect. By 2010, there were approximately 425 redevelopment agencies statewide overseeing about $8 billion of tax increment per year. As far as I know, this exceeds TIF in the rest of the country put together.

How did this happen? When Governor Jerry Brown was elected in 2010, he inherited a state budget deficit of over $20 billion. He decided, as I had recommended for Missouri in 2009, that the huge amount of money going to subsidies and debt service should be returned to state and local governments instead, as a way of paring down the state's deficit. As KABC reported, over $1 billion a year would be returned to school districts, and $500 million annually to local governments.

The abolition of redevelopment agencies was passed primarily with Democratic votes (Contra Costa Times 3/16/11, via Nexis subscription service), but it had the support of Republican assemblyman Chris Norby of Fullerton, who had been an early critic of the agencies in the 1990s (the 2006 version of his publication, "Redevelopment:  The Unknown Government" is here).

While other states have been spurred by the budget crisis to cut some of their subsidies to business, California has gone the farthest by eliminating tax increment financing. I have argued before that subsidy cuts could offset a large part of state and local budget deficits, and it's heartening to see it happen in the birthplace of TIF. Let's hope we see more of this before the year is out.

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Originally posted to Kenneth Thomas on Sun Feb 05, 2012 at 11:54 PM PST.

Also republished by Good News.

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