Mr. Smith is not Pyramid

A dialog on Tax Increment Financing.

June 13, 2006

Mayor: Hello Mr. Smith. Welcome to Syracuse. We hope you will decide to move here permanently. We are willing to make it worth your while.

Smith: Thank you very much. What do you have in mind?

Mayor: Well, our development specialists have calculated that if you move here, you will spend about $60,000/year locally and generate close to $5,000/year in sales taxes. We like to attract people with high income. So here's what we're willing to offer you:

  • We will exempt you from property taxes on the house you buy for a period of 30 years.
  • We will arrange for you to get a special below market mortgage by issuing low interest tax exempt municipal bonds to finance your house purchase.
  • We will earmark the projected $5,000/year in sales taxes you will generate to pay toward your house maintenance expenses or mortgage.
It's what we call a PILOT.

We will also declare the property you buy an "Empire Zone" so that the state will pay your property tax for the next 12 years. And since we agreed to exempt you from property taxes, we are willing to pass the state payments directly on to you. This will give you an additional $5,000/year to pay your mortgage.

As you can see, Mr. Smith, with these incentives, we are essentially offering you a free house and no property taxes just to have you settle here in our beautiful city.

Smith: That is truly a very generous offer! Forgive me if I blush.

Mayor: That's quite alright. We hoped you would find our offer overwhelming.

Smith: I know most people would just sign on the dotted line before you changed your mind. But I have to ask, what does the city get out of this?

Mayor: Well, you see, Mr. Smith, numerous studies show that people like you generate a lot of property and sales taxes, and that helps the city stay out of debt, spend more money on infrastructure, parks, and schools, which makes more people want to move here, which generates more taxes, and so on.

Smith: I see. But in this case you're giving up all the tax revenue you expect me to generate in order to give me a free house with no property taxes as an enticement to move here.

Mayor: Oh, that's alright. You see, it doesn't cost the city anything out of pocket. We're only using tax revenue that arises from you moving here. The experts call this Tax Increment Financing, TIF for short. It's like free money.

Smith: But with one more property to police, one more sewer line to maintain, my car's wear and tear on the roads, the schooling for my two children, surely the city will incur additional expenses.

Mayor: Oh, those things are barely measurable. For example: an extra house on the street won't require an additional police patrol; your two children can fit into existing classes without the need for additional teachers or classrooms; and your car's wear on the roads or one more sewer connection are negligible costs.

Smith: But what if you made this offer to everyone moving here. Pretty soon you would have to hire more police, build more schools, and hire more road maintenance crews. I recommend you review the difference between the marginal (incremental) versus the average cost of a new resident to the city. In the short-run your marginal cost accounting may be approximately correct. But in the long-run, as new people move in and existing tax-paying residents move away, your property tax and sales tax revenue will slowly dry up. But if you use average cost accounting, where the cost of an additional household is obtained by dividing city expenses by the number of households, you'll see that the cost will be close to the combined property and sales tax exemptions you generously offered me.

Mayor: Hmm... You bring up an interesting point, Mr. Smith. You've caused me to have some doubts about this incentive program. I should talk this over with my staff. I'll call you back next week.

...One week later...

Mayor: Hello Mr. Smith. I discussed with my staff the points you brought up last week. After much research and analysis, we concluded that it is mathematically undeniable that if we pursue this type of incentive program, the city's tax revenue will shrink, not grow. I regret to inform you that the incentive program I offered you is no longer available. But we still sure would like you to move here, and we'll be glad to assist you however we can by providing information or helping you make contacts with local businesses, employers, bankers, etc., as you may need.

Smith: Darn. I knew I should've kept my mouth shut.

Carlo Moneti