Want to know how a Tax Increment Finance District works? Check out my November 2007 explanation, back when Madison created its first TIF district for Randy Schaefer's housing project.

Madison and Lake County are on their way to establishing a second tax increment financing (TIF) district. At their September 5 meeting, the Madison City Commission approved Resolution 2013-26, consenting to Lake County's creation of Tax Increment District Number Two "within the corporate limits of the City."

Funny thing was, neither that resolution nor that night's agenda packet nor any other online document I could find told us where that TIF district would be, or who was asking for it, or what they were going to do with it. Also funny was that the Lake County Commission hadn't taken any formal action on any proposal to create a TIF district.

Tax Increment District 2 proposal draft, cover, showing location of proposed TIF district, Lloyd COmpanies, August 2013

Tax Increment District 2 proposal draft, cover, showing location of proposed TIF district in southwest Madison. Lloyd Companies, August 2013. Click to enlarge!

A little digging revealed that the proposal for TIF district #2 comes from Lloyd Companies in Sioux Falls. Lloyd prefers that their proposal not circulate until they finalize it. But the draft I have says that Lloyd (or, per the plan, a developer LLC that will be formed once Lake County O.K.'s the TIF) wants to build two 14-unit multi-family townhome-style apartment buildings on 1.7 empty acres at the corner of South Union Avenue and Eighth Street Southwest, between Falcon Plastics and the Union Square trailer park. They're ready to start this fall, if you and I and the rest of Lake County's taxpayers will just cover $419,450 of their projected two million-plus in start-up/construction costs.

Oooo. Let's see: if you're building a house, how would like the county to take 20% of the cost off your shoulders?

Yeah. I thought so.

Don't hold your breath. You, fellow home-builder, won't get that deal. State law says that tax increment financing may not be used "for the construction of residential structures." TIFs are to take out blight and promote economic development "through the promotion and advancement of industrial, commercial, manufacturing, agricultural, or natural resources." State law does include some housing projects in its definition of legitimate economic development projects that tax dollars may fund, but only housing for the elderly and the handicapped.

Lloyd reads state law, too. They won't use our money to build the apartments themselves. They'll use our money to clear and grade the lot, put in sewer and sidewalks and pavement, pay their architect, and other items authorized by tax increment finance law. To fit housing into the TIF scheme, Lloyd says expanding Madison's tight housing market is the linchpin to getting local bunnies to fart economic development rainbows:

At the present time, the number one concern in Madison, South Dakota is the lack of residential rental property. A Lake Area Improvement Corporation (LAIC) housing study was completed (2007) which demonstrated that there was need for housing development in many categories. To-date significant rental housing has not taken place to alleviate the need. In 2013 the Madison Chamber of Commerce and the Lake Area Improvement Corporation Housing Committee again determined that Madison was critically short of apartments for workforce housing.

As a result of this shortage, business which would like to expand their work force are having to put such plans on hold because there are not available living quarters for new employees. Dakota State University indicates that potential students have difficulty finding available rental property within the City of Madison, which could affect enrollment. Dakota State University also has concerns related to housing for graduates and incoming university personnel to reside within.

The development of this project will help alleviate the housing shortage, helping local businesses to expand, which will provide additional jobs and business opportunities in the commercial district of the City of Madison and Lake County [Lloyd Companies, "Tax Incremental District Number 2, Lake County, SD Project Plan," draft, August 2013].

We build apartments, workers and students can move here, and then businesses can expand—that sequence shows this TIF proposal is at least one step and maybe two removed from the direct economic development activities authorized by SDCL Chapter 9-54.

But if the legality of another residential TIF district in Madison smells a little fishy, the economics stink a lot. Lloyd cites information establishing six years of at least a perception of tight housing in Madison. All summer, I heard stories about Madison houses going on the market and selling in days. A friend said a California family bought a house for their daughter just for her to live in while studying at DSU.

If there's all this demand and so little supply, why isn't the market solving? What's stopping tool-belted entrepreneurs from putting up sticks and making easy money? Madison's high property taxes? Madison's high utility hookup and service charges? Madison's collusively low wages that that keep new workers from qualifying for mortgages?

Something is holding the market back in Madison. Do we really need government intervention via TIF to solve it?

I shouldn't have a beef with the tax increment financing concept itself. The developers and owners still pay property taxes. Their taxes still pay for public improvements, not private property that they can up and take with them or sell for profit, but streets, curbs, sidewalks, sewer lines, and other infrastructure that the community owns and benefits from. And there is merit to the notion that new housing is a useful component to a comprehensive economic development strategy.

But when we look at the big picture, TIF is a free ride. Go east on Eighth Street two blocks. You find apartment buildings there. I don't know who built them or when, but the developer of those buildings didn't get a TIF district to help make those apartments happen. That developer managed to cover his own construction bills and still pay regular taxes to support the city, school district, and county. TIF removes half of that burden from new developers, giving them an unfair advantage as they enter a tight Madison housing marketplace that ought to be drawing hordes of builders and buildings without taxpayer help.

The Lake County Planning Board apparently isn't too worried about exploring the mechanics of Madison's market failure. The board yesterday recommended the TIF 2 plan for approval. The Lake County Commission will take up the matter on Thursday, September 19, at 10 a.m.

p.s.: Lloyd is requesting this TIF through the county rather than through the city that completely encompasses the proposed district because, with one TIF already going, if the city financed this project, it wouldn't have money left to accept any more TIF requests. (Hmmm... is another ask in the chute for the city commission?) The county has a TIF for Dakota Ethanol on its books, but it still has more fiscal leeway to undertake this TIF #2.