Wauwatosa is embarking on a controversial plan to use a Tax Incremental Financing District (“TID”) to give the developer of the planned Mayfair Hotel over $13 million in direct subsidies. I could write reams about all the problems of government favoring one business so heavily. But smart readers are already familiar with market distortions, why the government shouldn’t pick winners and losers, and how developers use these tools to hold cities hostage and play them one off of the other.
Instead, I want to take a deeper look and ask whether those subsidies are even constitutional. The government is allowed to play favorites (to some extent) when it decides how to spend general tax revenues, but it can’t play favorites with property taxes. Under the Wisconsin Constitution, property taxes must be “uniform,” which our Supreme Court has said means that everybody needs to pay the same tax rate on the front end.
Cities also can’t use tax rebates or refunds on the back end as a loophole around that restriction. So, for example, our Supreme Court struck down a contractual agreement between a property owner and the city of Racine, where in exchange for an easement across the taxpayer’s property, the city refunded the taxpayer’s increased property taxes for 10 years. In another case, the court struck down a statutory scheme where homeowners who made certain improvements resulting in increased taxes got those taxes refunded. In those cases and others, the court looked at substance over form and found that tax rebates effectively give some owners a lower property tax rate.
What does this have to do with Wauwatosa? They are using a TID to provide the Mayfair Hotel developer just such a rebate.
Tax Incremental Finance (TIF) law allows a city to designate a particular area for renovation, dedicating any taxes raised from increases in property value within that area to pay for improvements within the district. Typically, TIF money is used to pay for infrastructure improvements that incentivize renovation and new development, but can also be used to pay project developers directly. By law, TIDs are allowed only in areas that would not see development without such incentives.
Earlier this month, Tosa created TID 12, which encompasses the planned Mayfair Hotel. The city proposes spending $19.6 million within the TID, with $13.8 million being paid directly to the Mayfair Hotel developer and the rest consisting of infrastructure improvements and a pedestrian/bike path. According to the term sheet agreed to by both Wauwatosa and the developer (item 6), as well as the TID’s project plan (pages 28 and 33), the city plans to refund the developer 90 percent (less some administrative overhead) of the taxes it pays on the new hotel for 18 years. The hotel pays its annual property taxes and, within 45 days, the city cuts it a refund check. If the hotel is assessed below expectations, the developer will get less money every year. If it’s assessed higher, it will get more.
My organization, the Wisconsin Institute for Law & Liberty, is challenging a similar TID in Eau Claire. In that case, currently before the Wisconsin Supreme Court, Eau Claire is giving a developer a huge up-front payment, financed by future taxes levied on the developer’s new property within the TID. We argue that even an up-front payment has the same practical effect as a rebate and is therefore unconstitutional. But what Wauwatosa is doing is even more blatant. They are taking the developer’s tax payment and handing most of it straight back to the developer. The incremental taxes the developer pays are even accounted for separately and aren’t available to pay other costs in the TID.
This kind of refund blatantly violates the Wisconsin Constitution. Wauwatosa is in effect telling the developer that if it builds the hotel, its taxes will be 90 percent lower for decades than anybody else with similarly-assessed property. Not only is that a bad deal for taxpayers, it’s unconstitutional.
