New York (both the state and city) had made little use of a particularly popular corporate subsidy program – tax increment financing, or TIF – until the massive Hudson Yards project came along (in NYC). Sold as a sure-fire fiscal boon, Hudson Yards only made it through the Great Recession due to millions in taxpayer support and now faces a drastically changed office culture.
Similar to Hudson Yards, Penn Station has been sold to the public as an economically prosperous, almost can’t-lose project, despite estimates it will receive billions of dollars in taxpayer subsidies. The true costs are difficult to estimate, as researcher Bridget Fisher has written, because the Empire State Development Corporation and developers have not released meaningful disclosure about the entire project.
Critics have said Hudson Yards boosted the fortunes of already wealthy investors while doing little to help everyday New Yorkers. The same is arguably true of Penn Station, a project being led by Vornado Realty Trust, which owns many properties in the project area.
Fisher, a New York City-based researcher with The New School’s Schwartz Center for Economic Policy Analysis (SCEPA), has been closely tracking this deal. I reached out her to ask her more about the project’s challenges – and why other communities working on true equitable development should be paying attention. She answered my questions by email.
Q: Vornado Realty Trust, a major player in the Penn Station deal as well as the biggest landowner in the neighborhood, announced it was putting the brakes on the project due to funding and a change in the real estate market, especially around the station. You and others though, were quite critical of the ways the plan had been proceeding. What were/are some of its biggest shortcomings?
A: New York State proposed using a highly risky financial tool paired with $1.2 billion in tax breaks but shared little information to show how it would work. The risk stemmed from the choice to skip traditional bond financing to fund $7 billion in renovation costs with future revenues from a commercial office deal with (mostly) Vornado. To be successful, this financing requires predicting two highly unpredictable things:
- the cost of large-scale construction, and
- potential revenues materializing decades into the future.
Anything upsetting this precarious balance – such as development delays, tax breaks, or recessions – and taxpayers can end up footing the bill. While Penn Station needs an overhaul, the state’s choice to take such risks, especially in today’s precarious office market, went unexplained.
Q: Is there an opportunity now, with Vornado’s at least temporary retreat, to re-think the plan? And if so, what could be changed?
A: Vornado’s retreat reveals the risk in relying on only large-scale private development to pay back public infrastructure debt. It is also one reason why tax increment financing is designed to be a tool of last resort. Private developers respond to market conditions, which means development can be delayed or canceled at any time. And when that development is necessary to produce revenues for the state to pay its debt costs, taxpayers are the backup when it doesn’t materialize as planned. Rather than further this precedent of reaching for the high-risk tool first, the state’s normal capital budgeting process – which is cheaper and requires less taxpayer risk – allows for infrastructure investments that benefit the state economy.
Q: TIF has been such a failure in so many places, driving investment to already affluent or up-and-coming neighborhoods, increasing sprawl by allowing open space to be designated as blight, and failing to drive investment to places that were actually disinvested. Why has NY chosen to go down this path?
A: Rhetorically, TIF projects can be called “self-financing” and promoted as paid for only by those who use it. But functionally, it shifts development and financing risk from private actors on to all taxpayers. But because TIF is less transparent, more complex, and unfolds over decades, it is often hard to track if it lives up to its rhetorical promises. These characteristics make TIF susceptible to misuse … Yet we see New York City and State, in Hudson Yards and now Penn Station, using an unregulated version of TIF backed by payments-in-lieu-of-taxes (PILOTs) that skips even the small hurdles that come with traditional TIF. As such, PILOT-based TIF projects can capture more revenues with less restrictions.
Q: Why should communities in other states be looking at this project and Hudson Yards? What can we learn from NY?
A: While New York State’s TIF law has fewer restrictions than some other states, this new TIF variant backed by PILOTs is entirely unregulated. Its use does not require basic, good-government protections, such as certification the project would not be feasible “but for” public support and limiting the project’s ability to capture only incremental property taxes (which cannot be reduced by tax breaks). The state’s Penn Station proposal also did not provide information necessary to determine if the project’s financing could be successful over its unprecedented 80-year operation. Given these projects cost billions of dollars, now is the time to set up reasonable guardrails to protect taxpayers from potential misuse.
Q: Pretend like you could design a project for that space, designed with the ideals of equitable economic development. How would you envision the process, funding and execution?
A: It’s important to walk back the notion that we can only build our infrastructure by giving public dollars to incentivizing private real estate development. It admittedly gets all the attention, but real estate investment is not the only form of economic development. Our economies – and tax receipts – also grow through public investments in education and small business, workforce development, affordable housing, and quality healthcare.
Read more:
- Hudson Yards Has $4.5 Billion In Taxpayer Money. Will We Ever See It Again?
- Hudson Yards’ Commercial Subsidies: $1.1B
- Penn Station Redevelopment: Projected Tax Breaks & PILOT Revenues
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