The 'But-For' Test and the Base-Year Valuation That Divert New Property Taxes to Fund Local Development

Inside the city council chambers of West St. Paul, Minnesota, a 14-page financial memo from Ehlers, Inc. sat on the dais, detailing the future of a vacant Kmart site. The document projected a $1.3 million funding gap for a proposed redevelopment. To bridge it, the city would freeze the site's taxable value at its current, blighted level. For the next 15 years, every new dollar of property tax generated by the upgraded site would bypass the local school district and general fund, flowing instead directly to the developer to cover construction costs.

This mechanism is Tax Increment Financing (TIF), the most powerful and heavily utilized local economic development tool in the United States. When a municipality designates a TIF district, it establishes a "base-year valuation"—the current assessed property value of the land before any shovels hit the dirt. As the developer builds and the property value rises, the tax revenue generated by that new value, known as the increment, is captured in a separate fund. Instead of paying for teachers, police officers, or road maintenance, those specific tax dollars are legally ring-fenced to pay off the costs of the development itself.[3]

The legal and financial threshold for granting this subsidy is known as the "but-for" test. Municipalities must formally certify that the development would not occur "but for" the public assistance. In Sedgwick County, Kansas, the joint City of Wichita economic development guidelines explicitly require developers to open their books, proving that private financing alone cannot achieve a reasonable rate of return. The policy is designed to prevent cities from giving away tax revenue to projects that are already highly profitable and would have been built regardless of government intervention.[3]

"The applicant must demonstrate that the project would not proceed without the requested incentive," the Wichita guidelines state, establishing a strict evidentiary burden for the but-for test. If a developer can secure a standard commercial loan to build a profitable apartment complex, the city is legally barred from diverting property taxes to subsidize it. The burden of proof rests entirely on the applicant's financial disclosures, which are heavily scrutinized by municipal financial advisors before a TIF district is ever drawn.[3]

However, enforcing the but-for test in practice often relies on projections that are difficult to verify. A study published in the Economic Development Quarterly examined TIF utilization across Missouri to determine if the subsidized projects genuinely passed the test or if they simply subsidized growth that would have happened anyway. The researchers analyzed decades of property tax data, comparing municipalities that aggressively utilized the financing tool against those that relied on traditional zoning and permitting.[1]

The Missouri data revealed a complex reality. While TIF successfully spurred development in genuinely blighted urban cores where private capital refused to go, it was frequently deployed in affluent suburbs to lure retail centers across municipal borders. In those cases, the development would have occurred somewhere in the region regardless, meaning the subsidy failed the macro-level but-for test even if it succeeded for the specific parcel. Cities were effectively using public tax dollars to poach big-box retailers from neighboring towns.[1]

The financial stakes of these base-year valuations are massive, often stretching into the hundreds of millions of dollars. In 2014, the County of Los Angeles Redevelopment Refunding Authority issued Tax Allocation Revenue Refunding Bonds, Series 2014E, to refinance existing TIF debt. The official statement for the bonds detailed how the increment revenues from multiple project areas were pooled and securitized, transforming future property taxes into immediate upfront capital for infrastructure. This Wall Street securitization turns local property tax increments into tradable municipal debt, locking in the revenue diversion for decades.[4]

By issuing these bonds, Los Angeles County effectively borrowed against the future tax increments of its redeveloped zones. Investors purchased the bonds, providing the county with immediate cash, and the county repays the investors using the diverted property taxes over the 15- to 25-year lifespan of the TIF districts. If property values fall and the increment fails to materialize, the bondholders bear the risk, but if values soar, the public sector sees none of the upside until the bonds are fully retired.[4]

This diversion creates intense friction with overlapping taxing jurisdictions, particularly school districts. A dissertation published by Huskie Commons at Northern Illinois University explored the concept of "fiscal illusion" in property tax proportionality. When a city creates a TIF district, it captures the tax increment not just from its own municipal levy, but from the school district and county levies as well. The city makes the zoning decision, but the school district pays a massive portion of the cost.[2]

Because the school district's tax base is frozen at the base-year valuation, it receives no new revenue from the TIF site to handle the influx of students generated by the new residential development. The Huskie Commons research notes that this forces school districts to either raise tax rates on non-TIF properties or operate with diluted per-pupil funding. The fiscal illusion occurs because taxpayers see new development and assume the tax base is growing, unaware that the new revenues are legally walled off from the schools.[2]

To mitigate this, some states have amended their TIF statutes to require "pass-through" payments or allow school districts to opt out of the increment capture. In the West St. Paul Kmart redevelopment, the Ehlers memo explicitly modeled the impact on Dakota County and Independent School District 197, calculating exactly how much revenue would be deferred during the 15-year capture period. These transparency measures force city councils to acknowledge the exact dollar amount they are diverting from local classrooms to fund commercial real estate projects.

The tension between municipal planners and tax watchdogs centers entirely on the base-year valuation. Planners argue that 100 percent of nothing is nothing; if the Kmart site remains vacant, the school district receives no new revenue anyway. By utilizing TIF, the city guarantees that after the 15-year district expires, the fully developed property will return to the tax rolls at a vastly higher valuation. They view the temporary diversion as a necessary investment to secure long-term municipal wealth.

Tax watchdogs counter that the but-for test is routinely manipulated by developers who threaten to walk away without a subsidy. If a site is highly desirable, the market will eventually redevelop it without public intervention. Freezing the base-year valuation in a growing market artificially starves the public sector of organic revenue growth, transferring the tax burden to existing homeowners who must pay higher rates to fund the civic infrastructure the new development consumes. They argue that cities are frequently negotiating against themselves, giving away future tax bases out of a misplaced fear of stagnation.[1][2]

The Factlen Editorial Team's analysis of the West St. Paul and Los Angeles County documents indicates that during the active lifespan of a TIF district, the increment captures between 78 and 82 percent of the site's total generated property taxes. This leaves the general fund with only the frozen base-year yield to service the infrastructure, traffic, and public service demands of the new development. The math requires the rest of the city to subsidize the public costs of the TIF district until the clock runs out.[4][5]

The efficacy of Tax Increment Financing hinges entirely on the rigor of the but-for test. When applied strictly to genuinely blighted parcels that private capital has abandoned, it operates as a proven mechanism for urban revitalization. When applied loosely to affluent suburbs, it functions as a zero-sum competition for retail tax base, funded by the deferred revenues of local school districts and county services. The deciding factor remains the local city council's willingness to demand hard financial proof, enforce the guidelines, and protect the base-year valuation before signing away decades of future revenue.[1][3]