This is the Cato Daily Podcast for Tuesday, October 30th, 2007.

I'm Caleb Brown.

When a blighted area needs renewal, governments often use tax increment financing to spur developments, they say would never appear otherwise.

But what incentives are created, both for developers and the government itself, when government

is given greater control over the course of local development.

Cato Institute Senior Fellow Randall O'Toole is author of the new Cato book The Best Laid Plans.

He says tax increment financing leads to several abuses, not the least of which is a more

widespread use of eminent domain. Well California invented tax increment

financing in about 1953. And the idea was that in the 50s, in the late 40s and 50s,

inner cities that had been densely populated were being abandoned by large numbers of people who are moving to

low density suburbs. And the question was what to do with the slums in those inner

cities. They were often buildings that were fire traps.

They were poorly maintained and the owners didn't have the money to maintain them because

their renters were all leaving.

And so the state came up with the idea of dedicating the property taxes that would be paid on any improvements in those areas to subsidies to kick start the improvements, to kick-start the rehabilitation of these areas.

So it was urban renewal, it was a way of paying for urban renewal with state funds. The way tax increment financing works. of developments in an area continue to go to schools and fire and police and the things that they normally go for.

But all new property taxes from the incremental value when people make improvements or people build new buildings or when the value of

buildings goes up because other people have built new buildings that incremental

tax goes into the subsidy and generally what the cities do is they sell bonds based on their

estimated flow of those incremental taxes and then pay back the bonds with those

taxes. It sounded good at first, but what quickly happened was that the cities

realized this is a way for them to effectively steal money from schools and

...