At the Conservative Party conference, Chancellor George Osborne announced the full localisation of business rates to local authorities in England. Councils will be able to retain up to 100% of any of growth in business rates revenue and have the ability to borrow against any future rates. In England, these changes signal the biggest decentralisation of economic power in living memory.
This type of local public finance model has been a common feature in North America for decades. So, what are the lessons for English authorities from these examples? In order to answer this question, we need to reflect on the similarities and differences between the emerging model in England and the established Tax Increment Financing (TIF) model in North America.
The first thing to say is that the Business Rate Retention Scheme (BRRS) in England is very different to a TIF, although they are often said to be synonymous. A TIF is a technique for exploiting future business rates and is used to finance urban development. First of all an area is designated (typically by fulfilling blight criteria and the 'but for' test), a baseline funding position is then taken any increase in revenue (in relation to all business properties) within this location above this baseline (the increment) is used to fund the cost of urban development. A typical TIF scheme usually lasts for 25-30 years in order to complete the planned developments, give certainty in relation to financial lending and to practically repay the cost of finance.
TIFs do exist in England, but they are rare. Under the Local Government Finance Act 2012, the local government secretary has powers to designate a geographical area that is not be subject to future levies and resets within the existing business rate retention system of 50% of revenue, thereby creating an area (and a stream of revenue) which is outside the current local government spending envelope. The Non-Domestic Rating (Designated Areas) Regulations 2013 (SI 2013/107) lists several dozen areas, many of which are New Development Deal Areas and Enterprise Zones, in which the local authority will retain 100% of business rates growth for the next 25 years. A further order, the Non-Domestic Rating (Designated Areas) Regulations 2014 (SI 2014/98), was made in early 2014.
The quantity of TIF schemes was restricted in England because of the belief that removing too much resource from BRRS would undermine its ability to function. TIF cannot really take place in BRRS because it would be subject to the 'levy' and 'top up' and 'tariff' arrangement and reset procedure. These ten-year reset system makes it problematic to plan income and debt flows over the traditional 25-30 year time frames seen in TIF models. Therefore any attempt at TIF under BRRS more realistically describes traditional prudential borrowing powers within the contemporary BRRS system.
Therefore although the models are technically different they are similar in purpose. Both approaches exploit and capitalise upon the value inherent in local commercial property markets to fund local (re)development and service provision. Yet, the key difference is in relation to which segments of commercial property can be exploited. In the TIF model additional income can be generated from all property through higher tax yields on both existing property and new construction. In the BRRS model it is only possible to benefit from new construction. This is primarily for two reasons: firstly, local authorities already receive empty property rates (notwithstanding the problem of empty property rate avoidance) on existing property; secondly, any relative value uplift on existing property is stripped out during the national revaluation exercise. This means any location that does not have the space to accommodate new construction, or does not have the underlying rental values to support new development, will be at a disadvantage and face an uncertain future
So, although certainly different, a local authority business rate portfolio may be regarded as one big TIF district, where the ability to construct new business premises (and therefore create new business rate income) can be likened to the aforementioned TIF increment.
Experts in North America (most notably the academic Rachel Weber in Chicago) have already outlined the risks associated with TIF, primarily completion risk, when intended developments do not take place, valuation risk, when the projected value of new development is lower than expected, taxation risk, where the rate of taxation is changed, and temporal risk, when the volatile nature of the property market may disrupt the level of taxation.
So, while models of local urban finance have been around since at least the 1950s in North America, England is only just starting down the road of its own version of civic financialisation and entrepreneurialism. It seems likely that local authorities in England will attempt to follow the North American model of urban finance, securitizing future business rate growth in order to fund improvement in public services and new urban investment.
However, in order to do so they will need to construct new business floorspace (in order to generate new tax) and the cold truth is that this is not always possible. In many locations (particularly in Northern England) there is insufficient residual profit (value less cost) to attract investment in new development and construction.
Certainly, the BRRS model contains all of the risks outlined by Rachel Weber in North America, which are closely associated with the arbitrary whim and cyclicality of local property markets, frequently turbulent global financial systems and the institutional conventions of market practice. Moreover, in England, in those locations where new development is possible, there is also an increased risk of overbuilding. This could take place when new property is constructed without any reciprocal increase in the quantum of demand in an attempt to fulfil future public sector spending growth. The consequence could be the filtering and displacement of existing business tenants from less resilient locations.
