Tax Increment Financing

How Tax Increment Financing Works

Some form of TIF has been authorized in every single U.S. state except Arizona. The tax in TIF's name is the local property tax. The increment is the increase in taxable property values after a district is designated. Taxes collected from the increment are earmarked for financing development within the district.

While the rules vary from state to state, the most common TIF features are these:

• The decision to adopt TIF is made by the municipal government.
• The area must qualify as “blighted,” which is satisfied by a checklist of features such as vacancy rates and deterioration of buildings.
• Requires a finding that development would not occur “but for” public expenditures.
• The designation expires after 20 or 30 years, and the increment is returned to the regular tax rolls.
• In future years, the municipality, school district, and other overlying governments collect property taxes on assessed value frozen at the base-year amount.
• In future years, the TIF authority receives property taxes from the assessed value increment times the combined property tax rate of all overlying governments.
• TIF district revenues are used to pay for development costs.
• Often, development costs in early years via borrowing and incremental revenue are used for debt service.

TIF began in the early 1950s as way to pay for the local match required for federal urban development grants. The number of states allowing and municipalities adopting TIF grew in the 1980s and 1990s as various sources of federal and state funds for local economic development dried up. Most TIF projects involve industrial development, commercial development, or downtown redevelopment. Except for some mixed-use development [Page 733]projects, using TIF for housing development is fairly limited.

Inconclusive Evidence of TIF Effectiveness

In its idealized form, TIF is all benefit and no cost. If economic development truly would not happen but for the public improvements or subsidies, then the incremental revenues come from taxable property value that would not otherwise exist. At the other extreme, if all of the growth in property values would have occurred without the TIF designation, then all that happens is a redirection of property tax revenues from overlying governments to the municipality and from other municipal spending priorities to the economic development projects.

Suppose an area is designated a TIF district and after that property values increase. This observation alone proves nothing about the effectiveness of TIF-funded development projects. TIF proponents can assert that the increase in value would not have occurred but for the TIF-funded expenditures. But TIF skeptics can just as easily argue that the area was selected because predicted property value growth caused by other factors was allowing the municipal government to capture tax revenues that would have gone to the school district.

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