Tax-Increment Financing

Tax Increment Financing (TIF)

Tax increment financing, or TIF, subsidizes companies by refunding or diverting a portion of their taxes to help finance development in an area or (less frequently) on a project site.

Usually, TIF helps to pay for infrastructure improvements (streets, sewers, parking lots) in the area near a new development. In some states, TIF can also be used for acquiring land (including eminent domain), paying for planning expenses (legal fees, studies, engineering, etc.), demolishing and rehabbing buildings, cleaning up contaminated areas (“brownfields”), or funding job training programs. Some states allow TIF to directly subsidize private development expenses.

How TIF works

TIF is authorized at the state level and administered by local governments. The local government designates an area it wants to target for redevelopment as a “TIF district” (sometimes also called by other names such as tax increment district, or TID).

State law defines the criteria for creating a TIF district. The area may have to meet criteria for blight such as property abandonment, building code violations, or aging housing stock. Many states have expanded their criteria to allow TIF to be used in “conservation areas” at risk of becoming blighted, or in “economic development areas” in which officials hope to encourage more development, create jobs, or increase the tax base. Most states also have a “but for” clause, requiring developers to certify that the project would not go forward “but for” the TIF.

As businesses locate in a TIF district and the area redevelops, the property values rise. Rather than simply collecting the increased taxes from TIF district properties, the city splits the property tax revenues into two streams. The first stream is set at the original amount of the property value before redevelopment, known as the “base rate.” This stream continues to go where it did before, typically to the school district or the city's general fund that pays for local services such as police and fire departments.

The second stream contains the additional tax money generated by the higher property value, or the “tax increment.” This stream does not go to the city or schools, but is kept separate and used to pay for the redevelopment. In some states and the District of Columbia, increases in sales tax revenues can be diverted as well.

The money a city invests in TIF projects is often obtained through the sale of bonds, which are then repaid over time with the annual tax increment funds. If the incremental revenue is not sufficient to pay off the bonds, the city has to make up the difference. Some cities take a more conservative “pay as you go” approach, spending TIF money only as the tax increment comes in each year. The city may spend the money on improvements itself, or may use the money to repay the developer for improvements the developer already completed.

Accountability and outcomes

Many proponents of TIF argue that improvements made under the program “pay for themselves.” That is, cities and towns assume that TIF will spur new development, increase property values, and create new tax revenue that would not have existed otherwise, which will be used to pay off the costs of the development.

This is a risky wager since it assumes that “but for” the TIF, no development would have occurred in the TIF district and property values would have remained unchanged. In reality, it is impossible to know whether a project will successfully generate the anticipated tax increases. It is also difficult to determine whether property value increases that do occur in TIF districts were exclusively the result of the TIF.

The “but for” provision in many TIF laws has already been weakened to allow TIF to be used on almost any project. In most states, TIF was originally intended for use only in areas deemed “blighted” or “distressed” where investment would not otherwise occur. Many states have since loosened their TIF criteria to allow TIF to be used to develop non-blighted and affluent neighborhoods (see Good Jobs First's report Straying from Good Intentions on the weakening of TIF and enterprise zone requirements).

Today it is not uncommon for TIF to finance development in suburbs and even rural areas. TIF increasingly funds big-box retailers and shopping centers that contribute more to sprawl than to poverty reduction. Located far from the urban core, such projects are often inaccessible to inner city residents most in need of jobs.

In the end, the “but for” provisions of state TIF laws often fall by the wayside, allowing TIF to finance development that would happen anyway. This results in a loss of revenue that could have gone to pay for schools and local services. Given that the diversion of taxes continues until the TIF district expires, which is typically 7 to 30 years, the long-term fiscal impact can be quite significant.

TIF can be improved by restricting the program's use to truly blighted areas, and by requiring projects to meet community needs such as affordable housing, job training, and the creation of quality jobs that provide family-supporting wages and benefits to local residents. TIF developers should be required to file annual, publicly-available reports showing their compliance with these obligations. Every TIF agreement should also contain a clawback clause requiring developers to pay back all or part of the subsidy if they fail to meet their job, wage, and other responsibilities.

Researching TIF subsidies

Researching TIF laws and procedures requires looking for documents at several levels of government. Look at the state level to find out if your state authorizes TIF, and what the requirements of the program are. Research at the city and/or county level is required to find out whether local governments add further requirements to TIF programs.

City and county development departments typically have information about TIF districts, including the life of the district, the improvements made, and details on how improvements were funded. Property tax records are public information, and can be obtained for particular companies within the district by contacting the city or county. Sales tax records are typically not public information. For research on TIF proposals, note that state TIF laws usually require cities and towns to hold public hearings before a TIF district or project is approved.

If you are researching the subsidies a company has received, keep in mind that TIF can benefit developments both directly and indirectly. Sometimes TIF districts are set up to lure a particular large company to the area. In such cases, the development agreement with that company or developer often spells out the locality's commitment of the benefits TIF will provide. In other cases, TIF districts may finance improvements that benefit an area generally; in rare cases, states and cities allow TIF funds to be used for improvements that are not within the TIF district at all.

The development agreement may also contain details about how TIF improvements were financed. In some cases in which improvements directly benefit a particular company, that company may put up the money for the improvements and then be repaid over time through rebates of the tax increment portion of their property and/or sales tax (so that the TIF basically functions as a tax abatement).

Resources:

For more on the weakening of TIF laws, see Straying From Good Intentions: How States Are Weakening Enterprise Zone and Tax Increment Financing Programs.