Tax increment financing

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Tax increment financing (TIF) is an economic development tool available to United States and many other countries. Tax increment is the difference between the property tax revenue generated without a TIF district designation and the property tax revenue generated after the TIF district designation. Local government uses the incremental tax revenue to fund the improvements in depressed, underdeveloped, or underutilized part of a jurisdiction where development might otherwise not occur. Because of the time lag between TIF expenditures and receipts, the usual practice is to use TIF district taxing authority to borrow for development expenditures in the early years and then pay off the debts with the tax increment in the later years.

CONCEPT


Goals
Example

A residential developer approached New City with a proposition to convert a factory complex near the central business district into residential lofts. Considering the blight of the site and lack of incentives of private development, New City decides to designate this area as a TIF district. The TIF program will increase the property value and the property tax around the TIF district. It will also create new jobs and generate revenue from other taxes. The program expenditures will be covered by the tax increment in the upcoming years. New City issues TIF bond to pay for the program up front.

Tradeoffs

Tradeoffs of implementing this policy may include:

  1. TIF may trigger interlocal conflict. The TIF-induced economic development may be at the expense of its neighboring area's economic growth.
  2. The legitimate interests of other overlapping jurisdictions (such as school districts, county governments, library districts, etc.) are often undervalued in the tax increment.
  3. The residents within the TIF district may suffer from the displacement activities of TIF.
  4. Municipalities need to bear the financial risk and the operational risk of the TIF project.
  5. TIF project often lacks transparency. Many municipalities do not publish the budget and the evaluation of costs and benefits of the TIF subsidies for public review.
  6. TIF project often lacks accountability. Many TIF laws do not require follow-up reporting to evaluate whether the project achieves its goal or not.
Compatibility Assessment

If answered yes, the following questions indicate superior conditions under which the policy is more likely to be appropriate:

  1. Is the proposed TIF district severely blighted, underdeveloped or underutilized?
    1. Is the built environment in the proposed TIF district aging, deteriorated, depreciated, excessively vacant or abandoned?
    2. Has the proposed TIF district been underdeveloped for a long time?
    3. Is the economic growth rate in the proposed TIF site significantly slower than other parts of the city?
  2. Does the proposed TIF district encounter market failure and need public support?
    1. Does the proposed TIF area lack of private developer interest?
    2. Does the TIF site have high-risk factors that discourage developers, such as potential environmental contamination, demolition, or historic restoration requirements?
  3. Is there no alternative strategy other than TIF?
  4. Is the TIF proposal financially feasible?
    1. Is the developer can profitably develop and finance the entire project?
    2. Will the aggregate future benefit fully cover the cost of development?
  5. Is the proposed TIF among the top priorities of the community?
Design

The following questions should be considered when determining how to implement this policy:

  1. What is the boundaries of the TIF district?
  2. What are the blighting influences that the district want to address?
  3. What are the public improvements can be made using the TIF funding?
  4. What is the effective starting date and the duration of the TIF district?
  5. What type of tax revenue can be used as tax increment: property tax (mostly accepted by municipalities), sales tax, utility tax, or income tax?
  6. What percentage of each type of tax revenue above can be utilized as incremental income?
  7. What is the estimated tax increment revenue within the boundaries of the TIF district?
  8. What is the minimum debt service coverage ratio (annual tax increment revenue divided by annual debt service) if the municipality decides to finance the program by TIF bond?

ADOPTION


PolicyGraphics
  • Has adoption of: Common. By 2009, TIF is authorized in forty-nine states and the District of Columbia, and has been implemented in virtually every kind of community - central business districts, gritty urban industrial neighborhoods, small towns, suburbs, and even farmlands on the urban fringe. [1]
Adopters
  • Notable entities who have implemented or adopted this policy include:
    • City of Chicago: Chicago operates more than 130 TIF districts with tax receipts totaling in the hundreds of millions, or about one-third of city's total property tax revenue. [2]
    • State of California: TIF was initiated in California in 1952 as a method of raising the local contribution required by a federal urban renewal program. Today, California maintains hundred of TIF districts, many to promote urban redevelopment in cities like San Diego, Oakland, and Los Angeles. [3]
    • Country of United Kingdom: UK Government confirmed its commitment to introducing tax increment financing schemes in 2010. The government has introduced TIF schemes as of 2013-14 financial year. [4]
    • Country of Canada: By 2015, major Canadian cities had already implemented community revitalization levies (CRL) - the term used for TIFs in Canada. [5]

STAKEHOLDERS


Supporters
  • Electeds - Local Legislators. Assumption: Elected officials may see it as a way to raise money for redevelopment painlessly, without having to appropriate money from general revenues or rely on funding from central or higher level government with strings attached. TIF can also raise the property tax without raising the property tax rate, which largely avoid local and legal limits on local tax increase.
  • Associations - Building and Construction and Associations - Real Estate. Assumption: Developers may support TIF subsidies, because TIF benefits can reduce the risks for development and increase their return on investment.
  • Providers - Bondholders. Assumption: Bond investors may support TIF, because TIF bond is tax-exempt and can generate tax-free returns.
  • Constituent Groups - Homeowners and Constituent Groups - Commercial Property Owners. Assumption: Property owners in the district may support TIF, because their property value will increase after the development occurs.
Opponents
  • Constituent Groups - Renters. Assumption: Renters within the district may oppose TIF, because they have to move when the project starts and may very possibly face a higher rents.
  • Constituent Groups - Local Businesses. Assumption: Local businesses that are not included in or are not close to the district may oppose TIF, because the redevelopment of TIF district may lead to interlocal business competitions.
  • Government Agencies - Departments of Taxation. Assumption: Taxation agencies collecting tax other than property tax may oppose TIF. They can barely benefit from a property-tax-focused project. Yet they may need to pay back the shortfalls if the incremental property tax revenue cannot cover the costs of capital projects in the later years.

REFERENCES


Research
Resources
Footnotes
  1. Briffault, Richard. "The most popular tool: Tax increment financing and the political economy of local government." The University of Chicago Law Review (2010): 65-95.
  2. Website of City of Chicago TIF.
  3. TIF Best Practices Reference Guide (2014).
  4. Local Government in England: Capital Finance (2014).
  5. Kyle Bakx (May 22, 2015). Risky business as Canadian cities turn to neighbourhood levies: Expert warns the levies can be "direct subsidies for the developers". CBC News. Retrieved 28 August 2015.
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