Tax Increment Financing, or TIF, is a method of public financing that is used for redevelopment, infrastructure, and other community-improvement projects in many countries, including the United States, for more than 50 years. Similar or related value capture strategies are also used around the world.
TIF is a method to use future gains in taxes to finance current improvements, which are projected to create the conditions for said gains. The completion of a public project often results in an increase in the value of surrounding real estate, which generates additional tax revenue. Sales-tax revenue may also increase, and jobs may be added, although these factors and their multipliers usually do not influence the structure of TIF.
When an increase in site value and private investment generates an increase in tax revenues, it is the "tax increment." Tax Increment Financing dedicates tax increments within a certain defined district to finance the debt that is issued to pay for the project. TIF is often designed to channel funding toward improvements in distressed, underdeveloped, or underutilized parts of a jurisdiction where development might otherwise not occur. TIF creates funding for public projects by borrowing against the future increase in these property-tax revenues. [1]
Currently, thousands of TIF districts operate nationwide in the US, from small and mid-sized cities, to the State of California, which introduced tax-increment financing in the United States in 1952. California maintains over four hundred TIF districts with an aggregate of over $10 billion per year in revenues, over $28 billion of long-term debt, and over $674 billion of assessed land valuation (2008 figures).[2]
Every state including the District of Columbia, except Arizona and Wyoming, have enabled legislation for tax increment financing. While some states, such as California and Illinois, have used TIF for decades, many others have only recently passed or amended state laws that allow them to use this tool.[3]
Since the 1970s, a reduction in federal funding for redevelopment-related activities including spending increases, restrictions on municipal bonds which are tax-exempt bonds, and an administrative transference of urban policy to local, lower-level governments, has led many cities to consider tax increment financing. State-imposed caps on municipal property tax collections and limits on the amounts and types of city expenditures have also led many local governments to consider this funding strategy as a way to strengthen tax bases, to attract private investment, and to increase economic activity.
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TIF districts are not without criticism. Although tax increment financing is one mechanism for local governments that does not directly rely on federal funds, some question whether TIF districts actually serve their resident populations. As investment in an area increases, it is not uncommon for real estate values to rise and for gentrification to occur. An organization called Municipal Officials for Redevelopment Reform (MORR) holds regular conferences on redevelopment abuse.[4]
Here are further claims made by TIF opponents:
The city of Chicago, in Cook County, Illinois, has a significant number of TIF districts and has become a prime location for examining the benefits and disadvantages of TIF districts. The city runs 131 districts with tax receipts totaling upwards of $500 million for 2006.[8] Lori Healey, appointed commissioner of the city's Planning and Development department in 2005 was instrumental in the process of approving TIF districts as first deputy commissioner.
The Chicago Reader, a Chicago alternative newspaper published weekly, has published articles regarding tax increment financing districts in and around Chicago. Written by staff writer Ben Joravsky, the articles are critical of tax increment financing districts as implemented in Chicago.[9]
Cook County Clerk David Orr, in order to bring transparency to Chicago and Cook County tax increment financing districts, began to feature information regarding Chicago area districts on his office's website.[10] The information featured includes City of Chicago TIF revenue by year, maps of Chicago and Cook County suburban municipalities' TIF districts.
The Neighborhood Capital Budget Group of Chicago, Illinois, a non-profit organization, advocated for area resident participation in capital programs. The group also researched and analyzed the expansion of Chicago's TIF districts. Though the organization closed on February 1, 2007, their research will be available on their website for six months.[11]
Currently, the largest TIF project in America is located in Albuquerque, New Mexico: the $500 million Mesa del Sol development. Mesa del Sol is controversial in that the proposed development would be built upon a "green field" that presently generates little tax revenue and any increase in tax revenue would be diverted into a tax increment financing fund. This "increment" thus would leave governmental bodies without funding from the developed area that is necessary for the governmental bodies' operation.
In 2009, SunCal Companies, an Irvine, California based developer, introduced a ballot initiative that embodied a redevelopment plan for the former Naval Air Station Alameda and a financial plan based in part on roughly $200 million worth of tax increment financing to pay for public amenities. SunCal structured the initiative so that the provision of public amenities was contingent on receiving tax increment financing, and on the creation of a community facilities (Mello-Roos) district, which would levy a special (extra) tax on property owners within the development.[12] Since Alameda City Council did not extend the Exclusive Negotiation Agreement with Suncal, this project will not move forward. In California, Community Redevelopment Law governs the use of tax increment financing by public agencies.[13]
Cities use TIF to finance public infrastructure, land acquisition, demolition, utilities and planning costs, and other improvements including sewer expansion and repair, curb and sidewalk work, storm drainage, traffic control, street construction and expansion, street lighting, water supply, landscaping, park improvements, environmental remediation, bridge construction and repair, and parking structures.
State enabling legislation gives local governments the authority to designate tax increment financing districts. The district usually lasts 20 years, or enough time to pay back the bonds issued to fund the improvements. While arrangements vary, it is common to have a city government assuming the administrative role, making decisions about how and where the tool is applied.[14]
Most jurisdictions only allow bonds to be floated based upon a portion (usually capped at 50%) of the assumed increase in tax revenues. For example, if a $5,000,000 annual tax increment is expected in a development, which would cover the financing costs of a $50,000,000 bond, only a $25,000,000 bond would be typically allowed. If the project is moderately successful, this would mean that a good portion of the expected annual tax revenues (in this case over $2,000,000) would be dedicated to other public purposes other than paying off the bond.