CityLab University: Tax Increment Financing
Date Posted: October 24, 2019
Posted In: Discussion,
From CityLab: Behind the dry-as-dust name is a powerful (and controversial) tool for financing urban redevelopment. Here’s a quick guide to understanding TIF.
Urban development professionals, neighborhood activists, and diligent readers of local newspapers have very likely come across the term “Tax Increment Financing” (TIF). Whether all of these groups understand what it means is another matter.
This mechanism for financing redevelopment is a powerful and controversial force in American urbanism. Every state except Arizona currently allows it, as does the District of Columbia, and it has become the most popular incentive tool for economic development in the United States as the federal government has decreased its urban development spending. TIF plays a role in megaprojects such as Chicago’s Lincoln Yards and Amazon’s HQ2 in Arlington, Virginia, as well as in smaller-scale neighborhood improvements, affordable housing, and transit projects.
Depending on the specific project, and whom you ask about it, TIF is an essential mechanism for cities to stimulate much-needed economic development and revitalize neighborhoods at no cost to taxpayers, or it’s an opaque developer giveaway that puts a strain on city services without providing much public benefit.
KEY POINTS
- Tax Increment Financing (TIF) creates special tax districts around targeted redevelopment areas from which future tax revenues are diverted to finance infrastructure improvements and/or development.
- At the beginning of the TIF period, tax revenues in the TIF district going to general city services are frozen at a certain rate. All additional tax revenues go toward directly funding new development or servicing debts related to new development until the end of the TIF period, which usually lasts 20 to 30 years.
- In most states, TIF can only be used in neighborhoods officially designated as “blighted” or “distressed,” and can fund developments ranging from stadiums and convention centers to affordable housing and parks.
- Critics say TIF diverts city tax revenues from schools and other essential community services to the private sector or the pet projects of city officials.
- Supporters say the new tax revenues generated by TIFs would not have taken place “but for” the investment that the TIF enabled, and that they are a valuable tool for neighborhood revitalization.
HOW IT WORKS
State legislatures authorize and set conditions for the use of TIF by local governments. Cities and counties then create TIF districts and specify the terms of operation. Most TIF periods last between 20 and 30 years and are used to service bonds taken out at the beginning of the period. The revenue for TIF usually comes from property taxes, but it can also come from sales or business taxes.