Cities seeking to spur development in underinvested areas have a number of tools at their disposal to entice developers. These tools include zoning changes, density bonuses, improved infrastructure, tax-related incentives, and more. All carry their own benefits, risks, and drawbacks, but within the broad tax category is a particularly interesting approach called tax increment financing (TIF).
How does it operate?
TIF has been succinctly defined as “a targeted development finance tool that captures the future value of an improved property to pay for the current costs of those improvements.” It does this by:
- Creating a TIF district – a TIF district (or authority) is created composed of the property/properties to be developed as well as surrounding lots
- Freezing assessed value within the TIF district – the assessed taxable value of property within the district is locked or frozen at pre-development level. This base tax level will continue to flow to the local or state tax authority for the remainder of the district’s life (e.g. 20 years).
- Diverting additional value to the TIF – any additional taxable value that the district enjoys during the term of the TIF district is diverted to that authority.
- Paying for improvement through the TIF – that new revenue is used to fund improvements within the district, including those the district (or another authority) may have paid for at the start (outright or through a bond) to catalyze the growth.
- Benefiting the state/city budget after TIF term ends – After the TIF district concludes, the full taxable value of the property within the district can be taxed by the traditional state/local body.
What can TIF money be used for?
TIF funds are used to finance activities or pay off debt for costs related to “public infrastructure, land acquisition, demolition, utilities, planning, and more. TIF funds have also been used to help support community amenities such as parks, recreational facilities, schools, and network infrastructure.” (source) Continue reading