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CDFA Spotlight:
Understanding Tax Increment Financing
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Tax increment financing (TIF) is a mechanism to capture the future tax benefits of real estate improvements to pay the present cost of those improvements. It can be used to channel funding, or tax increment, toward improvements in distressed or underdeveloped areas where development would not otherwise occur.
TIF uses the increased property or sales taxes that new development generates to finance costs related to the development such as public infrastructure, land acquisition, relocation, demolition, utilities, debt service and planning costs. See below for an expanded list:
- Sewer expansion and repair
- Storm drainage
- Street construction & expansion
- Water supply
- Park improvements
- Bridge construction & repair
- Curb & sidewalk work
- Traffic control
- Street lighting
- Landscaping
- Property acquisition
- Building acquisition
- Demolition & clearance work
- Parking structures
- Environmental remediation
States authorize local government units to designate tax increment financing districts. City or county development or nonprofit redevelopment entities usually administer this type of financing. A city council or a private board or commission governs the local agency.
A TIF district, or the area capturing tax increment, is drawn to direct benefits to a designated area -- typically one that is economically sluggish or physically distressed. The life of a district usually lasts 20-25 years, or enough time to pay back the bonds issued to fund the improvements.
From the 1970s until present day, a reduction in federal funding for redevelopment-related activities including spending cuts, restrictions on 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 induced local governments to adopt alternative funding strategies.
Tax increment financing has, in essence, provided local governments with a funding mechanism that does not rely on federal funds, escapes state limits on revenue and expenditures and does not apply any new tax on municipal tax payers.
Today thousands of districts operate nationwide, with many located in the Midwest and Western parts of the country. California, which invented tax increment financing in 1952, maintains hundreds of TIF districts, many to promote urban redevelopment in cities like San Diego, Oakland and Los Angeles. Chicago is another landmark municipality for tax increment financing. The city runs 131 districts with tax receipts totaling upwards of $325 million per year, or about one-third of the city's total property tax revenue.
A total of 49 states and the District of Columbia have tax increment financing legislation, with North Carolina, New Jersey, Delaware, Massachusetts and Georgia recently adopting or modifying state laws. Arizona is the only state without enabling legislation for tax increment or a similar form of special district financing.
Want to learn more about tax increment financing? Visit CDFA's Tax Increment Finance Coalition webpage.
This article is intended to provide accurate and authoritative information in regard to the subject matter covered. The author and CDFA are not herein engaged in rendering legal, accounting or other professional services, nor does it intend that the material included herein be relied upon to the exclusion of outside counsel. CDFA is not responsible for the accuracy of the information provided in this fact sheet. The information provided has been collected from a variety of sources. Those seeking to conduct complex financial deals using the tools mentioned in this document are encouraged to seek the advice of a skilled legal/consulting professional.
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