Tax Increments & Development Finance

Overview

Tax Increment Financing (TIF) is referred to in a variety of ways throughout the country, These terms include tax allocation district (TAD-Geroiga), tax increment reinvestment zone (TIRZ-Texas), community reinvestment area (CRA-Florida) and economic redevelopment and growth grant (ERGG-New Jersey). Generally, however, TIFs adhere to a similar structure and function in a similar fashion, regardless of geography. Today, 48 states and the District of Columbia employ TIF tools, with rules and regulations varying by state.

A TIF district is a mechanism for capturing the future tax benefits of real estate improvements, in order to pay for the present cost of those improvements. It can be used to channel funding toward improvements in distressed or underdeveloped areas where development would not other occur.

Tax increment finance is a popular development finance tool generally used to address blight, promote neighborhood stability and inspire district oriented development. While each state's TIF statue is different, common policy goals and objectives exist. These intentions include blight elimination, something discussed in nearly every state's statue, and infrastructure additions and improvements.

A TIF district is often used to advance economic development priorities, including:

Guiding public finance dollars towards targeted investment and development

Developing industry niches and opening new markets for services that do not exist in a given geographic area

Supporting overall development within a specific geographic area

Reusing existing infrastructure and cleaning up polluted or brownfield land

Creating or retaining jobs and supporting industrial development

A TIF district is a powerful tool that can be address many needs in a community, It is often used to encourage development, eliminate blight, address environmental issues, and facilitate adaptive reuse. TIF uses the increased property and/or sales taxes generated by a new development to finance costs related to that particular development These costs may include public infrastructure, land acquisition, relocation, demolition, utilities, debt service and planning costs. A TIF district may also be used for a variety of other improvements, including:

Sewer expansion and repair

Park improvements

Bridge construction and repair

Street lighting

Property and building acquisition

Environmental remediation

Street construction and expansion

Due Diligence and Transparency

The due diligence process is one of the most important elements in the use of TIF and should be considered throughout the decision making and financing process. Some local governments fail to conduct a thorough financial and legal analysis and find difficulties tin project completion as a result of these actions. However, with a solid process for vetting and evaluating TIF projects, the local government can minimize conflict and increase community participation in project fulfilment., Local governments should implement a transparent and thorough due diligence process. This includes closing examining the financial risk the local government will bear as well as the legal requirements of the state enabling legislation. Depending on the state statute and the structure of specific TIF financing's, there are a variety of risk that a local government might face, including:

Potential for tax revenues to fall short of projections

Project delays or failure to complete projects

Restrictions on investment of bond proceeds

Limitations on tax-exempt financing's

Restrictions on the cost categories for which TIF funds can be used

Ability of other taxing jurisdictions to claim a portion of TIF revenues to reimburse their costs

Costs incurred without offsetting tax revenues

Negative poetical fallout and consequences

Engaging quality bond counsel and financial experts throughout the process can mitigate these risks. In addition, fully understanding the TIF laws before applying the tool will help keep legal issues from developing rather into the process. While TIF can finance a variety of improvements, it does have limitations that should be understood.

The "But For" Analysis
Some states require that a "But For" test be met before a TIF deal can be approved. Such a testt shows that "But For" the proposed level of TIF assistance and given timetable for the infrastructure, growth timetable for the infrastructure, growth, development at the proposed level would not occur. This type of analysis is strongly recommended best practice for TIF programs in all states for the following reasons:

Keeps the purpose of the public investment clear

Promotes judicious use of public dollars

Maintains strong accountability to the affected taxing jurisdictions

Limitations on tax-exempt financing

Community Education and Engagement Process
In most states, the TIF process requires local governments to hold open and public discussions. In order for a local government to use TIF to its fullest potential, it is essential to educated the community. TIF is a powerful tool and the process must be conducted in an open and thoughtful fashion. There are a number of areas that the local governments should consider as part of the education and engagement process, including:

Building consensus

Identifying Stakeholders

Media

Communication and marketing

Accountability

The responsibility of implementation of TIF ultimately rests with the powers of local government. This power yields an accountability factor that cannot be ignored or set aside for the sake of priorities, headlines, or an eagerness to complete the projects. Local governments that have followed the recommended practices for due diligence and transparency will find it easier to comply with accountability requirements.

Summary

In each of these categories of qualified PAB's, bonds must meet the specific requirements of the IRC. These tests can be complex, and they require a clear understanding before bonds may be issued in order to ensure tax-exempt status. In relation to economic development efforts, the bonds outlined above represent the most concrete, readily available source of public finance. PAB use have increased exponentially over the past two decades, and today, they serve as the primary source for financing many types of projects, including infrastructure, industrial development and urban development.

Want to learn more on tax increment financing? View the Tax Increment Finance Resource Center