Tax Increment Financing, or TIF, is a tool for redevelopment and community improvement projects throughout the United States. With federal and state sources for redevelopment generally less available, TIF has become an often-used financing mechanism for municipalities. similar or related approches are used elsewhere in the world. See for example, Value capture.

What is tax increment financing?

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TIF captures the future tax benefits of real estate improvements in a designated area to pay the present cost of those improvements. It is designed to channel funding, or tax increment, toward improvements in distressed or underdeveloped areas where development would not otherwise occur.

Today 49 states and the District of Columbia have enabling legislation for tax increment financing. Arizona is now the only state without a tax increment financing law. 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.

• Arkansas (2000)
• Washington (2001)
• New Jersey (2002)
• Delaware (2003)
• Massachusetts (2003)
• Louisiana (2003)
• North Carolina (2005)

Why tax increment financing?

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Since the 1970s, 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 caused local governments to adopt funding strategies like this.

Tax increment financing is a mechanism for local governments that does not rely on federal funds, mitigates state limits on revenue and expenditures and does not apply any new tax on municipal taxpayers.

Thousands of districts operate nationwide. California, which invented tax increment financing in 1952, maintains hundreds of TIF districts and leads the nation in debt issued through tax increment financing.

Chicago is another landmark location for TIF. 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. TIF districts are also at work in small and mid-sized cities, such as Kenosha, Wisconsin, and Akron, Ohio.

Applications and administration

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Cities use TIF to finance public infrastructure, land acquisition, demolition, utilities and planning costs, and other improvements including:

• Sewer expansion and repair
• Curb & sidewalk work
• Storm drainage
• Traffic control
• Street construction & expansion
• Street lighting
• Water supply
• Landscaping
• Park improvements
• Environmental remediation
• Bridge construction & repair
• Parking structures

State enabling legislation gives local governments the authority to designate tax increment financing districts. The district usually lasts 20-25 years, or enough time to pay back the bonds issued to fund the improvements. While structures vary, it is common to have a city government division (or quasi-public authority) assuming the administrative role. This entity is governed by a city council or appointed commission, which makes decisions about how and where the tool is applied.

See also

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• Public finance

External links

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• More information about tax increment financing is available through the Tax Increment Finance Coalition (TIFC), a national initiative dedicated to professionals and organizations working in the tax increment finance industry.
• How TIF Works: Basic Mechanics Minnesota House of Representatives Research Department.
• Neighborhood Capital Budget Group's explanation on TIF in Chicago
• Tax Increment Financing: A Bad Bargain for Taxpayers, Daniel McGraw, Reason Magazine, Jan. 2006.
• Heartland Institue PolicyBot on TIFs