Are Tax Increment Financing (TIFs) Good or Bad?

Tax Increment Financing (TIF) is a public funding mechanism employed by local governments to support economic development and redevelopment. This tool stimulates private investment within designated geographic areas, particularly those considered underdeveloped or in need of revitalization. By leveraging future increases in tax revenues, TIFs finance projects that might otherwise not be financially viable without public sector involvement.

Understanding Tax Increment Financing

Tax Increment Financing operates by designating a specific geographic area as a TIF district. A “base value” is determined at the district’s establishment, representing the current assessed property value. Property taxes from this base value continue to be distributed to existing taxing bodies (e.g., school districts, municipalities, counties) as before.

As development occurs within the TIF district, property values are expected to increase. The difference between the new, higher assessed property value and the original base value is the “incremental value.” The tax revenue from this incremental value, the “tax increment,” is then captured and diverted into a special fund for TIF district projects. This increment typically comes from property taxes, though some states allow the capture of sales taxes or other local revenues.

Funds collected in the TIF account are used for public improvements. These often include:
Infrastructure upgrades like roads, water and sewer lines, sidewalks, and public utilities.
Land acquisition.
Site preparation.
Construction of public facilities.
To finance these projects, municipalities may issue TIF bonds, repaid using future tax increment. Alternatively, funds can be disbursed on a “pay-as-you-go” basis, where incremental revenues directly reimburse developers or cover project costs as they accrue.

Perspectives Supporting TIF Implementation

Proponents advocate for TIFs to catalyze development in stagnant areas, attracting private capital to economically challenged or blighted locations and fostering growth that might not otherwise occur. This stimulation of development can lead to increased property values within the district, ultimately expanding the overall tax base once the TIF period concludes.

TIFs fund public infrastructure and improvements without new general taxes. By using incremental tax revenues generated within the development area, the mechanism is self-sustaining. This approach allows local governments to undertake significant projects that might otherwise strain general municipal budgets.

TIF implementation is often associated with job creation and increased economic activity. New businesses and facilities within a revitalized TIF district generate employment, contributing to the local economy. Supporters emphasize that TIFs can promote partnerships between local governments and private developers, leading to a higher quality of projects and long-term community benefits.

Common Concerns Regarding TIFs

Despite intended benefits, TIFs draw criticisms. A prominent concern is the “but for” argument, which questions whether the development funded by a TIF would have occurred anyway, even without the public subsidy. Critics suggest TIFs may divert funds to naturally growing areas, rather than exclusively targeting truly blighted or underdeveloped zones, leading to inefficient public resource allocation.

Another issue is the diversion of tax revenues from other public services and taxing bodies. While base property tax revenue flows to these entities, incremental growth is redirected to the TIF district, potentially impacting budgets of entities like school districts, fire departments, and libraries. Some argue this diversion can create a revenue shortfall for these services, necessitating adjustments or higher tax rates in areas outside the TIF district to compensate.

Concerns also exist regarding transparency and accountability. The complexity of TIF agreements and fund allocation can make it difficult to track how tax dollars are spent. TIFs may also foster sprawl by incentivizing new development on undeveloped land rather than infill. The impact on existing businesses outside the TIF district, which may face increased competition from subsidized developments, is also a consideration.

Creating and Overseeing TIF Districts

Establishing a TIF district typically involves a structured process initiated by local government entities (e.g., city council, county board). This process usually begins with identifying an area for redevelopment and preparing a detailed plan outlining project goals, proposed improvements, and estimated costs. A “finding of necessity” study is often conducted to demonstrate the area meets specific criteria (e.g., blight, economic hardship) as defined by state law.

Public hearings are an integral part of the TIF approval process, allowing affected taxing bodies, property owners, and residents to review the proposed plan and provide input. Notifications are typically sent to all affected taxing jurisdictions, often requiring a minimum notice period (e.g., 30 to 90 days) before the public hearing or final approval. After public input, the local governing body formally designates the TIF district through an ordinance or resolution, defining its boundaries and establishing the base property value.

Oversight of TIF districts often involves the establishment of TIF commissions or redevelopment agencies. These bodies manage TIF funds, oversee project implementation, and ensure compliance with the redevelopment plan. Transparency is promoted through reporting requirements, which detail how increment revenues are used and the progress of projects within the district. Most TIF districts include “sunset clauses,” defining a specific end date (typically 20 to 30 years), after which the district terminates and full property tax revenues, including the increment, are redistributed to all taxing bodies.