What Is Tax Increment Financing (TIF) and How It Works

Tax Increment Financing (TIF) is a public financing mechanism employed by local governments to stimulate economic development and redevelopment within designated areas. This tool allows communities to address conditions such as blight, deterioration, or underdevelopment by channeling future tax revenues towards specific projects. TIF aims to foster private investment in areas where development might not otherwise occur due to extraordinary costs or existing challenges.

Defining Tax Increment Financing

Tax Increment Financing (TIF) is a method of public finance that dedicates future increases in tax revenues from properties within a defined area to fund specific development projects within that same area. This mechanism centers on the concept of a “tax increment,” which represents the additional property tax revenue generated after a redevelopment project increases property values. Local governments establish a “base value” for properties within a designated TIF district, representing their assessed value before any new development or improvements begin.

The tax increment is calculated as the difference between property taxes collected on this initial base value and higher taxes collected once property values rise due to redevelopment; only this new, incremental tax revenue is captured and directed to a special TIF fund. For example, if a property’s assessed value increases from $100,000 to $500,000 after development, the increment is based on the $400,000 increase in value. Existing tax revenues, those derived from the base value, continue to be distributed to pre-existing taxing bodies like schools, parks, and counties, ensuring existing funding for these entities is not reduced.

Establishing a TIF District

Identifying the Area

Establishing a Tax Increment Financing district involves a series of preparatory steps undertaken by a municipality or local government. The process typically begins with identifying an area characterized by economic stagnation, physical deterioration, or underdevelopment where private investment is unlikely to occur without public assistance. This identification often requires conducting detailed feasibility studies to determine if the proposed area meets the criteria for TIF designation under applicable state law.

Base Value and Public Input

A crucial step is determining the “base assessed value” of all taxable properties within the proposed district. This value, certified by the assessor, represents the total assessed valuation of the area at the time the TIF district is formally established, serving as the benchmark against which future increases in property value will be measured. The municipality must then hold public hearings to allow for community input and address concerns from affected taxing bodies, such as school districts, which continue to receive taxes from the base value. These hearings are typically preceded by public notices published in local newspapers, outlining the proposed TIF plan and its potential impacts.

Formal Approval and Duration

Following public input, the local governing body must obtain necessary governmental approvals, often through the adoption of an ordinance or resolution, to officially designate the area as a TIF district. Formal approval establishes the district’s legal boundaries and adopts a redevelopment plan for public improvements. Some state laws require a “but-for” finding, meaning the development would not occur without the TIF assistance. The duration of a TIF district is typically set for a specific period, often ranging from 15 to 25 years, or until the project costs are repaid.

How TIF Generates Funding

Capturing the Increment

Once a Tax Increment Financing district is formally established, funds are generated as property values within the designated area increase. As redevelopment attracts new investment, the assessed value of properties rises above the initial base value. The property tax revenue from this increase in value, known as the tax increment, is captured. This incremental revenue, normally distributed among all overlapping taxing bodies, is instead diverted into a special TIF fund controlled by the municipality.

Funding Mechanisms

This captured revenue finances redevelopment projects in two primary ways: directly on a “pay-as-you-go” basis, or more commonly, by securing bonds issued to finance initial development costs. These TIF bonds, often municipal debt, provide upfront capital for large-scale projects. Principal and interest payments on these bonds are repaid over the life of the TIF district using the annually collected tax increment. Should the increment be insufficient to cover debt service, some jurisdictions may have provisions for special assessments on properties within the district to make up the shortfall, ensuring bond repayment.

Utilizing TIF Funds

The funds generated through Tax Increment Financing are specifically allocated to support eligible activities within the designated TIF district, aligning with the approved redevelopment plan. Common uses of TIF funds include:

Public infrastructure improvements (roads, sidewalks, water/sewer lines, street lighting, storm drainage).
Land acquisition for redevelopment or site assembly.
Demolition of blighted or obsolete structures.
Environmental remediation (e.g., contaminated land cleanup) and extensive site preparation.
Other public facilities and services, such as job training, relocation assistance, and professional services (architectural, engineering, legal).

While the primary focus is on public improvements, some state regulations permit the use of TIF funds to subsidize certain costs associated with private development, including land purchases or interest costs of private financing. The eligible uses are defined by the specific state enabling legislation and the local TIF redevelopment plan.