Tax increment financing

Tax increment financing is a public financing method that is used as a subsidy for redevelopment, infrastructure, and other community-improvement projects in the United States. The original intent of a TIF program is to stimulate private investment in a blighted area that has been designated to be in need of economic revitalization. Similar or related value capture strategies are used around the world.
Through the use of TIF, municipalities typically divert future property tax revenue increases from a defined area or district toward an economic development project or public improvement project in the community. TIF subsidies are not appropriated directly from a city's budget, but the city incurs loss through forgone tax revenue. The first TIF was used in California in 1952. By 2004, all U.S. states excepting Arizona had authorized the use of TIF.

Use

Tax increment financing subsidies, which are used for both publicly subsidized economic development and municipal projects, have provided the means for cities and counties to gain approval of redevelopment of blighted properties or public projects such as city halls, parks, libraries etc. The definition of blight has taken on a broad inclusion of nearly every type of land including farmland, which has given rise to much of the criticism. "
To provide the needed subsidy, the urban renewal district, or TIF district, is often drawn around additional real estate beyond the project site to provide the needed borrowing capacity for the project or projects. The borrowing capacity is established by committing all normal yearly future real estate tax increases from every parcel in the TIF district along with the anticipated new tax revenue eventually coming from the project or projects themselves. If the projects are public improvements paying no real estate taxes, all of the repayment will come from the adjacent properties within the TIF district.
Although questioned, it is often presumed that even public improvements trigger gains in taxes above what would occur in the district without the investment. In many jurisdictions yearly property tax increases are restricted and cannot exceed what would otherwise have occurred.
The completion of a public or private project can at times result in an increase in the value of surrounding real estate, which generates additional tax revenue. Sales-tax revenue may also increase, and jobs may be added, although these factors and their multipliers usually do not influence the structure of TIF.
The routine yearly increases district-wide, along with any increase in site value from the public and private investment, generate an increase in tax revenues. This is the "tax increment." Tax increment financing dedicates tax increments within a certain defined district to finance the debt that is issued to pay for the project. TIF was designed to channel funding toward improvements in distressed, underdeveloped, or underutilized parts of a jurisdiction where development might otherwise not occur. TIF creates funding for public or private projects by borrowing against the future increase in these property-tax revenues.

History

Tax increment financing was first used in California in 1952 and there are currently thousands of TIF districts operating in the US, from small and mid-sized cities to large urban areas. As of 2008, California had over four hundred TIF districts with an aggregate of over $10 billion per year in revenues, over $28 billion of long-term debt, and over $674 billion of assessed land valuation. The state of California discontinued the use of TIF financing due to lawsuits in 2011, and enacted the California Fiscal Emergency Proclamation 2010, thereby ending the diversion of property tax revenues from public funding, including the use of TIFs for the funding of the nearly 400 redevelopment agencies in the state. The RDAs appealed that decision, though they were eventually eliminated in February 2012 after the passage of the 2011 state budget.
However, in 2015, the California Community Revitalization and Investment Authority Act was made law, providing for the creation of Community Revitalization and Investment Authorities, funded by Tax-Increment Financing. The primary purposes of CRIAs are the development or preservation of affordable housing for low and moderate income households and creation or upgrading of public infrastructure in economically disadvantaged areas as defined under the provisions of the law. Additionally, Enhanced Infrastructure Financing Districts may be created and financed by TIFs in California.
With the exception of Arizona, every state and the District of Columbia has enabled legislation for tax increment financing. Some states, such as Illinois, have used TIF for decades, but others have only recently embraced TIF. The state of Maine has a program named TIF; however, this title refers to a process very different than in most states.
Since the 1970s, the following factors have led local governments to consider tax increment financing: lobbying by developers, a reduction in federal funding for redevelopment-related activities, restrictions on municipal bonds, the transfer of urban policy to local governments, State-imposed caps on municipal property tax collections, and State-imposed limits on the amounts and types of city expenditures. Considering these factors, many local governments have chosen TIF as a way to strengthen their tax bases, attract private investment, and increase economic activity.

Urban regeneration

In a 2015 literature review on best practices in urban regeneration, cities across the United States are seeking ways to reverse trends of unemployment, declining population and disinvestment in their core downtown areas, as developers continue to expand into suburban areas. Re-investment in downtown core areas include mixed-use development and new or improved transit systems. With successful revitalization comes gentrification with higher property values and taxes, and the exodus of lower income earners.

Unintended consequences

Like any economic tool, TIF comes with drawbacks. Organizations such as Municipal Officials for Redevelopment Reform use to hold regular conferences on redevelopment abuse, as well as local organizations like Chicago's 33 Ward Working Families.

As efficient market theory predicts, and now empirical evidence from economic studies suggests, cities that adopt TIF grow more slowly than those that do not. A literature review by David Merriman, a professor at the University of Illinois at Chicago found TIF "may be moving development from one part of the city to another, and changing the timing of the development, but there's not more development than would have otherwise been made."
TIF increases the property taxes of the areas next to a TIF district by reducing the . Congressman Mike Quigley simplified the math and showed if a = / , then reducing the denominator, , increases the . A property owner's is typically x , thus as a new TIF district reduces the , the and increases for property owners near the TIF district. State Representative Keneth Nordtvedt of Montana paraphrased the scheme this way, "All property taxes --- city, county, school, state --- are exempted on TIF districts’ incremental properties, and then districts put a monetarily equal fee on those properties. Though collected by county treasurer as a tax, that fee is given to TIF district development boards to spend. The adversely affected taxing jurisdictions like school districts, county government, even city government's general fund, are then quietly directed by law to make themselves whole by raising their levies on properties outside of the TIF districts so as to compensate for revenues lost from the TIF district incremental properties."
As investment in an area increases, it is not uncommon for real estate values to rise and for gentrification to occur.
Although generally sold to legislatures as a tool to redevelop blighted areas, some districts are drawn up where development would happen anyway, such as ideal development areas at the edges of cities. California has passed legislation designed to curb this abuse.
The designation of urban areas as "blighted," essential to most TIF implementation, can allow governmental condemnation of property through eminent domain laws. The famous Kelo v. City of New London United States Supreme Court case, where homes were condemned for a private development, arose over actions within a TIF district.
The TIF process arguably leads to favoritism for politically connected developers, implementing attorneys, economic development officials, and others involved in the processes. However, most Urban Renewal Authorities require public notice and have competitive bidding requirements.
In some cases, school districts within communities using TIF are experiencing larger increases in state aid than districts not in such communities. This may be creating an incentive for governments to "over-TIF," consequently taking on riskier development projects. Local governments are under no obligation to recognize when TIF designation would adversely affect a school district's financial condition, and consequently the quality of some schools can be compromised.
Normal inflationary increases in property values can be captured with districts in poorly written TIFs, representing money that would have gone into the public coffers even without the financed improvements.
Districts can be drawn excessively large thus capturing revenue from areas that would have appreciated in value regardless of TIF designation.
Approval of districts can sometimes capture one entity's future taxes without its official input, i.e. a school districts taxes will be frozen on action of a city.
Capturing the full tax increment and directing it to repay the development bonds ignores the fact that the incremental increase in property value likely requires an increase in the provision of public services, which will now have to be funded from elsewhere, often from subsidies from less economically thriving areas. The use of tax increment financing to create a large residential development means that public services from schools to public safety will need to be expanded, yet if the full tax increment is captured to repay the development bonds, other money will have to be used. For example, a study in Saint Louis Missouri found low-income students lost 91 times more than wealthier students in the suburbs due to TIF, and students with disabilities as the second hardest hit group.