National Roundup: Tax Increment Financing
Deals Increase; More States Adopt Legislation
March 1, 2006
By Alex Iams
CDFA
Tax increment financing (TIF) is an increasingly popular tool for redevelopment and community improvement projects across the country. With federal and state sources for redevelopment generally less available, TIF has become a go-to financing mechanism for municipalities.
According to a February 23rd Standard & Poor’s report first publicized in The Bond Buyer, the number of TIF deals will continue to grow nationwide. Its attractiveness to local governments and a robust real estate market have helped solidify TIF’s role in bridging public and private sector financing.
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. While some states, such as California and Illinois, have relied on TIF for decades, many others have only recently passed or amended state laws that allow them to take advantage of this tool.
Arkansas (2000), Washington (2001), New Jersey (2002), Delaware (2003), Massachusetts (2003), Louisiana (2003), and North Carolina (2005), are among states that have recently adopted TIF legislation. Arizona is now the only state without a tax increment financing law.
Why Tax Increment Financing?
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 has provided local governments with a mechanism 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
TIF can help 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 empowers local governments 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.
Getting Involved
With tax increment financing on the rise, CDFA has taken the lead nationally to support sound practices and share information related to this tool. The initiative, known as the Tax Increment Finance Coalition (TIFC), includes educational sessions throughout the year. The next TIFC event is a half-day workshop on May 31st prior to the CDFA Annual Summit in Austin, Texas.
The workshop begins by addressing questions like:
- What’s the basis for this tool and how has it evolved?
- What types of projects does tax increment financing support?
- What are the variations – e.g. general obligation bonds, revenue bonds, pay-as-you- go – and what advantages does each confer?
- How does TIF fit into commercial, residential, industrial and mixed-use financing packages?
As the workshop progresses, a panel will explain how TIF has helped finance different kinds of projects, from heavy infrastructure to housing and anchor-style districts. It will also explore emerging applications, with a focus on TIF in combination with other types of special district financing and assessments.
Finally, CDFA will unveil its new online TIF resource database, the nation’s first virtual catalog of TIF-specific research, articles, and legislative information.
Want to learn more about tax increment financing? Visit CDFA's Tax Increment Finance Coalition webpage.
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