Tax Increment Financing (TIF) is a financing mechanism designed to revitalize underdeveloped urban areas. The basic concept of TIF involves using future increases in property tax revenues generated by development in a designated TIF district to finance public investment within that same district. By capturing a portion of the incremental growth in property tax revenues over the baseline assessment, the public sector can recover its investment in infrastructure or other improvements without imposing a new burden on existing taxpayers. The core idea behind TIF is to encourage private investment, which will ultimately expand the property tax base and increase revenues for all taxing entities.
The origins of TIF date back to the 1950s and 1960s when it was created to help investors recoup the costs of rehabilitating properties in areas with depressed property values. To reverse the decline and make private development profitable, TIF allowed for future gains in tax revenues to be used to finance worthwhile initiatives rather than drawing on existing revenues. This approach protected cities, counties, schools, community colleges, and special taxing districts from a hit to funding for ongoing operations while encouraging the expansion of the property tax base.
The central concept of TIF is to spread the cost of potentially risky projects among all taxing districts that ultimately benefit. By allowing the city or county creating the TIF to capture all new revenue from the increased property tax base to pay those costs, it can more quickly pay off the public investment and not hinder current services. Without TIF, traditional funding of such a project would take longer. Before any jurisdiction could benefit from a city investment using TIF, the city would first recover its costs.
Despite its original intent, the use of TIF has expanded beyond its intended purpose and is often employed in ways that go against its underlying principles. Cities may use TIF to take advantage of private development that has already occurred and capture its benefits at the expense of other jurisdictions. In such cases, a TIF district may be designated around a new completed facility and used to finance street and sidewalk improvements, with the TIF subsidy not causing the investment but rather resulting from it.
Moreover, TIF districts can be turned into a cash cow to finance a series of projects that go beyond the original, legitimate purpose of the TIF. In these cases, various jurisdictions may finance a city project that should be funded only by the city’s taxpayers. With no limits on the size or contiguity of TIF districts, or a requirement that projects be economically related, a TIF district may use revenues from one school district to stimulate private development that will benefit the tax base in a different school district.
The use of TIF may also erode the capacity of other taxing districts to meet their obligations. If a project would have occurred anyway and naturally led to growth of the tax base, using TIF causes a raid on property-tax base that was unnecessary and can hinder the ability of affected jurisdictions to do their jobs. Additionally, TIF law allows cities and counties to circumvent referendum requirements since all TIF debt can be issued without voter approval, creating a lack of accountability and encouraging fiscal irresponsibility.
In conclusion, TIF is a public financing tool originally created to revitalize underdeveloped urban areas. It captures incremental increases in property tax revenue to finance public investment within a designated TIF district. While the core concept of TIF is to encourage private investment, which will ultimately expand the property tax base and increase revenues for all taxing entities, its misuse can lead to unintended consequences that undermine the fiscal capacity of other jurisdictions and encourage fiscal irresponsibility. Therefore, TIF should be used judiciously and in accordance with its original purpose.