March 25, 2011 in TIF
Tax Increment Financing (TIF) is defined as the ability to capture and use most of the increased local property tax revenues from new development within a defined geographic area for a defined period of time without approval of the other taxing jurisdictions. It is a tool that cities, counties, economic development authorities (EDAs), port authorities, and housing and redevelopment agencies (HRAs) can use to spur private development.
There are four main reasons for using TIF:
- Redevelopment of substandard or obsolete buildings, such as revitalizing a downtown area or former industrial site
- Provide affordable housing, including rental or owner occupied housing for low to moderate income persons
- Create jobs and new tax base, such as develop an industrial park or other manufacturing facilities
- Clean-up environmental issues, such as remediating contamination in brownfield areas
Here’s an example of how TIF works. After a TIF district is established, the Authority collects a portion of the new taxes generated by the development and uses them to pay for specific development costs. The taxes being paid at the time of the establishment of the district continue to be distributed to the city, county, and school district, as done prior to the establishment of the TIF district.
Now assume a blighted piece of property is paying $5,000 in property taxes in 2011. Let’s also assume a new business wants to relocate on this piece of property and projects paying total local property taxes of $50,000 after construction is complete. The community could reimburse the business the incremental taxes, or $45,000 per year, to help offset the costs of demolition and environmental remediation
Only a portion of the increase in taxes will be captured as increment and used for the project. Tax increment does not capture the base (existing) taxes, State commercial/industrial property taxes, or market value based property taxes.
It is important to note that the development will pay the same amount of taxes it would if it were not in a TIF district; TIF is not a reduction in taxes. The increase in taxes is being redirected to pay for eligible development expenses.
The maximum amount of time the increased taxes are redirected to the project varies from 9 years to 26 years, depending upon the type of district and depending upon the community’s TIF policies.
One of the most important concepts in TIF is the “but for” test. A community must believe that the project would not have gone forward but for or without the use of TIF. There are a variety of ways to demonstrate the need for TIF, including a thorough review of the project’s finances, comparable land prices, and/or extraordinary development costs.