Tax increment financing
Encyclopedia
Tax Increment Financing, or TIF, is a public financing method which has been used as a subsidy
Subsidy
A subsidy is an assistance paid to a business or economic sector. Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry or an increase in the prices of its products or simply to encourage it to hire more labor A subsidy (also...

 for redevelopment
Redevelopment
Redevelopment is any new construction on a site that has pre-existing uses.-Description:Variations on redevelopment include:* Urban infill on vacant parcels that have no existing activity but were previously developed, especially on Brownfield land, such as the redevelopment of an industrial site...

 and community improvement projects in many countries including the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...

 for more than 50 years. Similar or related approaches are used elsewhere in the world, such as value capture
Value capture
Value capture refers to a type of public financing where increases in private land values generated by public investments are all or in part “captured” or recouped by the public sector...

.

Theory

TIF is a method to use future gains in taxes to finance current improvements (which theoretically will create the conditions for those future gains). When a development or public project is carried out, there is often an increase in the value of surrounding real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...

, and perhaps new investment (new or rehabilitated buildings, for example).

This increased site value and investment sometimes generates increased tax revenues. The increased tax revenues are the "tax increment." Tax Increment Financing dedicates tax increments within a certain defined district to finance debt issued to pay for the project. TIF is designed to channel funding toward improvements in distressed or underdeveloped areas where development might not otherwise occur. TIF creates funding for "public" projects that may otherwise be unaffordable to localities, by borrowing against future property tax revenues.

Currently, thousands of TIF districts operate nationwide in the US, from small and mid-sized cities, to the State of California, which invented tax increment financing in 1952. California maintains 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 (2008 figures).

Every state including the District of Columbia, except Arizona
Arizona
Arizona ; is a state located in the southwestern region of the United States. It is also part of the western United States and the mountain west. The capital and largest city is Phoenix...

 and Wyoming, have enabled legislation for tax increment financing. While some states, such as California
California
California is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...

 and Illinois
Illinois
Illinois is the fifth-most populous state of the United States of America, and is often noted for being a microcosm of the entire country. With Chicago in the northeast, small industrial cities and great agricultural productivity in central and northern Illinois, and natural resources like coal,...

, have used TIF for decades, many others have only recently passed or amended state laws that allow them to use this tool.

Since the 1970s, a reduction in federal funding for redevelopment-related activities including spending increases, restrictions on municipal bonds which are tax-exempt bonds
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...

 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
Property tax
A property tax is an ad valorem levy on the value of property that the owner is required to pay. The tax is levied by the governing authority of the jurisdiction in which the property is located; it may be paid to a national government, a federated state or a municipality...

 collections and limits on the amounts and types of city expenditures have also caused local governments to adopt funding strategies like this as a kind of loophole through the restrictions.

Criticism

TIF districts are not without criticism. Although tax increment financing is one mechanism for local governments that does not directly rely on federal funds, some question whether TIF districts actually serve their resident populations. As investment in an area increases, it is not uncommon for real estate values to rise and for gentrification
Gentrification
Gentrification and urban gentrification refer to the changes that result when wealthier people acquire or rent property in low income and working class communities. Urban gentrification is associated with movement. Consequent to gentrification, the average income increases and average family size...

 to occur. An organization called Municipal Officials for Redevelopment Reform (MORR) holds regular conferences on redevelopment abuse.

Here are further claims made by TIF opponents:
  • Although generally sold to legislatures as a tool to redevelop blighted areas, some districts are drawn up where development would happen anyway such as prime areas at the edges of cities. California
    California
    California is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...

     has had to pass legislation designed to curb this abuse.

  • The designation as blighted can allow governmental condemnation of property through eminent domain. The famous Kelo v. City of New London
    Kelo v. City of New London
    Kelo v. City of New London, 545 U.S. 469 was a case decided by the Supreme Court of the United States involving the use of eminent domain to transfer land from one private owner to another to further economic development...

    Supreme Court case, where homes were condemned for a private development, was about actions within a TIF district although the TIF mechanism, itself, was not the cause.

  • Normal inflationary increases in property values can be captured with districts in badly written TIFs, representing money that would have gone to the public coffers even without the financed improvements.

  • Districts can sometimes be drawn too large and capture value that would have been increased anyway for unrelated reasons.

  • The process can lead to favoritism for politically connected developers, lawyers, economic development directors and other implementers.

  • Funding often goes toward what have been traditionally private improvements from which developers profit. When the public "invests" in these improvements it is the developers that still receive the return, although this criticism seldom includes calculations from jobs created by the development.

  • 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 subsides from less economically thriving areas). For example, 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.

Chicago

The city of Chicago
Chicago
Chicago is the largest city in the US state of Illinois. With nearly 2.7 million residents, it is the most populous city in the Midwestern United States and the third most populous in the US, after New York City and Los Angeles...

, in Cook County, Illinois
Cook County, Illinois
Cook County is a county in the U.S. state of Illinois, with its county seat in Chicago. It is the second most populous county in the United States after Los Angeles County. The county has 5,194,675 residents, which is 40.5 percent of all Illinois residents. Cook County's population is larger than...

, has a significant number of TIF districts and has become a prime location for examining the benefits and disadvantages of TIF districts. The city runs 131 districts with tax receipts totaling upwards of $500 million for 2006. Lori Healey
Lori Healey
Lori T. Healey is the former Chief of Staff for the Office of the Mayor of Chicago. Healey replaced former Chief of Staff Ron Huberman, who was named President of the Chicago Transit Authority by the CTA Board. Healey left the Mayor's office in December 2008 to become president of the Chicago 2016...

, appointed commissioner of the city's Planning and Development department in 2005 was instrumental in the process of approving TIF districts as first deputy commissioner.

The Chicago Reader, a Chicago
Chicago
Chicago is the largest city in the US state of Illinois. With nearly 2.7 million residents, it is the most populous city in the Midwestern United States and the third most populous in the US, after New York City and Los Angeles...

 alternative newspaper published weekly, has published articles regarding tax increment financing districts in and around Chicago. Written by staff writer Ben Joravsky, the articles are critical of tax increment financing districts as implemented in Chicago.

Cook County Clerk David Orr, in order to bring transparency to Chicago and Cook County tax increment financing districts, began to feature information regarding Chicago area districts on his office's website. The information featured includes City of Chicago TIF revenue by year, maps of Chicago and Cook County suburban municipalities' TIF districts.

The Neighborhood Capital Budget Group of Chicago, Illinois, a non-profit organization, advocated for area resident participation in capital programs. The group also researched and analyzed the expansion of Chicago's TIF districts. Though the organization closed on February 1, 2007, their research will be available on their website for six months.

Albuquerque

Currently, the largest TIF project in America is located in Albuquerque, New Mexico
Albuquerque, New Mexico
Albuquerque is the largest city in the state of New Mexico, United States. It is the county seat of Bernalillo County and is situated in the central part of the state, straddling the Rio Grande. The city population was 545,852 as of the 2010 Census and ranks as the 32nd-largest city in the U.S. As...

: the $500 million Mesa del Sol
Mesa del Sol
Mesa del Sol is a proposed mixed use community in Albuquerque, New Mexico.-History:Mesa del Sol was approved as part of a public-private partnership strategy with the State of New Mexico, City of Albuquerque and University of New Mexico and has been planning stages since the 1980s...

 development. Mesa del Sol is controversial in that the proposed development would be built upon a "green field" that presently generates little tax revenue and any increase in tax revenue would be diverted into a tax increment financing fund. This "increment" thus would leave governmental bodies without funding from the developed area that is necessary for the governmental bodies' operation.

Alameda, California

In 2009, SunCal Companies, an Irvine, California based developer, introduced a ballot initiative that embodied a redevelopment plan for the former Naval Air Station Alameda
Naval Air Station Alameda
Naval Air Station Alameda was a United States Navy Naval Air Station in Alameda, California, on San Francisco Bay.NAS Alameda had two runways: 07-25 and 13-31...

 and a financial plan based in part on roughly $200 million worth of tax increment financing to pay for public amenities. SunCal structured the initiative so that the provision of public amenities was contingent on receiving tax increment financing, and on the creation of a community facilities (Mello-Roos) district, which would levy a special (extra) tax on property owners within the development. Since Alameda City Council did not extend the Exclusive Negotiation Agreement with Suncal, this project will not move forward. In California, Community Redevelopment Law governs the use of tax increment financing by public agencies.

Applications and administration

Cities use TIF to finance public infrastructure
Public infrastructure
Public infrastructure is a general term often qualified specifically as:* Aviation infrastructure - air traffic control technology in aviation* Critical infrastructure - assets required to sustain human life...

, land acquisition, demolition
Demolition
Demolition is the tearing-down of buildings and other structures, the opposite of construction. Demolition contrasts with deconstruction, which involves taking a building apart while carefully preserving valuable elements for re-use....

, utilities and planning costs, and other improvements including sewer
Sanitary sewer
A sanitary sewer is a separate underground carriage system specifically for transporting sewage from houses and commercial buildings to treatment or disposal. Sanitary sewers serving industrial areas also carry industrial wastewater...

 expansion and repair, curb
Curb (road)
A curb, or kerb , is the edge where a raised pavement/sidewalk/footpath, road median, or road shoulder meets an unraised street or other roadway.-Function:...

 and sidewalk
Sidewalk
A sidewalk, or pavement, footpath, footway, and sometimes platform, is a path along the side of a road. A sidewalk may accommodate moderate changes in grade and is normally separated from the vehicular section by a curb...

 work, storm drainage, traffic control
Traffic control
Road traffic control involves directing vehicular and pedestrian traffic around a construction zone, accident or other road disruption, thus ensuring the safety of emergency response teams, construction workers and the general public....

, street construction and expansion, street lighting, water supply, landscaping
Landscaping
Landscaping refers to any activity that modifies the visible features of an area of land, including:# living elements, such as flora or fauna; or what is commonly referred to as gardening, the art and craft of growing plants with a goal of creating a beautiful environment within the landscape.#...

, park improvements, environmental remediation, bridge
Bridge
A bridge is a structure built to span physical obstacles such as a body of water, valley, or road, for the purpose of providing passage over the obstacle...

 construction and repair, and parking structures.

State enabling legislation gives local governments the authority to designate tax increment financing districts. The district usually lasts 20 years, or enough time to pay back the bonds issued to fund the improvements. While arrangements vary, it is common to have a city government assuming the administrative role, making decisions about how and where the tool is applied.

Most jurisdictions only allow bonds to be floated based upon a portion (usually capped at 50%) of the assumed increase in tax revenues. For example, if a $5,000,000 annual tax increment is expected in a development, which would cover the financing costs of a $50,000,000 bond, only a $25,000,000 bond would be typically allowed. If the project is moderately successful, this would mean that a good portion of the expected annual tax revenues (in this case over $2,000,000) would be dedicated to other public purposes other than paying off the bond.

External links

The source of this article is wikipedia, the free encyclopedia.  The text of this article is licensed under the GFDL.
 
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