Tax Increment Financing

Tax Increment Financing (TIF) is a value capture revenue tool that uses taxes on future gains in real estate values to pay for new infrastructure improvements. TIFs are authorized by state law in nearly all 50 states and begin with the designation of a geographic area as a TIF district. Plans for specific improvements within the TIF district are developed. The TIF creates funding for public or private projects by borrowing against the future increase in these property-tax revenues. The intent is for the improvement to enhance the value of existing properties and encourage new development in the district. TIF districts are usually established for a period of 20 to 25 years, during which time all incremental real estate tax revenues above the base rate at the time the district is established flow into the TIF.

The proceeds from the TIF can be used to repay bonds issued to cover upfront project development costs. Alternatively, they can be used on a pay-as-you-go basis to fund individual projects. In some states, private developers may self-finance infrastructure improvements, with the municipality reimbursing them from the tax increment as tax proceeds are received. In many states, areas must be blighted in order to establish TIF districts. The intent is for the TIF to be used to channel funding toward improvements in distressed, underdeveloped, or underutilized areas where development might not otherwise occur.

Thousands of TIF districts have been established around the U.S. in cities of all sizes. The strategy is commonly used by local governments to promote housing, economic development, and redevelopment in established neighborhoods. Although TIF has not been used extensively to fund transportation infrastructure, some state laws specifically authorize the use of TIF for transportation purposes.

Implementing TIF financing is complicated and involves the creation of a special district and a public agency to administer it. The following steps are involved in the process:

A finding of necessity is prepared that establishes the need for the TIF and formalizes the boundaries of the district. This finding is normally a detailed study that demonstrates that the district meets the criteria contained in the state's enabling legislation.
A redevelopment agency is created by resolution or ordinance. This agency may be the governing body of the municipality, or it may be a new agency appointed by the governing body.
A development plan is prepared and approved by the agency and the city.
The base year is declared following adoption of the plan.
The redevelopment agency solicits developers and enters into development agreements to implement the improvements.

Tax Allocation Districts

In Georgia, TIF districts are referred to as tax allocation districts (TAD). As with TIF, Georgia's Redevelopment Powers Law gives cities and counties the authority to sell bonds to finance infrastructure and other redevelopment costs within a TAD. The tax increments deposited in a special fund to repay the bonds can include property taxes, personal property, and sales taxes. Generally, only property tax increments are used, and therefore local governments continue to receive new revenues from within TADs from personal property value growth, new business licenses, and other sources.