Value Capture Implementation Manual

August 2019
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7 Tax Increment Financing

This chapter provides an overview of tax increment financing, an important source of potential value capture revenue for many highway projects.

Agencies may consider tax increment financing to fund transportation projects if the development would not occur without tax increment financing and the market value of the development would be higher than what would occur on the site if tax increment financing were not used.

Opportunities: Tax increment financing can raise substantial revenues for capital projects through revenue-backed bonds.

Challenges: Tax increment financing requires significant institutional capacity to manage and can face public resistance.

7.1 Overview

Definition: A tax increment financing (TIF) district is a geographic area administered by a special authority in which incremental property tax value increases from an infrastructure investment are captured to fund or finance the infrastructure investment.

Alternative terms: TIF districts are known by different names. For Texas highways they are called transportation reinvestment zones (TRZs), and in Georgia they are called tax allocation districts (TADs). 167

7.2 Sectoral Uses

Highways and Roads: TIF has not frequently been used to fund highways and roads. 168 Texas and Utah have created a form of TIF dedicated to funding transportation projects, called transportation reinvestment zones (TRZ). 169 A summary of the El Paso, TX, TRZ is provided in Section 7.8 and a detailed analysis of the Hays County/San Marcos TRZ in Texas is provided in Appendix Section VII.

Transit: TIF has frequently been used for transit, typically in combination with transit-oriented development. In at least four States - Georgia, Illinois, Oregon, and Pennsylvania - TIF has funded transit or transit-related projects. 170 Section 7.8 illustrates two transit projects funded through TIF, including Atlanta, GA's BeltLine TAD (see Appendix Section I).

Other sectors: Across the United States, TIF is widely used to finance economic development projects, including improvements to sewer systems, storm drainage, parks and streets, streetscape and landscaping, libraries, emergency services facilities, schools, and public transportation.

7.3 Implementation and Funding

Structure and Timing of Funds: A new development paid for with TIF revenues can be funded in two ways. Under a pay-as-you-go approach, the development is funded only when the TIF revenue is generated. This approach may result in slower implementation. Under a pay-as-you-use approach, the implementing agency issues bonds to fund capital costs. The latter enables agencies to immediately launch new investments. However, it requires incremental tax revenues to be relatively stable to repay the bonds. 171 New infrastructure may either fall within an existing TIF district - in which case TIF revenues collected from that district can be used to fund redevelopment - or a local government may create a district with the sole purpose of funding a project.

Sources and Uses of Funds: In most jurisdictions, TIF is only used to finance capital costs. O&M costs can then be funded through other revenue sources, such as farebox or tolls or sales tax revenues.

Management of Funds: Incremental tax monies are typically placed into a special account to fund the project or respective debt issued. 172

Ease of Implementation: Implementing a TIF district requires significant institutional capacity. This is particularly the case when an agency issues TIF-backed bonds to finance a project's capital costs. In the case of Chicago's Wilson Yard, the city of Chicago programmed over $140 million in 2017 173 in administration costs, an amount that would likely be higher for municipalities with less experience. Institutional capacity is also required to raise public support. 174

7.4 Legal Considerations

Enabling Legislation: TIF is authorized in all States except Arizona. 175 In some states, TIF for transportation projects is specifically authorized. 176

Legal Basis: In most States, two conditions must be met before a TIF district can be created: 1) the area must be "blighted" (i.e., distressed based on economic and other indicators) and 2) the public sponsor must demonstrate that the area would not develop "but for" the establishment of the district. 177 A 2015 report found that more than half of States with TIF legislation list "blight" or distressed as a requirement for district creation, although each State defines the term differently. 178 Most States also require that project plans and redevelopment plans be drafted, public hearings be held, and plans be approved by elected officials. 179 As with all value capture techniques, practitioners are advised to consult with legal counsel familiar with the case law in their State.

7.5 Market Considerations

Challenges: TIF revenues depend on property value increases, which are impacted by both redevelopments and real estate market conditions. 180 Example 11 illustrates Illinois' experience with a drop in TIF revenues during the real estate market downturn in 2007. If property values decrease, the relevant authority may struggle to repay the TIF-backed bonds. Redevelopments should also happen on schedule, as delays impact expected property tax revenues. 181

Opportunities: Some studies have found that TIF resulted in a real appreciation of property values through increased investment in the district. 182

Example 11: Downturn Causes Significant Illinois TIF Revenue Decline

The State of Illinois is one of the country's most active users of TIF, with 1,405 active TIF districts in 2016. TIF revenues rose significantly in the early- to mid-2000s, during what is referred to as a real estate bubble. Between 2000 and 2007, statewide TIF revenues rose from $5.09 to $19.44 billion. The collapse of the subprime mortgage market in 2007 resulted in a real estate market downturn that heavily impacted these revenues. TIF revenues statewide decreased from $19.74 to $11.71 billion between 2009 and 2013, a 41 percent decline. 183 The case of Illinois highlights how TIF revenues remain dependent on real estate market conditions, which should be carefully analyzed from a risk perspective. This example highlights the need to carefully manage real estate risk, which is discussed in detail in Chapter 11.

7.6 Political Considerations

Challenges: Because incremental revenues are typically separated from the normal budgeting process, these revenues may not always be subject to the same public scrutiny as the general fund. Building public support for the technique requires transparency and accountability, including carefully tracking and monitoring TIF usage and its performance, ensuring that information on expenditures and revenues is published and clearly explained. 184 Also, they need to be carefully reviewed to ensure they do not encourage the relocation of development and the movement of property taxes from one location to another. They should be used to stimulate new development, not relocation. Otherwise, there is no net gain from their use.

Opportunities: Because they do not involve additional taxes, TIF may be less controversial than special assessments.

7.7 Economic and Equity Considerations

Challenges: TIF may result in certain inequities. When investments are funded by TIF, the accompanying increases in property values may price out current increment financing district residents. Since projects are typically targeted toward economically disadvantaged neighborhoods, lower income residents may no longer be able to afford housing in the district. The second type of inequity relates to property tax increases that would have occurred without TIF and could have resulted in greater tax revenues for other agencies, such as the school district or other city functions. Because those incremental revenues are redirected toward the TIF purpose, public services such as schools and county services could be negatively impacted. 185 Chicago citizens have criticized TIF for shifting revenues away from the public school system (see Example 14). As described in Appendix Section I, the city of Atlanta overcame this challenge by negotiating an agreement with the county and public school system in which both would receive annual fixed payments resulting from the TIF revenues.

Several recent studies have shed doubt on the direct linkage between TIF and growth. A 2013 study concluded that TIF in Chicago showed no evidence of increasing economic development benefits for local residents. 186 A 2018 study examined the causal relationship between a TIF district and growth. It found that when a municipality used TIF, the overall tax base of the municipality did not grow faster than in other municipalities that did not use it. This indicates that, in many cases, TIF serves to shift revenue rather than create additional revenue.

Opportunities: TIF proponents argue that above-average growth in TIF districts shows that the technique creates economic growth.

7.8 Case Studies

TIF is a flexible tool that can be used in both dense cities and low-population rural areas for industrial, commercial, and residential developments. Example 12 highlights the use of TIF to finance a rural road connecting an agricultural facility served by a rail line to South Dakota Highway 50. Example 13 shows the issues with implementing TRZs in Texas. Example 14 highlights several reasons why public support for TIF wavered in Chicago. In the case of the Atlanta BeltLine, as discussed in Appendix Section I, an agreement was signed with local schools to enable them to benefit from property tax increases, addressing one of the sources of public opposition to TIF.

Example 12: Yankton County Napa Junction Tax Increment District 187 188

In 2015, the South Dakota Transportation Commission made a $6 million loan to Yankton County to construct a concrete, industrial-grade service road connecting South Dakota Highway 50 to Napa Junction, a freight rail line. The South Dakota loan will be repaid through a TIF district located at an industrial park adjacent to Napa Junction. The industrial park consists of a recently constructed $40 million agricultural center and a $25 million dry distillers' grain processor. Additional businesses are also expected to locate in the district.

Yankton County is required to repay the loan over 10 years at a 1-percent interest rate. The loan was structured so that early payments are small with a large balloon payment at the end of the 10-year period. The repayment proceeds will be reinvested in South Dakota highways. If the TIF proceeds from the agricultural center do not cover the required repayment, Yankton County is required to pay the State DOT any difference between the TIF proceeds and the amount owed to the State. To mitigate Yankton County's risk and ensure the road's construction, the agricultural center agreed to secure this gap.

The 2017 TIF proceeds at the agricultural center were $125,369, which was short of the required loan repayment. The agricultural center paid an additional $208,981 to Yankton County to cover the county's interest payments to the DOT. As additional businesses relocate to the Napa Junction area to take advantage of proximity to transportation and to the agricultural center, the agricultural center's funding burden beyond property taxes is expected to decline.

The road was ineligible for Federal funding and therefore could not take advantage of South Dakota's State Infrastructure Bank. The TIF arrangement was a creative solution that allowed the county to construct the road, stimulating economic development and creating jobs.

Example 13: El Paso Transportation Reinvestment Zones 189 190 191 192 193

In 2007, the Texas Legislature established transportation reinvestment zones (TRZs), a type of TIF district, to facilitate Texas DOT funding with this local revenue source. They were established in order to simplify the process of financing transportation projects through value capture. TIF districts were already permissible in Texas but were very complex to manage.

The city of El Paso became the first jurisdiction in Texas to implement a TRZ, approving the first one in late 2008. However, due to issues with the city's revenue data and corridor contiguity compliance, it was repealed in December 2010. This repeal did not affect project funding, as it was immediately replaced with a second and third TRZ, which established new boundaries and included a recalculation of revenue estimates. El Paso's 2008 Comprehensive Mobility Plan sought to expedite development and improve regional connectivity, and therefore included 15 proposed projects with a total cost of $1 billion across the roadway, highway, bus rapid transit, and toll road modes. The Plan included a wide range of potential funding options, including TRZs. TRZs were expected to pay for $56 million in capital expenditures (or 5.6 percent of the Comprehensive Mobility Plan) and to be allocated to three projects.

TRZs have some weaknesses, namely the potential for high variability in revenue based on real estate market fluctuations and potentially slow ramp-up periods for revenue collection, especially if it takes a while for property prices to rise or for a new development to materialize. Because of this, TRZs and similar measures typically are difficult to finance through traditional bond markets. Therefore, El Paso's TRZ projects were financed with State Infrastructure Bank loans, which have lower interest rates and more favorable terms than market debt. These loans did require a backstop from the city of El Paso, the need for which is described in more detail in Chapter 13. El Paso expects to fund a further $90 million in infrastructure improvements through TRZs as part of its Horizon 2040 plan. Additional information about TRZs, as well as details on the execution of a nonconventional TRZ project, can be found in Appendix Section VII.

Example 14: Tax Increment Financing Should Be Used with Caution: The Case of Chicago

In 2017, the city of Chicago had 143 active TIF districts, covering approximately 30 percent of the city. Historically, and according to Illinois law, TIF districts are intended to revitalize distressed neighborhoods. In practice, municipalities have used the technique as a general financing method to stimulate job creation, finance infrastructure, and grow property values. The tool has faced significant public resistance, however.

A 2008 report argued that Chicago's TIF revenues had been disproportionately used to create higher-income housing. It noted that between 1995 and 2008, only 27 percent of the units funded with TIF went to households earning less than $20,000 annually and only 4 percent of funds were dedicated toward affordable housing. 194 Critics also argued that TIF had diverted property tax revenues from Chicago Public Schools and that it was not subject to the same transparency requirements as the regular budget. 195 196

In May 2011, then-Mayor Rahm Emanuel announced the creation of a TIF reform panel, admitting that Chicago did not possess a comprehensive policy on TIF usage and that citizens had not been provided with adequate platforms to evaluate TIF performance. In July 2011, an open hearing was held to allow citizens to express their views on TIF reform. The TIF reform panel recommended production of an economic development plan to guide TIF designations, a capital budget subject to city council approval to allocate resources, metrics to evaluate TIF performance, monitoring systems to enhance accountability, 5-year strategic reviews for TIF projects, and enhanced oversight. 197

The final report of the TIF Reform Task Force in 2018 highlighted four areas of caution: 1) TIF districts that were poorly designed or implemented were unlikely to lead to increased private sector investment, job creation, or higher property values; 2) a financially successful TIF project was no guarantee for meeting the "but for" test, 198 as some districts may have prospered without TIF; 3) TIF districts failing the "but for" test create opportunity costs, because "schools and other units of governments sharing the same tax base with sponsoring governments will not share incremental revenues;" and 4) schools and other municipalities "that lose revenues captured by the TIF sponsor may have to respond by increasing the tax rate to compensate for a stagnant tax base. Although there may be no direct increase in tax rates, there may be an indirect tax rate increase later." 199

This example illustrates the importance of prioritizing transparency and accountability in TIF districts. Because TIF can be complicated to explain, public resistance is common. Chicago also found that, although it had made a large amount of information on TIF available to the public, it was not necessarily presented in a way that could be easily understood.

7.9 Decision-Making Tool

Implementing agencies can use the following tool to assess the appropriateness of TIF for their jurisdiction.

Table 9. Decision-Making Tool for Tax Increment Financing
Focus Area Questions for Decision Makers Possible Next Steps
  • Does the State allow tax increment financing (TIF)?
  • If not, is there a precedent of municipalities using TIF without State enabling legislation?
  • Does legislation require a condition of "blight" 200 and that a TIF meet the "but for" test? 201
  • If yes, consider procuring economic studies to ensure that the planned TIF district meets the requirements of "blight" and "but for." 202
  • Does the legislation impose implementation requirements in terms of drafting project and redevelopment plans, holding public hearings, and requiring approval by elected officials?
  • If yes, have the project implementation plans sufficiently met legal requirements and has enough time been budgeted to complete them?
Economic and Equity
  • Is the use of TIF expected to redirect property tax revenues away from schools?
  • If yes, consider creating an agreement with schools and other governments by which they would share in the upside of the increased property tax revenues by receiving fixed payments over a period.
  • Is there a risk that the TIF may disproportionately benefit higher-income housing or price out current residents?
  • If yes, consider undertaking additional economic studies in order to determine the impacts of the TIF on equity.
  • If yes, consider incorporating affordable housing into the redevelopment project.
  • Is the TIF district expected to meet the "but for" test? 03
  • If no, then growth may be likely to occur irrespective of the TIF, therefore TIF may not be the most appropriate technique.
  • In the case in which TIF revenues will back bonds, has the implementing agency assessed whether TIF revenues are sufficiently stable?
  • If no, research how TIF revenues have performed in other jurisdictions, including which types of market risks jurisdictions are currently facing.
  • Has the implementing agency undertaken a risk assessment related to future TIF revenues?
  • Is the public educated about the functioning of TIF districts?
  • If no, consider what techniques will be used to educate the public on the technique and any related projects to ensure public support and also ensure that development and economic activity would not just be relocated from another area - that it would be new development and economic activity.
  • Has TIF been used in the jurisdiction before and, if so, was there any public opposition to the technique?
  • If so, consider investing in a stakeholder study of why the public opposed any previous TIF efforts and how outreach efforts can overcome these difficulties.
  • Has the implementing agency assessed whether to utilize a pay-as-you-go approach or a pay-as-you-use approach?
  • If no, consider which steps should be taken to ensure a clear geographic scope, fee structure, fee management, and public support.
  • Has the implementing agency considered the most optimal geographic scope?
  • If no, consider undertaking options studies to ensure the geographic scope not only maximizes equity considerations and revenue yield, but also discourages development relocation.
  • Has the agency considered the fee structure, including how and when the fee will be charged?
  • If no, ensure a clear fee structure is communicated with taxpayers.
  • Has the implementing agency considered how funds will be managed and kept segregated?
  • If no, create a clear plan for how TIF revenues will be used to ensure taxpayers understand how fees will be used.
  • Has the implementing agency planned enough outreach efforts within the community?
  • If no, invest time in understanding lessons learned from other jurisdictions in terms of building public support for TIF.
  • Has the implementing agency considered the performance metrics to assess progress, including how to ensure transparency and accountability?
  • If no, consider making these a part of outreach efforts to provide the community and taxpayers with the ability to assess and monitor performance.


167 Vadali, Using the Economic Value Created by Transportation to Fund Transportation.

168 Vadali, Using the Economic Value Created by Transportation to Fund Transportation.

169 "Transportation Reinvestment Zone," Texas Department of Transportation (TxDOT),

170 Shishir Mathur and Adam Smith, A Decision-Support Framework for Using Value Capture to Fund Public Transit: Lessons from Project-Specific Analyses, Norman Y. Mineta International Institute for Surface Transportation Policy Studies, 2012.

171 Mathur and Smith, "A Decision-Support Framework."

172 Mathur and Smith, "A Decision-Support Framework."

173 City of Chicago, Tax Increment Financing (TIF) District Programming 2017-2021, October 2017,

174 Vadali, Using the Economic Value Created by Transportation to Fund Transportation.

175 Craig L. Johnson and Joyce Y. Man, Tax Increment Financing and Economic Development: Uses, Structures, and Impacts, Albany, NY: State University of New York Press, 2001.

176 "Tax Increment Financing," Federal Highway Administration,

177 Daniel N. Farwell, "A Modest Proposal: Eliminating Blight, Abolishing But-For, and Putting New Purpose in Wisconsin's Tax Increment Financing Law," Marquette Law Review, 8th ser., 89, no. 2 (2005),

178 Council of Development Finance Agencies, "Tax Increment Finance State-by-State Report: An Analysis of Trends in State Tax Increment Financing Statutes," 2015.

179 Mathur and Smith, "A Decision-Support Framework."

180 Mathur and Smith, "A Decision-Support Framework."

181 Mathur and Smith, "A Decision-Support Framework."

182 Brent C. Smith, "The Impact of Tax Increment Finance Districts on Localized Real Estate: Evidence from Chicago's Multifamily Markets," Journal of Housing Economics, vol. 15, no. 1, March 2006, pp. 21-37.

183 Illinois General Assembly, "Final Report of the Tax Increment Financing Reform Task Force," June 1, 2018,

184 David Merriman, Improving Tax Increment Financing (TIF) for Economic Development, Lincoln Institute of Land Policy, September 2018,

185 Mathur and Smith, "A Decision-Support Framework."

186 T. William Lester, "Does Chicago's Tax Increment Financing (TIF) Program Pass the 'But-For' Test? Job Creation and Economic Development Impacts Using Time-Series Data," Urban Studies, vol. 51, no. 4, March 1, 2014, pp. 655-674,

187 Bob Mercer, "State panel makes highway loan to help Yankton County rail park," Mitchell Republic, October 2, 2015.

188 Nancy Wenande, "Napa Junction Community Investment," Yankton Area Progressive Growth, October 3, 2019.

189 Partners for Mobility, El Paso MPO 2008 Comprehensive Mobility Plan, July 2008.

190 Sharada Vadali et al., "Transportation Reinvestment Zone Handbook," Texas Transportation Institute,

191 Rafael Aldrete and Sharada Vadali, Transportation Reinvestment Zones: Texas Legislative History and Implementation, Texas A&M Transportation Institute, February 2016.

192 Camino Real Regional Mobility Authority, "Annual Financial and Compliance Reports with Independent Auditor's Report, Years Ended August 31, 2017 and 2016," April 6, 2018.

193 El Paso Metropolitan Planning Organization, Amended Horizon 2040 MTP, February 2018.

194 Julie Dworkin, "Tax Increment Financing (TIF) Funding and Affordable Housing: An Analysis of Current Tax Increment Financing Resources and City of Chicago TIF-Funded Housing 1995-2008," report prepared by Chicago Coalition for the Homeless on Behalf of the Sweet Home Chicago Coalition, June 2009,

195 Ted Dabrowski and John Klingner. "Chicago Tax Increment Financing Districts Take Nearly $500 Million in Yearly Tax Revenues Away from Other Local Governments," Illinois Policy Institute, August 22, 2017,

196 Chris Lentino, Nearly a Third of Property Tax Revenue in Chicago is Diverted into 143 Tax Increment Financing Districts," Illinois Policy Institute, July 26, 2018,

197 City of Chicago, "Findings and Recommendations for Reforming the Use of Tax Increment Financing in Chicago: Creating Greater Efficiency, Transparency and Accountability," Tax Increment Financing Reform Panel, August 23, 2011, Room/Press Releases/2011/August/8.29.11TIFReport.pdf.

198 In most jurisdictions, it must be proven that the area would not develop "but for" the establishment of the tax increment financing district.

199 Illinois General Assembly, "Final Report of the Tax Increment Financing Reform Task Force."

200 A 2015 report by the Council of Development Finance Agencies found that a little over half of TIF-enabling statutes listed blight as a requirement for the establishment of a TIF district. Each State defines "blight" differently. Council of Development Finance Agencies, "Tax Increment Finance State-by-State Report: An Analysis of Trends in State TIF Statutes," 2015.

01 The "but for" test involves demonstrating that the new development funded through TIF revenues would not have happened if it had not been for the use of TIF. Some States have stricter requirements than others for establishing the "but for" causation. For an example of the "but for" test, refer to the website of the Minnesota Legislature: More information on the "but for" and "blight" tests can also be found at the following source. Nicholas Greifer, "An Elected Official's Guide to Tax Increment Financing," Government Finance Officers Administration, 2005,

202 Greifer, "An Elected Official's Guide to Tax Increment Financing."

203 Greifer, "An Elected Official's Guide to Tax Increment Financing."

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