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In economically distressed areas, infrastructure improvements might be necessary to induce development. However, because of economic distress and a lack of economic activity, revenues may not be available for making such improvements. Tax increment financing (TIF) was created for such situations. The concept is simple:
Specified tax revenues in an eligible designated area are benchmarked prior to any infrastructure improvement.
After infrastructure improvements have commenced, any revenue from this area up to the benchmarked amount continues to be deposited into that jurisdiction's general fund. However, any increase in revenue in this area above the benchmarked amount or a designated portion of such an increase (the "tax increment") is deposited into a special account.
Funds in the special account are used exclusively for infrastructure improvements to benefit the properties and businesses in that designated area (TIF district).
TIF proponents claim that such infrastructure improvements are "self-financed" because they are paid for by revenue from economic development that would not occur without these improvements. In other words, TIF is an example of "value capture," whereby a portion of the private economic gain that is created by a public infrastructure investment is returned to the public sector to pay for that public infrastructure.
This relatively simple funding and financing mechanism rests on two primary assumptions:
Without the infrastructure improvements, little or no economic development would occur in the TIF district and public revenues would remain unchanged into the future.
Infrastructure improvements are necessary for private development to occur. In other words, the new development that generates the tax increment would not occur "but for" the infrastructure improvements being paid for by the tax increment.
This document provides detailed information about the:
Types of infrastructure projects that are suited to being funded by TIFs.
Steps to establish and operate TIFs.
Risks associated with anticipated TIF revenues and how these risks can be mitigated.
Administrative, legal, and regulatory issues, including competing views about whether the two primary and essential assumptions are being satisfied.
Examples of individual TIFs that have been implemented or proposed.
