FHWA Center for Innovative Finance Support - Value Capture Strategy Primers

Introduction to Tax Increment Financing

TABLE OF CONTENTS

State legislation typically establishes:

Criteria for establishing a TIF district including:
- Underlying economic conditions
- The types of jurisdictions that can establish a TIF
- And, in some cases, a “but for” requirement related to the necessity of a public infrastructure project to catalyze private development.
A list of revenue streams that can be utilized for TIF purposes.
Rules for benchmarking the revenue stream(s) and defining the tax increment.
Permissible activities that a TIF district might pursue to catalyze private development

Typically, an implementing jurisdiction must make findings to show:

The State-established criteria exist for establishing a TIF, including the “but for” analysis if required;
A designation of revenue streams to be benchmarked and utilized according to the State law.
A proposed TIF project will catalyze development and increase revenues within the designated area sufficient to cover the TIF-designated portion of the project costs
A Redevelopment Plan consistent with State criteria and procedures to ensure that the TIF project fosters the desired development.

Spending Public Funds for Private Gain

Many States prohibit spending public funds to create private gains.
TIF enabling statutes will carve out an exception for TIF activities or distinguish TIF activities so that they do not fall into this prohibited category.
Jurisdictions seeking to establish a TIF will follow State guidance scrupulously to avoid illegal conduct.

Takings

Some TIF development plans entail the use of eminent domain to assemble properties for development.
Strict adherence to substantive and procedural due process is required.

Inappropriate Diversion of General Fund Revenues

If other taxing jurisdictions (e.g., a school district) rely on revenues from taxes or fees that have been designated for TIF, they might believe that a TIF will divert revenues that they rely upon for up to 10 to 25 years.
These jurisdictions might be motivated to sue the TIF-creating jurisdiction and often have the resources to hire legal counsel.

Strict Adherence to Requirements in State TIF Enabling Legislation:
- Local governments’ experience suggests that it is beneficial to document the investigation (process and results) about whether an area and a TIF project satisfy the statutory criteria for TIF formation.
Judicial Standard of Review:
- Courts will NOT second-guess legislative findings as long as a good-faith effort was made to investigate and evaluate legally mandated criteria.
- However, courts might invalidate findings if the findings lack evidence or are based upon spurious evidence.