Tax increment financing (TIF) is a financing method used by local governments, often to redevelop blighted or disinvested areas where market-rate development is seen as unprofitable without assistance. A TIF agreement incentivizes a developer to work in a designated geographic area (TIF district) by subsidizing a portion of the development costs through the sale of bonds to investors, and then gradually paying them back out of increased property taxes over the next 20 or 30 years.
Any increased property taxes above the pre-development level are set aside in a TIF fund. That fund is reserved for gradually paying back the TIF investors. Once the investors are reimbursed, local governments can use the future property taxes for anything—road maintenance, schools, etc.
In the short-term, local governments often see TIF as a positive: the area wasn’t generating much property tax revenue beforehand—now, the TIF district is redeveloped and, eventually, they can use the increased property taxes however they’d like.
In the long-term, however, TIFs can create tax revenue issues for local governments. They could’ve used the property taxes over the past 20 or 30 years for city-wide projects. Instead, they may need to raise citizens’ taxes or take on additional debt to complete needed projects.
Does the TIF perform well, creating a flourishing area with tax-paying businesses and residents where one would not have otherwise existed? Or does it perform poorly, creating a huge loss of tax revenue?
(Read more: Strong Towns Blog)