Tax increment financing (“TIF”) is a tool that is commonly used throughout the country to finance public infrastructure and other improvements.  But while its use may appear to be fairly limited, TIF is actually extremely versatile, and may be used by both public and private entities for many types of projects.

What Is TIF?

TIF is not a true tax exemption.  Rather, it is a diversion of the real property taxes that would otherwise be paid on increases in assessed value of real property into a special fund to be used for public infrastructure improvements and, in limited circumstances, private improvements.  TIF payments, which are called service payments, are made at the same time, and in the same manner as real property taxes.  Thus, TIF is essentially property tax neutral for property owners.

How Are TIFs Established?

TIFs are established by municipal corporations, counties and townships throughout the country.  The public entity establishing the TIF passes legislation declaring the increase in the assessed value of specific parcels of property to be a public purpose, and exempt from real property taxes (although, as noted above, TIF is not a true tax exemption).

How Are TIF Revenues Used?

In general, TIF service payments must be used to finance “public infrastructure improvements” that benefit the property that is subject to the TIF.  “Public infrastructure improvements” is defined by statute, and includes logical things such as street improvements, water and sewer improvements, traffic lights and sidewalks.  However, the definition is very broad, and also includes demolition, land acquisition and public utility-related costs, even when those activities take place on private land.  In addition, there is a specific type of TIF that may only be established by municipal corporations that are “engaged in urban redevelopment” in which the TIF service payments may be used as directed in the municipal ordinance establishing the TIF, including for private improvements. 

Who May Use TIF?

As noted above, TIFs are established by public entities, and TIFs are often established to provide a pool of financing for those public entities to use for significant infrastructure projects.  But TIF also is often an integral part of an incentives package designed to support private development.  For private projects that require road improvements, utility connectivity or other public infrastructure needs, TIF can be used as a gap-filler in conjunction with other project financing to ensure a sufficient financing structure.  In addition, in municipalities that are engaged in urban redevelopment, TIF dollars can be used to help finance private improvements in addition to public infrastructure.  Private companies can either be reimbursed for certain costs over time using TIF service payments, or the TIF service payments can be pledged for debt service on bonds or notes issued to finance the necessary improvements.

Do TIFs Harm School Districts and Other Taxing Units?

Existing (i.e., pre-development) property values and the real property taxes associated with those existing values are unaffected by TIFs, which apply only to increases in assessed value above that existing, base value.  Thus, no taxing unit truly loses money as a result of a TIF.  With respect to increases in assessed value, compensation arrangements may be negotiated with school districts in a manner such that the school district is placed in the same net revenue position as if the property were not subject to the TIF.  If structured carefully, a TIF can truly be a win-win for all parties.

Conclusion

In the economic development toolbox, TIF serves the role of the utility player that can be used effectively for projects of all types and sizes.  TIF has been used throughout the country to support projects as small as a simple building expansion, and as large as the construction of a new headquarters facility for a multi-national corporation.  In order to use TIF most effectively, however, it must be structured and used carefully.