In the Know: Tax Incremental Financing (TIF)

Finance

With the ebbs and flows of property values and tax revenues received by local governments, a hot topic of debate involves the use of TIF (Tax Incremental Financing) to fund local infrastructure and revitalization projects. Black Mountain Software offers TIF management software specifically designed to automatically calculate tax by property and easily track multiple TIFs, but nothing can completely eliminate the complexity that TIFs add to a clerk’s accounting tasks. It does help to have a clear understanding of TIF basics, however. Below is a breakdown of what TIF is, how it works, and the key controversies that surround this financing tool.

What is TIF?

TIF, or Tax Increment Financing, is a fiscal tool used by local governments to “self-finance” capital projects for economic development projects.  TIF allows communities to borrow money to pay for infrastructure improvements such as sewers, facilities, bridges, and roads.  TIF can fund an individual project, or can be a part of a larger overall finance package used to revitalize an area or attract/retain new businesses (aka, TIF districts). TIF is both a financing tool and a land development tool.

Why do communities use TIF?

TIF allows communities to borrow money for projects that are deemed to enhance the community or infrastructure, luring developers who will hopefully invest in the community further, and therefore enhance the overall economic development (and future tax revenues) of an area.

How does TIF work?

Theoretically, when a TIF district is funded, developers invest in the area, property values rise, and additional revenues from property taxes help pay down the original debt accrued to fund the TIF.  Once the debt is paid in full, property taxes flow once again to standard taxing units–schools, roads, bridges, municipalities, etc.–which sacrificed tax revenues while the TIF was being funded.

What is the key advantage to TIF financing?

TIFs have been used to redevelop and revitalize numerous otherwise depressed urban areas with little upfront cost or fiscal stress on the community. This method allows the financing of projects in low and moderate-income areas that otherwise could not fund the improved infrastructure. Successful TIF projects have spurred economic growth and have been good not only for the district, but for the surrounding community because they bring forth jobs, development, housing, and raise property values.  Once paid off, these TIF districts bring additional revenue to the county because the taxes are assessed at the new, higher, appraised property value.

What is the key disadvantage to TIF financing?

TIF districts work great during times of economic growth, however, in a slow economy with depressed commercial and industrial development, TIF districts suffer. When property values do not meet or exceed original TIF estimates, tax revenues that are received to fund the TIF district or project fall short, and the TIF debt takes longer to pay off.  Lower property values may also deter further investments in the community and districts may be required to scale back projects and further investments within the community. When this happens, some districts are able to receive a time extension to pay off the debt. In very special circumstances, the districts have been forced to hand the debt over to the county to collect, though this is a widely unpopular and controversial move.

Though 48 of the 50 states (and the District of Columbia) use TIF, TIF laws are dramatically different from state to state. If your local government uses TIF districts, you may want to find out more about Black Mountain Software’s Tax Increment Financing District add-on module for Assessor.

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