What Happened?
Lincoln, Nebraska, is considering the issuance of “TIF” bonds to developers who would redevelop areas of the city. The news comes as other regions also consider “TIF Districts,” and provides an opportunity to review just what TIF bonds are, how they work, and where they’re being utilized.
What’s a TIF?
TIF stands for “tax increment financing.” It is a method most commonly used when financing community-improvement or redevelopment projects. Basically, a TIF uses future gains in taxes to subsidize current projects. In other words, when a project is completed and real-estate values increase, the additional tax revenue is the “tax increment”; that money is used to finance the debt issued to pay for the project. Cities are ostensibly borrowing against future increases in property-tax revenues.
How Do TIFs Work?
Typically, a specific “TIF District” must be created. This is the area where the redevelopment will occur. An auditor must then determine the area’s existing “net tax capacity” or property tax base; as the tax capacity increases, the incremental taxes are dedicated and paid to a redevelopment authority. That money can then pay for the costs incurred for the redevelopment project.
Of course, there is typically a mismatch in the timing—TIF costs must be paid at the start of a redevelopment project, but the incremental tax revenue won’t be received until after the project is built and higher property taxes are paid. To accommodate that, bonds are typically issued to pay upfront costs, and the incremental tax revenue pays back the bonds.
A more detailed FAQ on TIFs was published by the Illinois TIF Association, and the economics (i.e., the mathematical equations) behind typical TIF arrangements was published by the Lincoln Institute of Tax Policy.
How Common are TIFs?
TIFs are extremely common; literally every state in the country allows tax increment financing, and there are thousands of TIF districts nationwide. In addition to the Lincoln TIF project under consideration, Paxton, Illinois is also considering a TIF District, as is Westborough, Mass. and Straban, Penn. Jacksonville, Florida, is in the middle of a TIF project, as is Evanston, Illiois and many other communities.
Details on TIF programs at a variety of states can be found here:
- Chicago
- District of Columbia
- Indiana
- Kansas City
- Maine
- Massachusetts
- Ohio
- Texas
- West Virginia
- Wisconsin
The Controversy
In places like California, there has been controversy about redevelopment agencies “sucking up” tax revenues due to TIF projects. While the agencies certainly have a right to the incremental tax revenues that resulted from the projects they funded, some argue that “general economic trends could also be contributing to the increase in property values.” If that’s the case, then the redevelopment agency is diverting revenue that should be going to schools, for example.
In addition, some cities have used TIFs for full-blown development, instead of community redevelopment projects; research from the Public Policy Institute of California found that in some projects “more than 50 percent of the project area was vacant land, suggesting that some RDAs were engaging more in development than redevelopment.” An article that first ran in Reason Magazine in 2008 provides some other anti-TIF arguments.
Additional Research
If your city or town doesn’t have a TIF District, consider educating appropriate managers on the basics. “The ABCs of TIFs” is a good place to start, as is this old-but-interesting briefing called, “Looking Into Tax Increment Financing.” (At the very least, readers should see this document because of the creepy alien-like sculptures featured on the cover. We don’t get it.)
Some of the best thought leadership comes from the University of Manchester (UK), where several TIF research projects are ongoing. Professor Kevin Ward recently published “TIF: A Model in Motion,” and “TIFs: Learning From Chicago,” both of which—while UK centered—provide excellent background. A detailed presentation on Edinburgh, Scotland’s TIF projects is also available, complete with maps and photos.
A case study on the impact of TIF projects on home values in Chicago is available, as is data on Chicago’s TIF revenue. Additional data and calculation schedules are featured in a comparison of TIF projects in the Pacific Northwest.