Tax Increment Financing
Boosts Local Tax Base

Tax increment financing (TIF) is an economic development tool that sets aside property tax revenue generated by a new project in a targeted area. These funds are used to pay for improvements associated with the project.

Municipalities in most states have been using TIF for several decades to stimulate economic development in distressed areas. As far as public finance tools go, TIF is popular because it raises tax revenue for development efforts without raising taxes, offers incentives for businesses and developers, is a revenue generator for municipal governments and regional development organizations, and builds communities.

The TIF concept began in the 1940s and was first implemented in California in 1952. Most states did not enact TIF legislation until the 1970s, as federal and state aid to municipalities shrank.

"TIF raises tax revenue for development efforts without raising taxes, offers incentives for businesses and developers, is a revenue generator for municipal governments and regional development organizations, and builds communities."

Although each state develops its own TIF guidelines to be followed by its municipalities, the procedures for establishing and implementing a TIF are similar. While TIFs are often proposed to planning organizations by companies or developers, more planning organizations are taking the initiative to designate appropriate areas. Designation is based on an eligibility study that determines whether or not a proposed section of town meets the state’s TIF criteria, such as physical and economic distress. A redevelopment plan and budget are prepared that define the goals and objectives for the TIF to stimulate investment in the area.

The municipality is responsible for financing improvements in the TIF that will attract new businesses and residents. These include public infrastructure (e.g., roads, sewer lines and schools) and developer subsidies. Subsidies can cover planning expenses, land assembly and acquisition, job training and career education, renovation, and project financing and interest costs.

How does the municipality cover these costs without raising tax rates? The local government sets the original property tax income from the TIF district. As investment in the district increases and the tax base improves, tax revenues beyond the original base level — the increment — are used to pay for improvements and subsidies. (Some states also allow local sales tax and earnings tax revenues to fund the increment.)

Municipalities have two financing options. The pay-as-you-go method is the more common and slower of the two, relying on the tax base to increase on its own and/or on a developer to invest in improvements upfront, to be reimbursed as increment revenue comes in. Another approach is to issue municipal bonds. As investment increases in the district and the tax base improves, the increment is used to pay off the debt.

Originally conceived to target development of blighted and substandard areas, TIF programs in a number of states have been expanded to finance a wider range of projects even in nondistressed areas. According to Tax Increment Financing (National Association of Counties, January 2000), eligible projects have included golf courses and hotels. The report cites increased competition for investment between states and localities as an important reason for this loosening of TIF criteria. Some states have also added TIF requirements, such as requiring that a portion of the increment finance affordable housing.

The Southeast Missouri Regional Planning and Economic Development Commission, an Economic Development Administration funded district headquartered in Perryville, has applied the TIF methodology to brownfields cleanup.

According to Executive Director Thomas Tucker, the commission prepared the plan and assisted the city of Bonne Terre in establishing a TIF district. The TIF district incorporates an officially designated brownfield area with waste from a former lead mining operation. Tucker notes that the intent of the redevelopment plan is to capture taxes from a non-brownfields area that will be developed first and use the tax increment to help pay for the brownfields redevelopment.

For more information, contact Thomas Tucker of Southeast Missouri Regional Planning and Economic Development Commission at (573) 547-8357 and the National Association of Counties at (202) 393-6226.

By William Amt, NADO’s EDFS-Project Manager

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