Tax Increment Financing

Tax increment financing, or TIF, is a public financing method that is used for subsidizing redevelopment, infrastructure, and other community-improvement projects in many countries, including the United States. Similar or related value capture strategies are used around the world.

TIF is a method to use future gains in taxes to subsidize current improvements, which are projected to create the conditions for said gains. The completion of a public project often results in an increase in the value of surrounding real estate, which generates additional tax revenue. Sales-tax revenue may also increase, and jobs may be added, although these factors and their multipliers usually do not influence the structure of TIF.

When an increase in site value and private investment generates an increase in tax revenues, it is the "tax increment." Tax Increment Financing dedicates tax increments within a certain defined district to finance the debt that is issued to pay for the project. TIF is often designed to channel funding toward improvements in distressed, underdeveloped, or underutilized parts of a jurisdiction where development might otherwise not occur. TIF creates funding for public or private projects by borrowing against the future increase in these property-tax revenues.

Currently, thousands of TIF districts operate nationwide in the US, from small and mid-sized cities, to the State of California. As of 2008, California had over four hundred TIF districts with an aggregate of over $10 billion per year in revenues, over $28 billion of long-term debt, and over $674 billion of assessed land valuation. California, where TIF began in the United States in 1952, has currently discontinued the use of them.

Every state including the District of Columbia, except Arizona and Wyoming, have enabled legislation for tax increment financing. While some states, such as Illinois, have used TIF for decades, many others did not pass or amend state laws to allow them to use this tool until the first decade of the 21st century.

Since the 1970s, the following factors have led local governments (cities, townships, etc.) to consider tax increment financing: a reduction in federal funding for redevelopment-related activities (including spending increases), restrictions on municipal bonds (which are tax-exempt bonds), the transfer of urban policy to local governments, State-imposed caps on municipal property tax collections, and State-imposed limits on the amounts and types of city expenditures. Considering these factors, many local governments have chosen TIF as a way to strengthen their tax bases, attract private investment, and increase economic activity.