Tax Increment Financing (TIF) is one of municipal government’s most popular tools for financing economic development. First introduced in California during the 1950s, TIF legislation has since been passed in every state in the nation as well as the District of Columbia.
There are 172 TIF Districts within Chicago covering over 30% of the City’s geographic area (2011). Resulting in one of America’s most TIFed cities. Used to fund projects from parks and transit stations to office towers and residential communities, TIF has become a substantial source of funding for urban development.
TIF is intended to spur investment in blighted areas where development would not otherwise occur. Once a TIF district is created, the City diverts any increase in property tax revenues from that district into a TIF allocation fund, holding constant the amount of funding channeled to other taxing bodies with jurisdiction over that area. These incremental increases in property tax revenues arise when public and private investment takes place in the TIF district, thus increasing the value of the surrounding property.
TIF districts in Chicago remain active for 23 years (and can be extended to 35 years) and the process of diverting incremental increases in property taxes to the TIF fund continues for the entire life of that TIF district. All revenues in the TIF fund must be reinvested in the TIF district from which they were collected, or a TIF district that is directly adjacent (see Portability). TIF funding can be allocated to many types of projects, including public works, private development, and land acquisition. When a TIF district expires, taxes on the increment revert back to the overlapping jurisdictions.
The City of Chicago uses TIF primarily to encourage development that will increase property values and expand the tax base. The incremental property tax revenues generated in the district provide subsidies for development costs such as land assembly, site clearance, financing, and infrastructure. These types of public expenditures are expected to make the TIF district more attractive to private investors and encourage additional development.
The TIF Designation and Distribution Process
1. State passes initial legislation enabling the use of municipal TIFs
States set the legal context in which local governments tax, borrow, and spend. As wards of the state, municipalities depend on enabling legislation to provide them with powers to control and manage their economic and fiscal well-being. TIF is no exception. The power to use this financing mechanism must be expressly allowed by the authorizing state government. In the absence of such legislation, TIF may not be adopted by local governments.
2. Areas of need and potential TIF projects are identified
Developers, property owners, and private businesses propose the designation of a TIF district to assist them with redevelopment plans and projects on a specific site. These private interests may have identified a vacant parcel, deteriorated building, or underutilized area that, if developed, would yield needed property tax revenues. Municipalities often prefer to initiate TIF districts based on a developer’s solicitation of funding because it reflects the developer’s willingness and interest in investing in the area.
3. Submit report for eligibility
Most states require that the project area meet both a “blight” and a “but for” requirement. Blight may be construed in many different ways, although most definitions harken back to the heyday of urban renewal in the 1960s and 1970s in defining this condition as one that threatens public safety, health, morals, or welfare. A blighted area is typically one where the built environment is older, deteriorated, depreciated, excessively vacant or abandoned, overcrowded, or sparsely developed compared to the rest of the municipality.
Evidence to support the blight and but for determinations may be required in an “eligibility study” that is drafted either by municipal planners or by outside consultants retained by the municipality
4. Create redevelopment plan for TIF district
TIF redevelopment plans vary across municipalities. In general, the initial TIF redevelopment plan provides planners with loose guidelines for financing specific development and infrastructure projects. In some municipalities, they are formalities. In Illinois, for example, some plans are vague and open-ended “wish lists” of projects that they would like to see funded with increment. Many municipalities, particularly smaller ones, lack comprehensive plans. In such cases, TIF plans may be required to conform to any existing zoning codes and regulations.
5. Notify overlapping tax jurisdictions and inhabitants of district
Overlapping jurisdictions may be county governments, school districts, library districts, or other special purpose districts with jurisdiction over property in the TIF. In certain parts of the city of Chicago, for example, up to fifteen overlapping districts are affected by TIF, including the Chicago Board of Education, the Chicago Park District, Community College District, Mosquito Abatement District, Chicago Transit Authority, Urban Transportation District, Forest Preserve District, The Metropolitan Sanitary District of Greater Chicago, the Cook County Health and Hospital Governing Commission, and Cook County. These taxing bodies must wait until the end of the life of the TIF district to levy taxes on the growth in the tax base.
6. Hold public hearing
How does the municipality decide to whom and how much it should allocate portions of the total TIF increment? Such decisions comprise the most crucial part of planning within the TIF district and yet are typically the least regulated and formalized aspect of the entire process. Municipalities retain a tremendous amount of autonomy and flexibility in the increment allocation decision, which is perhaps the reason why local governments love TIF while others – citizens and other taxing jurisdictions – are often suspicious.
7. Adopt ordinance authorizing TIF district
State legislation requires municipalities to designate a manager to keep track and release funds from the TIF accounts. In many states, this is a government agency such as the municipal comptroller (e.g., Chicago and St. Louis) or finance department who controls the cash flow. These agencies do not typically possess the independent discretion to allocate TIF increments to specific projects. They receive authorization to release funds from the agencies responsible for planning and development.
8. Establish TIF account fund
TIF increments are essentially committed before they are generated. In other words, although developers and the public sector require the funds immediately, it is the future stream of expected increments that are assigned to subsidize projects.
As most projects require an infusion of public capital early on in the life of the TIF, municipalities draw on three “front-funding” methods for TIF projects. These are:
- Bond financing
- Short-term tax anticipation notes
9. Execute proposals with developers and make public improvements in district
TIF revenues can be used for infrastructure and other public improvements (including improvements to schools, parks, and other public buildings), or the funds can also be used to subsidize private residential, commercial, industrial, and mixed-use development. These priorities are laid out in a redevelopment plan, which outlines the priorities for the TIF district, estimates a budget for the improvements, and is approved as part of the designation process.
The following are “eligible expenses” for TIF funds in Illinois:
- Planning expenses, such as studies and surveys, legal and consulting fees, accounting, and engineering
- Property acquisition, demolition, site preparation and environmental site improvements
- Rehabilitation, construction, repair and remodeling of existing buildings
- Construction of public works and improvements
- Job training implemented by businesses located in the redevelopment project area
- Project financing
- Tenant relocation
- Payments in lieu of taxes
- Reimbursements to school districts for increased costs caused by TIF assisted housing projects
- Construction of new housing units for low income households
1o. Collect incremental tax revenues
The City relies on two primary methods of “front funding” expenditures from the expected future increments. Under the first method, the City issues debt (bonds or shorter term notes) for the total amount of the redevelopment, dedicating the expected tax increments to pay the debt service. The second method of front funding – commonly known as “pay-as-you-go” – requires the private developer to pay for the project up front. The City then reimburses the developer annually as it receives the incremental property taxes.
11. Distribute funds to developers
The City of Chicago retains a tremendous amount of autonomy and flexibility in TIF fund allocation decisions. TIF monies can be used for most kinds of projects that demonstrate financial feasibility, promise increases in property value, and reflect the City’s current planning priorities.
12. TIF district expires after legislation period
Municipalities are able to extend the lives of their TIF districts if they are able to win state or local approval. In special circumstances, extensions are possible in Minnesota for up to 6 years. More than 35 Illinois municipalities have successfully requested that the state General Assembly add another 12 years to their districts in order to complete their redevelopment plans. In Wisconsin, cities can obtain three year extensions by getting approval of affected local governments.