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Tax Increment Funding

DEFINITION

Tax Increment Financing, or TIF, is a form of funding that come from the public and goes towards projects in service of the public like towards infrastructure, redevelopment, and other community-improvement projects.

EXPLANATION

TIF funnels future property taxes from a specific district into public improvements in the community. The first TIF was put into use in California in 1952. All 50 states were using TIF by 2004.

TIF subsidies contribute to financing projects like refurbishment of public projects like parks, libraries, and city parks. They also finance land purchase, demolition, utilities and planning costs, street lighting, water supply, bridge construction, street construction, traffic control, curb and sidewalk work, storm drainage, parking structures, and more.

Local governments have the authority to designate TIFs through state enabling. A TIF district is always drawn around up to thousands of acres to provide the needed borrowing capacity for future projects. The borrowing capacity is set up through committing all normally incoming future real estate taxes from every property for 20-25 or more year in the TIF district, along with projections for anticipated new tax revenue that would come from completed projects. If the project holds public status, and therefore won’t be paying taxes, then the total of repayment will come from properties adjacent to the project within the TIF district.

City and local governments tend to assume an administrative role and make decisions as to how the incoming funds are applied.

It’s often assumed that public improvements will inherently trigger tax increases above what is normal. This is why some jurisdictions restrict yearly property tax so that they can’t exceed the normal amount.

Criticism

Opponents of TIF districts have garnered attention. Critics ask whether TIF districts really serve the citizens, and an organization called the Municipal Officials for Redevelopment Reform, or MORR regularly hold conferences on redevelopment abuse.

Some of the specific points that critics of MORR claim include the following:

–              The designation of urban areas as ‘blighted’, can allow governments to condem property though domain laws. This means that private homes can be condemned because an entire area has been condemned.

–              Gentrification increased as real estate value rises and investments pour in.

–              The process of TIF districts tends to create favoritism for developers connected to politics, implementing economic development officials, attorneys, and others.

–              In some areas, calling a zone a TIF district is redundant because the area would have seen redevelopment regardless. The state of California has passed laws to stop this from happening.

–              Occasionally, school districts in communities using TIF have higher levels of state aid than areas that aren’t in such communities. This might be creating reasons for governments to ‘over-TIF-, by taking on riskier development projects. Local governments are not under any obligation to recognize any adverse effects of TIF designation over schools, which means that school quality may be compromised.

–              Sometimes the approval process can capture an entity’s future taxes with official input, i,e, school district taxes can be frozen on action of a city.

–              Districts can be over drawn, which means they’ll capture revenue from areas that would appreciate in value with or without a TIFF.

–              Since property will increase in value due to development, taxes are likely to go up naturally and if that happens, subsidizing development bonds will have to come from other sources — often from the subsidies of less thriving areas. For instance, funding a large residential development means that public services from educational institutions, to police and fire services will need to grow.

History

TIF districts have since been discontinued in their state of origin, California, due to lawsuits. However, thousands of TIF districts still operate all over the United States, from small and medium sized cities to California, which will be paying off TIF debt years into the future. In 2011, Jerry Brown passed legislation that removed California’s 400 redevelopment agencies that implemented TIFs. This stopped the diversion of property tax revenue from public funding,and was a reaction to a Fiscal Emergency Proclamation in California in 2010.

Every state, with the exception of Arizona, has introduced laws for tax increment financing. Some American states have only recently embraced the use of TIFs, while others have used it for decades.

There have been many factors that have contributed to local governments choosing to enact TIF policies. These include the following:

–              Restrictions placed on municipal bonds, which are exempt from taxes

–              Local governments now being responsible for urban policy

–              Federal funding going down for redevelopment projects

–              Caps imposed by state governments for city governments

–              Limits placed on city spending.

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