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A Brief Introduction to Tax Increment Financing

Krista D. DeCastro

Photo illustration for Bilzin Sumberg's P3 Blog on Tax Increment Financing Tax Increment Financing (TIF) is a financing tool used by local governments to fund economic development projects. In Florida, TIF is most commonly associated with Community Redevelopment Agencies (CRAs), which have statutory authority to utilize TIF to revitalize blighted areas. It allows local governments to capture a portion of the tax revenue generated by a specific area and use it to fund improvements within that area. In this guide, we will briefly summarize what Tax Increment Financing is, who can benefit from it, and its advantages and disadvantages.

1.  What is Tax Increment Financing?
Tax Increment Financing, also known as TIF, is a public financing method used by local governments to finance infrastructure and redevelopment projects. It enables municipalities to invest in blighted or underdeveloped areas and stimulate economic growth. TIF works by establishing a designated TIF district, where any increase in property tax revenue within that district is allocated to a special fund.
The process begins with the identification of a designated area in need of redevelopment or infrastructure improvement. This area is typically characterized by blight, disinvestment, or other conditions that hinder economic growth. Specific statutory processes and criteria must be met to establish a new TIF district. Once the TIF district is established, the property taxes generated within that district are frozen at the current level (with numerous exceptions depending on the type of TIF district, but the intent of this summary is to illustrate the concept).

As development occurs, the property taxes increase due to the improved value of the properties. The incremental increase in property tax revenue, known as the tax increment, is then diverted to a separate fund. This fund is used to finance the costs associated with qualifying development projects within the TIF district.

2.  Who Should Seek Tax Increment Financing?
Tax Increment Financing can be beneficial for various stakeholders, including municipalities, developers, and businesses. Here are some examples of who can benefit from TIF:

Counties and Municipalities
Local governments can utilize TIF to revitalize blighted areas, improve infrastructure, and attract new businesses. TIF allows municipalities to fund development projects without raising tax rates, thereby reducing the burden on the community.

Developers
Developers can leverage TIF to finance projects, especially in areas where traditional financing options may be limited. TIF provides developers with an additional source of funding, making it easier to undertake large-scale projects, or projects with narrower margins, that serve a public good and may otherwise be financially unfeasible.

Businesses
TIF can be advantageous for businesses looking to relocate or expand within a designated TIF district. The infrastructure improvements and economic incentives associated with TIF can make an area more attractive to businesses, leading to increased job opportunities and economic growth.

3. Advantages and Disadvantages of Tax Increment Financing
Like any financing tool, Tax Increment Financing has its advantages and disadvantages. Before considering TIF for a specific project, it is essential to evaluate these factors carefully:

Advantages

1. Stimulates Economic Development: TIF allows municipalities to invest in blighted areas, revitalize communities, and attract new businesses. It promotes economic growth, job creation and increased property values.
2. Alternative Financing: TIF provides an alternative source of funding for developers and municipalities. It allows them to undertake projects that may not be feasible through traditional financing methods alone.
3. Self-Funding: TIF is designed to be self-funding, as the increased tax revenue generated within the TIF district is used to finance the development projects. It reduces the reliance on taxpayer dollars.
4. Infrastructure Improvements: TIF funds can be used to finance infrastructure improvements within the designated district, such as road construction, utility upgrades and public transportation enhancements.


Disadvantages

1. Time: Establishing a TIF district and accessing the TIF requires many layers of public processes, often at many levels of government. Establishing a new CRA, or even expanding the TIF district of an existing CRA, can take years. Accessing TIF within an existing TIF district is often more streamlined, but still requires more time and process than many traditional financing methods.  Additional Requirements: As with any economic incentive granted to a private developer by government, TIF will come with strings attached that may add to the total development cost.  Minimum wage and local hiring requirements, for example, are common, and the cost impact of any such requirements should be considered.
2. Impact on Other Taxing Bodies: TIF districts can divert tax revenue from other taxing bodies. This can create tension and potential conflicts among different entities.
3. Long-Term Commitment: TIF projects often require a long-term commitment, as the tax increment may take several years to accumulate and generate sufficient funds for development projects.

In conclusion, Tax Increment Financing is a powerful tool that can be used to stimulate economic development, revitalize communities and fund infrastructure improvements. It provides an alternative source of financing for municipalities and developers, while also offering benefits to businesses and the local community. However, careful consideration should be given to the advantages and disadvantages of TIF, as well as proper administration and oversight to ensure its effectiveness and accountability.

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