Tax Increment Financing
What is TIF?
Tax Increment Financing (TIF) is used to collect the property tax revenue generated by new construction in a designated area and deposit it in a special fund to pay for public improvements within the designated area. New tax revenue generated by increased assessed value within the designated district resulting from direct and indirect real estate investment is captured by the TIF Authority (Redevelopment Commission) and used to pay for public development costs rather than general government services. In other words, through the TIF concept, new business development pays for street, sewer and water service improvements that are required for locating in that particular area.
How can TIF "pay for itself"?
The Central Park TIF District, established in 1991, is a good example. The major change in assessed value in this designated TIF area comes from the Zimmer corporate headquarters. Picture the assessed value that was generated by the old Freshman High School (zero) compared to the structure that is there now. Other development generated by the TIF District includes the CVS Drug Store and renovation of the Warsaw Community Library.
The local taxing body freezes property values within a TIF District. Bonds are then issued to make the infrastructure improvements needed to encourage and promote the development. This, in turn, leads to higher property tax revenues. The increased assessed value is used to pay off the bond issue that was necessary to finance the improvements.
How does the "public/private" partnership get facilitated?
Some experts in the Tax Increment Finance field suggest there are several broad steps in the TIF process, which also feature several sub-tasks along the way. The first concern of municipal officials is straightforward: Is the project and its financing feasible? Assuming feasibility is present, the next requirement is a determination of blight elimination or significant economic benefit as a reason for creating the TIF District (these stipulations are determined by the state statute). The third step recommends the establishment of an agreement between the TIF Authority (Redevelopment Commission) and the developer involved in the project -- which should include an overall development plan for the District.
With these initial steps in mind, it is clear that there needs to be some projections and commitments established with the developer to help determine which players are on board, who is going to make the structural investments if the public improvements are going to take place, etc. These pre-established financial commitments from the developer(s) and the City need to take place before a District is determined as feasible. The work that Mayor Jeff Plank, the Redevelopment Commission, and other community members did for the Central Park TIF District serves as a good example of the public/private partnering necessary for a successful TIF District.
Are there negative aspects of TIF for a community?
There will always be discussions regarding the pros and cons of any finance mechanism or process. Some of the positive aspects are: flexibility, public improvements created without the use of existing property taxes, and a means for a local solution for economic development (compared to diminishing federal and state support). One of the arguments frequently brought up opposing TIF is that the School Corporations (local taxing units) will not receive any of the incremental revenue for the improved area during the longevity of the TIF allocation area.
An answer to that argument is that the School Corporation will still receive their portion of the base assessed value of the area, so no loss to them should occur. Although they generally will not receive any of the incremental assessment, it can be argued that without TIF being used as the finance mechanism, there may not be any improvements in the area. After a bond is retired, it is quite possible that the other taxing entities (including the School Corporation) will benefit from the entire assessed value from the area.