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Tax Increment Financing


 New Model for Urban Infrastructure

Tax increment financing (TIF) is the most widely used urban renewal funding and delivery model in North America. While its primary benefit is a conservative, transparent method of redirecting a portion of the value created from urban renewal to fund infrastructure, TIF also encompasses an integrated governance and delivery model based upon achieving consensus among three key constituents: government agencies, the general public and private developers. 

TIFs were originally conceived in the United States as a means of ‘kick starting’ economically depressed areas by providing a source of funds to ‘front load’ major capital expenditures on public services and infrastructure in residential, commercial and industrial areas. In the US model, property tax revenue increases attributed to the TIF program are temporarily diverted to pay for the infrastructure improvements in the TIF District. These property tax increases, referred to as the “tax increment”, are used to repay government-issued bonds or privately secured loans which are used to “front load” the infrastructure. Bond holders and investors receive a stable, long-term and often tax-favourable investment and communities are able to spread large capital expenditures over a 20 – 25 year term.

The key characteristics of TIF are;

++ Infrastructure and service improvements are planned within a defined area;
++ TIF improvements are designed to attract private developers to invest in specific projects in the district, thereby leveraging public investment;
++ Tax revenue increases resulting from the improvements pay for the improvements, so no new taxes are created;
++ TIF revenue can only be used in the TIF District for pre-determined improvements;
++ TIF funding is intended to work with other existing public and private funding sources to attract new investment to the District; and-:
++ Once the cost of the improvements have been fully repaid (typically over 20 to 25 years), the full tax revenue stream returns to the original taxing authority.
The City of Chicago’s TIF program effectively combines property tax revenue and private investment to regenerate its urban centres.
TIFs have evolved significantly over the past 20 years as state and local governments and community groups gained experience with this funding method and revised TIF laws and operations to improve them. A significant body of knowledge on TIFs now exists that can be used to tailor an alternative and innovative infrastructure funding tool for Australian conditions based upon the TIF model.

Characteristics of TIF Districts

American municipalities usually create a special purpose entity called a development or redevelopment authority to undertake TIF improvements. Project plans for the TIF District typically include;

++ A statement listing the kind, number and allocation of all improvements;
++ An economic feasibility study of the project and its effect on the municipality’s tax base;
++ A detailed list of estimated project costs;
++ A description of the methods of financing all estimated projects costs and a cash flow statement;
++ A map showing existing uses and conditions of property in the district;
++ Proposed changes to any zoning instrument, master plan or other planning instrument; and A list of estimated non-project costs.
A well-conceived TIF program is designed and scaled to meet unique local needs, and can therefore be any size.

A study of TIFs in Missouri found that 76 TIFs generated $993,700,000 in property tax increment revenue in 2000, ranging from around $900,000 in the community of Hillsboro (7% of the total property tax base) to $239,800,000 in the community of Chesterfield (23% of the total property tax base). Typical uses of funds include some or all of the following:

++ Studies, survey and plans;
++ Professional services, such as architectural, engineering, legal, property marketing and financial planning;
++ Property acquisition and site consolidation;
++ Demolition and site preparation;
++ Rehabilitation or renovation of existing buildings;
++ Construction of new public works or improvements to existing public works, such as parking structures, water, sewer and storm water systems, street and footpaths, and plazas;
++ Low and moderate income housing programs for new and displaced residents  
++ Enhanced security services, job retraining programs and day care services; [1]
++   Relocation costs.

While not all of these uses would be appropriate in the Australian context, they represent the flexibility of TIF in addressing local infrastructure needs.
A key advantage of funding urban infrastructure by TIF over developer contributions is the ability to spread the cost of the improvements over time. Developer contributions must be paid to the State Government before land development is approved, and are widely criticised for negatively affecting housing affordability.

After creating the necessary governance structure and defining the TIF district boundaries, revenues from property taxes are calculated for all properties within the district. This establishes the “Base Year” or pre-TIF tax revenue from the district.

A TIF district improvement strategy and detailed project plans are then prepared to improve the amenity and value of TIF district. These plans would typically be designed to increase property tax revenue above the Base Year level by improving land use mix and efficiency, increasing densities and upgrading public infrastructure, such as public transportation stations, roads and intersections, and other public amenities and services. As the TIF project plan is implemented, additional tax revenues are generated over and above the Base Year levels.

This additional tax revenue, called the Tax Increment, repays bonds or other financing instruments used to fund the upfront public infrastructure improvements which contribute to the increase in tax revenue. The Base Year tax revenue continues to be collected and used by the taxing authority in the normal manner.
At the conclusion of the TIF program, the New Tax Base, comprised of the Base Year tax revenue and the Tax Increment, fully reverts to the taxing authority.

Examples of Successful TIFs

TIFs are actively employed in 49 US states and the District of Columbia, although TIF legislation and uses vary from state to state. Illinois is perhaps the most active user of TIFs in the country, where 389 municipalities administered 998 active TIFs in 2006. Chicago Mayor Richard Daley has been an advocate of this funding model as state and federal government urban economic development programs have been phased out [2] 

A study of TIF by the non-profit Neighbourhood Capital Budget Group in 2000 found that 114 TIF Districts existed and 10 were pending in the City of Chicago alone  An audit of 36 of those districts found that TIFs would increase property tax revenue from $1.3 billion to $1.66 billion over a 23 year period,
an increase of $360 million (28%). [3] 

The City of Chicago has used TIF to upgrade the riverfront and provide parks and amenities along the Chicago River.
Using TIFs and general revenue funds, the City of Chicago has invested $23 million in the State Street Renovation Project, which has attracted over $100 million in private investment in the area. One project involved the reconstruction of eight blocks of the historic Randolf Street theatre district with “vintage-style streetlights with space for banners that will announce the latest theatre shows, old-fashioned kiosks with maps indicating theatre locations, newly planted trees, sidewalk planters, and new sidewalks [4]  

Approximately $7 million of the $7.7 million cost of this project was paid by the Central Loop Tax Increment Funding District.

The City of East Point, Georgia created the $22 million Camp Creek Tax Allocation Fund (TAD) in 2001 to extend infrastructure into an area that had not been previously developed due to difficult topography. These improvements sparked the development of the Camp Creek Trade Centre (a business park), Camp Creek Market Place (a 123,000 sq.m. regional shopping centre) and 1,400 housing units in the area in 5 years. The additional tax revenue from these developments is generating the income stream to repay the TIF bonds that funded the initial improvements.

This TIF has been so successful that the City has created its second TIF, the East Point Corridors TAD, to encourage private investment in the City’s major corridors and Central Business District. This $98 million TIF is expected to generate $164 million in appreciation of existing properties and $191 million in new development over 25 years, thereby providing the new tax revenue needed to retire the TIF bonds [5]

[1] Sereleas, Lolita. “The ABCs of TIF”, Zoning News. The American Planning Association. July 1998
[2] Leher, Eil, “The Town that Loves to TIF”, Governing. September 1999.
[3] Neighborhood Capital Budget Group. Who Pays for the Only Game in Town? (p. 2).
[4] Lockwood, Charles. “Chicago’s Public Works”, Urban Land. October 1998 (p. 73).
[5] City of East Point, Georgia, East Point Corridors Tax Allocation District and Redevelopment Plan. December 2006 (p. 21)