If you have read local newspapers or listened to talk radio recently, you may have seen or heard about something called TIF, or tax increment financing.
Like many government-sponsored programs, TIF financing is frequently misunderstood and mischaracterized. The current, sometimes heated debate over the wisdom of employing TIF as an economic development tool is framed around a classic political issue: What role, if any, should the public sector play in promoting private development?
On one end of the spectrum are the free-market theorists who believe that government should do nothing to assist or hinder the private sector. On the other end are those who believe that the government is responsible for promoting and enabling economic development.
Any reasoned debate must start with the facts.
A TIF by definition
Tax increment financing is a financing device that uses incremental increases in property, sales or other tax collections within a specified area to finance capital improvements in hopes of drawing businesses and residents to a community. A TIF district, with specifically identified boundaries, is created within an area in need of redevelopment.
A redevelopment or industrial development authority then issues debt, in the form of bonds or notes, and uses the proceeds to pay for redevelopment costs. The TIF debt is secured by a pledge of anticipated increases in tax revenues, or tax increment. Taxing bodies are asked to give up the right to collect all or some of the increases attributable to the financed development for a limited period. When the TIF bonds are paid off, all subsequent tax revenue belongs to the taxing bodies.
Pennsylvania’s Tax Increment Financing Act was adopted July 11, 1990 and amended Dec. 16, 1992. The act’s stated purpose is to “prevent, arrest and alleviate blighted, decayed and substandard areas in municipalities, to increase the tax base and to improve the general economy of the commonwealth” and to “provide an additional and alternative means to finance public facilities and residential, commercial and industrial development and revitalization.”
What they finance
The TIF Act broadly defines projects to include undertakings and activities for the elimination and prevention of blight, including property acquisition, clearance, redevelopment, rehabilitation or conservation. Eligible project costs include costs of public works or improvements, or residential, commercial or industrial development or revitalization within a TIF district. Prior to the 1992 amendments, the act limited financing to public projects. Now, development for private use and ownership is expressly permitted.
The TIF Act permits a municipality or redevelopment authority to develop a TIF plan and proposal. The municipality with jurisdiction over the area where the TIF District is to be located (which can be a county) designates and identifies the district’s boundaries. The governing body that creates the district must hold public hearings and adopt a resolution or ordinance which, among other things, finds that the district is a blighted area and the project to be undertaken is necessary to eliminate such conditions of blight.
How they’re created
The process of creating a TIF district includes opportunities for public input on a number of levels. Each taxing body involved has the ability to opt out of the TIF plan, or to participate in part. A district can have a maximum life of 20 years.
Once the district has been created, the local assessor is directed to identify the specific parcels of property within the district on the tax roles. On the date of creation, a “base-assessed value” is determined. As development occurs, increases in tax revenue over the base-assessed value may be captured for allocation to principal and interest on TIF debt, or may be used to pay project costs as they are incurred.
The payments that may be pledged to support TIF financing include ad valorem real property taxes, payments in lieu of taxes made by governmental or nonprofit entities, sales taxes, and tax revenue derived from gross receipts or gross or net income realized from business conducted in a TIF district.
Indeed, tax increment financing can be a tool that promotes vitality, creates jobs, adds activity to local economies and improves distressed areas.
To learn more about TIF funding, contact your local government or legal professional who concentrates in public/private financing matters.
Sara Davis Buss is an attorney at law firm Houston Harbaugh, P.C. Reach her by e-mail at [email protected] or by phone at (412) 288-2229.
