Tax increment financing (TIF) is a public financing method to subsidize redevelopment, infrastructure, and other community-improvement projects. TIF was designed to channel funding toward improvements in distressed, underdeveloped, or underutilized parts of a jurisdiction where development might otherwise not occur.
Through the use of TIF, municipalities create this subsidy by diverting the increase in future property tax revenue from new development in the newly defined TIF district. That increase in tax revenue is then removed from the city’s operations budget for the TIF district’s defined period - usually decades.
The little discussed consequence is taxpayers outside of a TIF district must foot the bill for city operations/services provided inside the TIF district.
“Although generally sold to legislatures as a tool to redevelop blighted areas, some [TIF] districts are drawn up where development would happen anyway... California has passed legislation designed to curb this abuse.”
Tax Increment Financing
Three Things to Know
TIF does not supply “free money” for development. It is taxpayer money. If a new apartment complex is built inside a TIF district, taxes from that complex are diverted to repay the TIF financing and are not available to the City to pay for services or public education. Instead, these costs of the apartment complex must be paid by the residents outside of the TIF district.
TIF financing for private development projects is a taxpayer funded subsidy. Because the City never charges a TIF district more than its fair share of taxes even after the TIF financing is repaid, the lost tax revenue is never recouped by the City. Were the taxpayers left with a public benefit such as school or library, or the redevelopment of a blighted area, there would be a long-term public benefit to justify the extra tax expense incurred by residents. Where TIF funds are used to build privately owned and operated apartments or commercial properties, there is no such residual benefit. Instead, in these cases TIF funding typically only enhances the profits of the developers or land owners at the expense of the public. This is especially the case when development would have occurred without the use of TIF.
TIF financing is a valuable tool but is easily abused. TIF financing was created to help revitalize blighted areas, but increasingly is being used to subsidize private development in wealthy areas where such subsidies are not required, and for uses that provide, at most, a small benefit to the public at large. In Edina, the benefits often touted by developers include a token number of non-permanent affordable housing units, or a token public space that largely benefits the developer or residents of the private development. These public benefits are frequently greatly exaggerated by proponents of a TIF project to justify the public subsidy.
TIF financing becomes a circular, self-induced financing requirement.
Ironically, because TIF financing artificially inflates land values, private developers have become adept at making a case that development is not financially feasible without TIF financing. On the contrary, studies show that communities using TIF aggressively get no significant additional development investment relative to communities using it much less or not at all.