Note from PCJ Editor Wayne Senville: We’re pleased to run this short article by Christopher Leo, who has been a long-time Planning Commissioners Journal subscriber. Leo is a Professor in the University of Winnipeg’s Department of Politics, and an Adjunct Professor in the University’s Department of City Planning. He also writes an excellent blog, which is where I first came across his summary of the benefits of tax increment financing — which he agreed to update for our use here on the PlannersWeb.
Tax Increment Financing (TIF for short) is a funding mechanism that has been used in many American jurisdictions to revitalize blighted neighbourhoods, and that is now beginning to make inroads in Canada. In my home city of Winnipeg – population: more than 700,000, an hour’s drive north of the Minnesota-North Dakota border — it has been used to develop housing, and is now being considered as a way of funding a co-operative business centre, the Neechi Commons, in a low-income neighbourhood, as well as street improvements around the MTS Centre, a wildly popular sport venue.
Typically a TIF is used for the revival of blighted areas, but by no means does that necessarily imply that the benefits flow to low-income people or neighbourhoods. It could be and has been used to tear down such a neighbourhood and replace it with a commercial development. And, as we see in the case of the MTS Centre, it can be used for a wide variety of community projects. A local community considering its use should begin by checking to see whether provincial or state legislation authorizes it.
How TIF works
1. A sponsoring jurisdiction, a city or other community, meets legal requirements and establishes the boundaries within which the TIF development will take place.
2. The property tax base is frozen, meaning that the total property value of the area is put on the record. From then on, the tax revenues on the recorded value remain part of regular tax revenues, exactly as before. But the tax proceeds of any increase in property value – called the incremental valuation – flows to the TIF fund.
3. Borrowing. Assuming a successful project, this will create a revenue stream. So the agency managing the TIF puts forward its development proposal, and if it can convince lenders of its viability, it can borrow using the future revenue stream as collateral.
4. The incremental valuation or increment is to be used for the project for which the TIF was created. Any part of the incremental valuation not so used is called the excess increment, and it flows into general revenues. The TIF is time-limited and, when it runs its course, revenues from the area once again all flow into the general fund.
Advantages
TIF offers a way of financing projects that would not otherwise attract finance. If it’s successful, it can result, not only in an improvement to the TIF area, but in increased tax revenue that ultimately flows back into the community’s general revenue fund.
Disadvantages
From the viewpoint of the rest of the community, it can be seen as a “heads I win, tails you lose” proposition. If the project is successful, the benefits, at first, flow only to the TIF area. It it’s unsuccessful, and the TIF fails, the area goes back to being a problem for the community as a whole.
Potential pitfalls
The TIF might be used to finance a project that would have been financed anyway, in which case it becomes a simple tax give-away to a developer. The financing that the TIF provides would, in that case, be money the developer wouldn’t have to come up with, money she or he saves.
A second potential pitfall is that the return of TIF benefits to the sponsoring jurisdiction may be postponed, possibly indefinitely, by continually inventing new development projects and thereby avoiding either the payment of an excess increment, or the winding-down of the TIF, or both.
But, for a board of commissioners that keeps its wits about it, and stays focused on the goal — get the job done and earn revenue — it offers the possibility of accomplishing important objectives that might otherwise not be achievable.
Have you had experiences with tax increment financing in your community? We’d welcome your sharing your thoughts on the pros and cons. Just use the Comment field below.