Tax Increment Financing (TIF)

What Is Tax Increment Financing?

Tax increment financing (TIF) is a way for a local government to pay for public improvements in a defined area using the future growth in that area’s property tax revenue. The practice began in California in 1952 as a way to raise local matching funds for federal grants, during the era of urban renewal. It has since spread across most of the country, under names that vary by state.

TIF was built mainly for economic development, paying for roads, utilities, and site cleanup. Some places now also use it to create or preserve affordable housing.

How TIF Works

1. Draw the district. The government sets boundaries and records the current assessed value of property inside them. That is the base.
2. Capture the increment. As new development and rising values increase the tax base, taxes on the value above the base — the increment — flow into a special TIF fund. Taxes on the base still go to the usual budgets.
3. Spend or borrow. The government spends increment as it arrives or issues bonds backed by expected increment to pay for improvements up front.
4. Close out. When the district expires, the full tax base returns to the regular rolls.

Districts typically require findings before they are created, usually that the area is blighted or underdeveloped and that growth would not happen “but for” the public investment.

TIF and Affordable Housing

Housing set-asides take two forms: a required share of increment for affordable housing, or a required share of affordable units in TIF-assisted projects. According to the Housing Solutions Lab, Minnesota allows housing-specific TIF districts, Massachusetts’s Urban Center Housing TIF program requires at least 25% of assisted housing to be affordable, and Portland, Oregon, has dedicated 45% of TIF revenue to affordable housing since 2015. Texas allows tax increment reinvestment zones, and its related homestead preservation districts are intended to protect existing residents from displacement as property values rise.

Criticisms and Limitations

• Diverted revenue. School districts and other overlapping governments lose access to the increment even though they usually do not decide whether a district is created.
• The “but for” problem. Lincoln Institute researchers have called blight and “but for” findings largely a formality, since consultants can supply supporting evidence almost anywhere. If growth would have happened anyway, TIF redirects money rather than creating it.
• Mixed results. A 2018 Lincoln Institute review of the research found that TIF frequently fails to deliver the economic development it promises, and recommended stronger “but for” tests, more transparency, and opt-out rights for school districts and counties.
• Neighborhood change. TIF depends on rising property values, which can also raise housing costs for existing residents in areas facing gentrification. Housing set-asides are one response to that risk.