By Bill R. Shelton, CEcD
Looking for ways to pump up your community’s retail sector? Don’t overlook the power of tax-increment financing (TIF), a widely used tool by municipalities in forty-nine states to finance capital projects, which encourage existing businesses to stay or new businesses to move in.
Originally designed to finance the redevelopment of blighted urban areas, TIF now commonly pays for infrastructure improvements to spur private investment and development in non-blighted areas as well. A good definition of TIF is “the funding of public infrastructure by bonds that are backed by the pledge of accelerated taxes, generated by additional private investment in a given geographic area.” In its purest form, TIF is a self-financing way to pay for economic development projects. Tax revenues pay to make the project possible.
TIF originated in California in 1952 and became widespread in the 1980s as an economic development technique to finance land acquisition, site development, water and sewer expansion, and road improvements. A survey by the International City/County Managers Association reported the most common goals for TIF projects in descending order: (1) attracting new business, (2) downtown redevelopment, and (3) retention or expansion of local businesses. Today, tax-increment financing has become recognized as a flexible, all-purpose financing tool for economic development.
To raise funding, the municipality draws boundaries around commercial districts and declares that area a “TIF district.” Within the TIF district, future property tax revenues are split between the district and the jurisdictions receiving the tax revenues prior to the establishment of the district.
Some states allow various taxes to be diverted. Most states include only property taxes, but others tap a wide variety of revenues, such as sales or utility taxes.
TIF is a great tool for stimulating retail growth. The Bolger Square TIF in Independence, Missouri, is typical. Approved by the Independence City Council in 1997, the Bolger Square TIF district has spurred the redevelopment of 32 acres that was deemed blighted because of topographical and soil conditions. Today, the site’s tenants include Target® and Dick’s Sporting Goods®. JC Penny® recently signed a lease. Restaurants include Bob Evans®, TGI Friday’s®, and Longhorn Steakhouse®.
For the Bolger Square project, most of the TIF $31 million went to public infrastructure and site development. The resulting 300,000 square feet of retail space increased the property value from $8,630 to more than $5 million (and still growing). In addition to property tax revenue, the TIF district is expected to generate $2.3 million each year in sales tax revenue.
The advantages of TIF are numerous. Most importantly, the current property tax base is left in place to pay for existing basic public services. Property taxes collected on properties included in the TIF district at the time of its designation continue to be distributed to the school districts, county, community college, and other taxing authorities as they were before the TIF district was created. It is the projected additional revenue—the “incremental revenue” —that pays for the new infrastructure. And, when the project is paid for, all taxes revert to the taxing jurisdictions. That’s a big “win” for everyone.
Another big plus for TIF is its relative speed to create. As a locally controlled option, TIF minimizes bureaucratic delays and reporting requirements associated with state and federally funded programs.
The major downside of TIF occurs if the project financed doesn’t produce projected revenues. Avoid this calamity by doing your homework before starting the project. Commission a demographic and psychographic profile of the TIF trade area to determine retail viability of the district. Then, work with developers to make sure they are recruiting stores and restaurants suitable to profiled customers.
Done correctly, TIF is a useful, effective means for local governments to put financial muscle in their economic development efforts.
