Sunday, January 25, 2009

Tax Increment Financing (TIF)

According to a recent news release, the Town of Avon will be funding its public improvement projects for the redevelopment of Avons Town Center with Tax Increment Financing (TIF) revenue.

When a public improvement project is carried out, there is an increase in the value of the applicable real estate and the increased tax revenues are the "tax increment." Tax Increment Financing dedicates that increment to finance debt issued to pay for the project. In other words the incremental difference is used to pay for the development rather than other town-wide public projects such as trails, parks and open space. Under current Colorado law school districts are not harmed by TIF as they are in some other states.

Every state, but Arizona has enacted legislation allowing Tax Increment Financing. Government entities prefer this type of tax because it does not require a general tax increase. In the case of Colorado it does not require a vote of the people like other taxes increases under Colorado law.

The original intent behind TIF was to level the playing field between economically distressed and more affluent neighborhoods by providing tax incentives to rebuild in blighted neighborhoods. However the definition of "blight" has become so lax that TIF can used as an incentive for developers in almost any area of most municipalities.
As TIF districts grow exponentially through out the country, groups such as the Neighborhood Capital Budget Group in Chicago are looking at them more closely. ( The city of Chicago, which has used TIF for several decades, has about a third of its property tax revenue tied up in TIF districts. The City of Denver, according to the Front Range Economic Strategy Center, used approximately 7% of its 2003 General Fund Revenues to subsidize TIF shortfalls. General Fund Revenues are typically used to pay for standard municipal services such as police and transit.

TIF districts are usually implemented in the hope of spurring on more economic development. Sometimes this is successful, however, recent studies in Texas and California have shown that sometimes economic development does not always grow city-wide but may only move from one part of a city to another. This can have a negative impact on small business in other areas outside of the TIF district. One of the other potential downsides of TIF districts is the they change the character of a neighborhood and drive up property values to the point that existing residents and businesses cant afford to stay in that area.

Tax Increment Financing is a way for governments to borrow money to pay for improvements now based on the hope of future revenue rather than rather than letting growth naturally pay for itself. In other words it works like a credit card for the government.

As with credit card debt, there is potential danger in tax increment financing, and municipalities as well as the taxpayer should be wary of it.

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