This week’s edition of Efficient Government, an online information service for public sector leaders, includes a summary of Tax Increment Financing (known widely as TIF) as a tool for government targeted development (and re-development) efforts. From their online coverage:
How Do TIFs Work?
Typically, a specific “TIF District” must be created. This is the area where the redevelopment will occur. An auditor must then determine the area’s existing “net tax capacity” or property tax base; as the tax capacity increases, the incremental taxes are dedicated and paid to a redevelopment authority. That money can then pay for the costs incurred for the redevelopment project.
Of course, there is typically a mismatch in the timing—TIF costs must be paid at the start of a redevelopment project, but the incremental tax revenue won’t be received until after the project is built and higher property taxes are paid. To accommodate that, bonds are typically issued to pay upfront costs, and the incremental tax revenue pays back the bonds.