Issue BriefPresidential Initiative Task Force onEconomic DevelopmentPresident C. Vernon GrayChair, Howard County (Md.) CouncilTax Increment Financing:An Alternative Economic Development FinancingTechniqueNational Association of CountiesFounded in 1935, the National Association of Counties (NACo) is the onlynational organization in the country that represents county governments. Withheadquarters on Capitol Hill in Washington, D.C., NACo’s primary mission isto ensure that the county government message is heard and understood in theWhite House and in the halls of Congress.NACo’s purpose and objectives are to:• Serve as a liaison with other levels of government;• Improve public understanding of counties;• Act as a national advocate for counties; and• Help counties find innovative methods for meeting the challenges theyface.AcknowledgementsThis Issue Brief, Tax Increment Financing: An Alternative EconomicDevelopment Financing Technique, was produced under the supervision ofJacqueline J. Byers, Director of Research. This Issue Brief was researched andwritten by Jim Culotta, Research Associate.January 2000Tax Increment FinancingTax increment financing (TIF) is one of the few toolsthat local governments can use to directly intervene inthe economic development of their communities. TIFserves as a public financing technique to assist infinancing economic development projects that aredesigned to stimulate private sector investments andrelated employment opportunities which otherwisewould not have occurred within the redevelopment area.TIF is utilized to assist in redevelopment projects bycapturing the projected property tax revenue stream tobe created by the development and investing thatresource into improvements associated with the project.This technique is used to pay for the public anddesignated private improvements and other servicesneeded to prepare a project area for privatedevelopment.Although the concept of TIF has existed since the early1940s, California (1952) and Minnesota (1960) werethe early pioneers of this financing mechanism. Thewidespread use of TIF did not occur in most statesuntil the 1970s.The increased utilization of TIF since the 1970s islargely related to changes in federal urban renewal andcommunity development funding policies. In the late1960s, the federal government began cutting back andrefocusing economic development programs that manystate and local governments had been using forcommunity revitalization. This trend, whichcontinued for the most part throughout the 1980s and1990s, caused many states to enact legislationauthorizing the use of tax increment financing.Evolution of TIFSince its origin, TIF has long been associated withurban renewal projects. However, many states nowallow the use of TIF for most developmental projects.In some states where property taxes are collected onbehalf of overlapping districts (for example a countygovernment, a municipal government, a school district,or a transportation district), TIF provisions require allof the property tax increment from a redevelopmentproject to be used for that project. The effect is todistribute the costs of redevelopment broadly overseveral jurisdictions.The criteria and eligibility for TIF designation hasvaried from state to state. Early on, states restrictedTIF projects to “blighted” or “substandard” areas withina community, to enterprise zones or to parts of anarea-wide redevelopment plan. Although TIF programshave differed from state to state, traditionally TIF hasbeen employed to redevelop sites within older urbanbusiness centers. These areas tend to have the greatestpotential for property value growth, usually becausethe existing property value is low.Over time, political and economic pressures havecaused some jurisdictions to move away from thetraditional approach to TIF. One of the mostsignificant changes in TIF laws has been the looseningand/or abandonment of some of the traditionalrequirements for TIF district designation. Some states(i.e., Indiana and Iowa) have removed “blighted” and“substandard” from their TIF designation criteria. Asresult, local governments in these states have greaterlatitude to pursue a broader range of eligible projects,including public improvements such as golf coursesand parks, and private projects such as hotels andskywalks. Some planning experts believe that manystates broadened their TIF criteria in order to cope withthe unbridled competition for business development andjobs. The competition between state and localgovernments to recruit new companies or to retainexisting ones has never been more intense. NotIntroduction2surprisingly, local elected officials have recognized thedynamics of our rapidly changing economy and haveincreasingly pursued efforts to rehabilitate theirdepressed urban areas and underutilized properties. Forsome of these states, TIF has increasingly been used asan incentive program for corporations and developers.Although many have loosened TIF requirements, somestates have placed new legal requirements on TIFdistricts. In Texas, counties with a population over 2.1million are required to dedicate one-third of their taxincrement to providing low-income housing.California and Indiana have also earmarked taxincrements toward the construction of affordablehousing.Another significant change has been the method offunding TIF projects. Traditionally, property taxrevenue was the sole funding method. However, thesame political and economic pressures previouslymentioned have also induced several states to broadentheir TIF laws to allow the use of other community taxbases. Although they vary in their usage, these statesgenerally allow their counties and other localgovernments to use local option sales tax, earnings tax,and business activity revenues to fund TIF projects.Some of the more aggressive states allow localgovernments to use all three tax sources.TIF is based on the premise that if a blighted area isimproved it will generate additional property taxrevenues that can be used to service the bonds issuedto provide the capital to redevelop the area.First, the county delineates a proposed project area andcreates a plan for the redevelopment of that area. Oncethis geographic area, also known as a district, isdefined, the financial feasibility of the redevelopmentplan is analyzed. The most critical question is whetherthe TIF redevelopment will generate a revenue streamthat can provide a large enough