A Tax Increment Financing Example

In the town VermontVill there is a vacant lot that has been so for some time. A developer is interested but the sewer and power service is inadequate. The property would be developed but for the need for infrastructure. The Town cannot afford the infrastructure upgrades. The "but for" in that sentence is important. In order for a TIF district to be approved there must be good reasons to believe that the development would not happen anyway and without the TIF financing.

If the TIF financing is approved, then a TIF district is created. Let's say the property taxes received for the vacant lot is $10,000 a year. The town votes to sell a bond for $2 million to put in sewer and electric upgrades. The developer takes out a loan for $10 million to develop the property. Work begins. The first year, when there are no significant improvements to the property (just planning) the value of the property has not changed and the $10k in Property Taxes is paid. Those funds re deposited in the Education Fund as are all property taxes.

The next year there have been improvements. The property taxes jump to $15,000 which the developer pays in full. Under a TIF agreement $10k will continue to go to the Education Fund. The additional $5k is the "increment." Of the $5,000 increment 30% goes to the Education Fund and 70% can be used by the town to pay of the infrastructure loan. Over the years, the increment increases along with the value of the property. After 20 years, the TIF financing ends and the full amount of property tax is sent to he Edeucation Fund. By then, the town should have paid off the infrastructure debt.

Why is this good?

Those who like TIFs say that it encourages development where it would not otherwise take place.

Why is it bad?

Those that don't like TIFs say that it amounts to corporate welfare. In some cases the development may well have taken place without the TIF. The developer should take on the risk and total cost of developing the property.