Tax increment financing is a local government financing tool that freezes the taxable value of a defined area at a base figure and directs the property tax on everything above that base to pay for improvements inside the area. Tax Increment Financing, TIF, is a value capture revenue tool that uses taxes on future gains in real estate values to pay for new infrastructure improvements, and TIFs are authorized by State law in nearly all 50 States and begin with the designation of a geographic area as a TIF district (FHWA, Tax Increment Financing Fact Sheet).
There is no federal TIF statute. Each state writes its own act, so the definitions below are quoted from one state’s, Minnesota’s, as a worked example of how the machinery is actually drafted. The names for the moving parts change from state to state; the structure does not.
What the Increment Actually Is
The tool has one arithmetic idea underneath it, and the statutory definition states it as a subtraction. Captured net tax capacity means the amount by which the current net tax capacity of a tax increment financing district or an extended subdistrict exceeds the original net tax capacity, including the value of property normally taxable as personal property by reason of its location on or over property owned by a tax-exempt entity (Minnesota Statutes 469.174, subdivision 4). Current value minus frozen base value is the captured amount, and the tax on that captured amount is the increment. That subdivision then carries a second, different formula for a hazardous substance subdistrict other than an extended subdistrict, which measures the excess over the subdistrict’s own original net tax capacity (the same subdivision), so the general rule above is not the only one in the section.
The frozen base is certified and then adjusted, and the definition opens with a cross-reference that has to be carried with it. Except as provided in paragraph (b), original net tax capacity means the tax capacity of all taxable real property within a tax increment financing district as certified by the commissioner of revenue for the previous assessment year, provided that the request by an authority for certification of a new tax increment financing district or for the expansion of an existing district has been made to the county auditor by June 30, and the original tax capacity of districts for which requests are filed after June 30 has an original tax capacity based on the current assessment year, and in any case the original tax capacity must be determined together with subsequent adjustments as set forth in section 469.177, subdivisions 1 and 4 (Minnesota Statutes 469.174, subdivision 7). The date qualifier is the whole of what decides which assessment year the base is drawn from, and the closing clause is what stops the base being read as a number fixed forever.
The word “increment” is then defined more broadly than the property tax alone. Increment, tax increment, tax increment revenues, revenues derived from tax increment, and other similar terms for a district include taxes paid by the captured net tax capacity but excluding any excess taxes, as computed under section 469.177, the proceeds from the sale or lease of property, tangible or intangible, to the extent the property was purchased by the authority with tax increments, principal and interest received on loans or other advances made by the authority with tax increments, interest or other investment earnings on or from tax increments, and repayments or return of tax increments made to the authority under agreements for districts for which the request for certification was made after August 1, 1993 (Minnesota Statutes 469.174, subdivision 25). All five items carry the same restrictions as the tax itself, which is why the list is drafted as one definition rather than five.
What TIF Is Not
It is not a tax cut, and the point is worth stating first because it is the most common misreading. TIF is not a tax reduction; taxes are paid on the full taxable value, and the original taxable value continues to be part of the tax base that supports the tax levies of the city, county, school district, and other taxing jurisdictions (Minnesota Office of the State Auditor, What Is Tax Increment Financing (TIF)?). The property owner’s bill is not reduced. What changes is where part of it goes.
What is set aside is the growth, and only for a stated period. The new, additional value from development activity is captured from the tax base for the duration of the TIF district, and after the TIF district is terminated, or decertified, the captured value becomes part of the tax base (the same page). So the other taxing jurisdictions are not levying against the captured value while the district runs, and they are once it ends. The general idea of a tax charged in proportion to value, which is what is being captured here, is set out in ad valorem tax, and the property tax itself in real estate tax.
What the Money Pays For
Two spending patterns are in common use, and they differ in who carries the risk. The proceeds from the TIF can be used to repay bonds issued to cover up-front project development costs, or alternatively they can be used on a pay-as-you-go basis to fund individual projects, and in some States private developers may self-finance infrastructure improvements with the municipality reimbursing them from the tax increment as tax proceeds are received (FHWA, Tax Increment Financing Fact Sheet). Where the first pattern is used, the obligation issued against the increment is a liability of the issuer, and the accounting for that instrument is in bonds payable.
The purpose test is written into the definitions too, not left to policy. Tax Increment financing is a financing tool meant to support local economic development, redevelopment, and housing development that would not otherwise occur without assistance, and TIF uses the incremental property taxes, or tax increments, generated by the increased taxable value of a new development to help finance qualifying costs (Minnesota Office of the State Auditor). The clause “that would not otherwise occur without assistance” is the whole of the but-for standard that most state acts turn on.
How a District Gets Created
The sequence is administrative and it runs in a fixed order. A finding of necessity is prepared that establishes the need for the TIF and formalizes the boundaries of the district, and this finding is normally a detailed study that demonstrates that the district meets the criteria contained in the State’s enabling legislation. A redevelopment agency is created by resolution or ordinance, and this agency may be the governing body of the municipality or a new agency appointed by the governing body. A development plan is prepared and approved by the agency and the city. The base year is declared following adoption of the plan. The redevelopment agency then solicits developers and enters development agreements to implement the improvements (FHWA, Tax Increment Financing Fact Sheet).
The certification step sits inside that sequence, and it is a continuing duty rather than a single act. Upon or after adoption of a tax increment financing plan, the auditor of any county in which the district is situated shall, upon request of the authority, certify the original net tax capacity of the tax increment financing district and that portion of the district overlying any subdistrict as described in the tax increment financing plan, and shall certify in each year thereafter the amount by which the original net tax capacity has increased or decreased as a result of a change in tax exempt status of property within the district and any subdistrict, reduction or enlargement of the district or changes pursuant to subdivision 4, and the auditor shall certify the amount within 30 days after receipt of the request and sufficient information to identify the parcels included in the district (Minnesota Statutes 469.177, subdivision 1). The annual limb is the one most summaries drop, and it is what keeps the base current for exemption changes and boundary changes.
Types of District, and Why the Type Matters
A district is not a single legal object. A tax increment financing district, or district, means a contiguous or noncontiguous geographic area within a project delineated in the tax increment financing plan, as provided by section 469.175, subdivision 1, for the purpose of financing redevelopment, housing or economic development in municipalities through the use of tax increment generated from the captured net tax capacity in the tax increment financing district (Minnesota Statutes 469.174, subdivision 9). The act then names types, and each type carries its own qualifying findings.
The redevelopment type is the one with the blight test, and the test is drafted as alternatives rather than as a single condition. A redevelopment district means a type of tax increment financing district consisting of a project, or portions of a project, within which the authority finds by resolution that one or more of a listed set of conditions, reasonably distributed throughout the district, exists, and the first of those conditions is that parcels consisting of 70 percent of the area of the district are occupied by buildings, streets, utilities, paved or gravel parking lots, or other similar structures and more than 50 percent of the buildings, not including outbuildings, are structurally substandard to a degree requiring substantial renovation or clearance (Minnesota Statutes 469.174, subdivision 10). Read the two halves of that first condition together. Both the area threshold and the substandard-building threshold have to be met for that one condition to be satisfied, while only one condition from the list has to be satisfied overall.
The blight framing is common but not universal. In many States, areas must be blighted in order for TIF districts to be established, and the intent is for the TIF to be used to channel funding toward improvements in distressed, underdeveloped, or underutilized areas where development might otherwise not occur (FHWA, Tax Increment Financing Fact Sheet).
Common Questions
The base value of a district is frozen and certified, the district is left to develop, and the tax on the value above the frozen base is captured and spent inside the district instead of flowing to the general levies. Captured net tax capacity is the amount by which current value exceeds the original value (Minnesota Statutes 469.174, subdivision 4), and the tool spends taxes on future gains in real estate values to pay for improvements made now (FHWA, Tax Increment Financing Fact Sheet).
It is set by state law and by the plan, not by any national rule. TIF districts are usually established for a period of 20 to 25 years, during which time all incremental real estate tax revenues above the base rate at the time the district is established flow into the TIF (FHWA, Tax Increment Financing Fact Sheet).
They keep the base and forgo the growth while the district runs. The original taxable value continues to be part of the tax base that supports the tax levies of the city, county, school district, and other taxing jurisdictions, and the additional value is captured from the tax base for the duration of the district, returning to it on decertification (Minnesota Office of the State Auditor). What that costs any one jurisdiction depends on whether the development would have happened anyway, which is the question the but-for finding is supposed to answer and the reason the finding is contested.
No. TIF is not a tax reduction; taxes are paid on the full taxable value (Minnesota Office of the State Auditor). The bill is the same size. The tool works on the destination of part of that bill, not on its amount, which is what separates it from any incentive that reduces the amount owed.
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