Bible Park USA is a one-of-a-kind themed story park that brings the Bible to life through well-loved, familiar stories and ancient historical experiences.

 

Explanation of Tax Increment Financing

(August 22, 2007)

Tax increment financing (TIF) is a commonly used tool (used in 49 States across the country) that allows cities or counties to encourage and generate private-sector development.  TIF is used because it allows future gains in taxes to finance the current improvements that will create those gains. 

EXAMPLE:  The annual property taxes on a particular piece of property are $15,000.  After development, the property is worth more and the annual property taxes are increased to $1M.  With TIF in place, a portion of the difference in the original property tax of $15,000 and $1M ($1,000,000 - $15,000 = $985,000) can be used to fund a portion of the new development. 
If the annual sales taxes on a particular piece of property are $0, and after development, the annual sales taxes grow to $5M, a portion of that $5M can be used to help fund a portion of the new development.

When TIF is in place, a portion of the new taxes, known as incremental taxes, collected on a piece of property can be used to fund a portion of the new development. 

A community using TIF financing does not lose the tax revenues that were being collected before the TIF began.  All taxes on the property before the TIF was in place are still collected.  TIF does not involve loaning any money or giving any money to the project at any time.

How does this actually work?

In projects using TIF, a portion of the project is funded by private investment, and a portion of the project is funded using TIF. 

The way it usually works is thus:  private investors put up their portion of the money for the project.  For the TIF portion of the project, a bond is issued.  Payments on the bond are made from the collected incremental taxes.  Once the bond is fully paid, all of the taxes, original and incremental, go to the taxing authority (city or county).
 
If the project fails, the taxing authority (city or county) is not liable to finish paying the bond.  The holders of the bond are liable. 

Why do governments use TIF?

Since the 1970s, a reduction in federal funding for development-related activities including spending cuts, restrictions on tax-exempt bonds and an administrative transference of urban policy to local, lower-level governments, has led many taxing authorities to consider tax increment financing. State-imposed caps on property tax collections and limits on the amounts and types of expenditures have also caused local governments to adopt funding strategies like this.

State & local governments often use TIF because it helps attract development that adds to and/or diversifies the tax base, creates jobs and eliminates or delays the need to raise property taxes.  In Tennessee, counties are largely limited to property taxes, development taxes and various fees to raise revenue to pay for essential services like education, police and fire protection, and others.  Counties in fast-growing areas are often seeking ways to help generate tax-generating development, instead of tax-spending development, to help pay for services.  Having a strong diversified tax base helps the community by eliminating or deferring the need to raise existing taxes. Projects such as the relocation of Nissan Headquarters to Tennessee, Bellsouth’s Tower and Dell’s expansion are good examples of regional employers and institutions that have utilized TIF in bringing their operations to the region.