Tax Increment Financing (TIF)
What is TIF?
Tax Increment Financing (TIF) is a public financing method which allocates future increases in property taxes from a designated area to pay for improvements only within that area. Municipalities use TIF to attract private development and investment to areas that have not seen appropriate growth. TIF may only be used when private development would be too difficult or costly without improvements and incentives sponsored by the municipality. The increased property tax revenues that arise when new development occurs repay the costs of the improvements or incentives funded by the TIF.
How does TIF Work?
Normally, property is taxed by several different governmental jurisdictions: the municipality (Village), School District, County, Park District, etc. The taxes levied are allocated to each district in accordance with its tax rate. Under TIF, the property taxes due to increased value from new development, increases in assessment due to rehab or improvement, equalization, or rate changes are all allocated to the Village. Other districts continue to receive the property taxes generated by the base value of properties in the district.
Tax increment financing is not a tax and does not generate tax revenues by increasing tax rates; it generates revenues by allowing the municipality to capture, temporarily, the new tax revenues produced by the increased value of properties in the Project Area.
Under TIF, all taxing districts continue to receive property taxes levied on the initial valuation of properties within the Project Area. Taxes are not “frozen” under TIF. Taxing districts can, through normal means, increase their tax rates. They can also receive distributions of excess Incremental Property Taxes when annual Incremental Property Taxes received exceed principal and interest obligations for that year and redevelopment project costs have been paid. Taxing districts also benefit from the increased property tax base after redevelopment project costs and obligations are paid.
What Are Some of the Popular Myths Concerning TIF?
- Some property owners would be receiving some kind of tax break. This is not true. Property owners pay the same amount of property taxes they would have paid had the TIF District not existed.
- Property taxes for owners within the TIF District will increase. This is also not true. Their property taxes are the same as everyone else in the municipality. Property taxes will only increase if the value of their property increases, or if the tax rate changes.
- The school district will be deprived of revenues during the life of the TIF District. Again, this is not true. First, because of the way tax rates of the various taxing bodies are calculated when a TIF District is established, the school district as well as the county, the municipality and the other taxing bodies continue to receive the full amount of the taxes that they have levied during the life of the TIF District. Secondly, the school aid formula at the state level has been adjusted so that during the life of the TIF District, the school district actually receives more school aid from the State than it would have, had the TIF District not been in place. Third, because the area would not have been developed without TIF, the school district could not take advantage of any increased equalized assessed value. And last, the TIF legislation requires payments to school districts if additional children are generated from TIF supported projects.
How Does “Conservation” and “Blight” Factor Into TIF Designation?
There are two ways to qualify an improved area: (i) a blighted area, or (ii) a conservation area. Designation as a “blighted area” requires that at least 5 of 13 listed criteria are found to a meaningful extent and reasonably distributed. Designation as a “conservation area” requires that more than 50 percent of the buildings in the study area are 35 or more years of age, and that at least three of the listed criteria are found. These criteria include dilapidation, obsolescence, deterioration, structures failing to meet minimum building codes, illegal use of structure, inadequate utilities, excessive vacancies, declining assessed values, the necessity of environmental clean-up, and structures built under a lack of community planning.
**Please note that the TIF law does not require every parcel in the area must have blighting characteristics for either the area to qualify as a blighted or a conservation area. In fact, new construction can exist in the proposed area. Rather, the blighting factors must be present to a meaningful extent and reasonably distributed throughout the area.
What Can TIF Funds Be Used For?
The improvements which may be funded through TIF are defined by State law and may include such items as:
- Roadway, stormwater and streetscape improvements
- Relocation and demolition costs
- Facade improvements, building rehabilitation, interior remodeling
- Land assembly and demolition
- Utility extensions and enhancements
- Planning, architectural, engineering, legal and other services
- Bond financing costs incurred by the municipality
- Certain interest costs incurred by a redeveloper
- Costs of construction or rehabilitation of housing for low- and very-low income households
- Job training
What is the “But For” Test?
For a municipality to establish a TIF District, the municipality must determine that the TIF District, as a whole, would not develop without the assistance to be provided by TIF. This is what is known as the "But For" test and is one of the safeguards to prevent the abusive use of TIF. This test does not imply that any new proposed development occurring without TIF assistance would disqualify the District. Rather, you have to look throughout the District to see if the whole area would develop without the benefit of TIF, and not just one or two parcels.
How Does TIF Make Development Occur?
The municipality undertakes certain activities or agrees to pay certain private costs as incentives to make the TIF District attractive for private redevelopment. The costs connected with these actions by the municipality are paid for with the Tax Increment, caused by new private development. The types of activities include: construction of public improvements, acquisition of property, relocation costs, demolition of buildings, site preparation, creation of certain training programs, developing planning studies, the rehabilitation of existing structures, and occasionally the construction of facilities for other taxing bodies.
How Does the TIF Process Work?
When a municipality decides that TIF might be a valuable tool for economic development, a feasibility study is prepared. The feasibility study includes an inventory of any existing housing in the study area, and determines whether the area is eligible for TIF according to State regulations.
If the study area is found to be eligible, the municipality, or a consultant hired by the municipality, prepares a plan for redevelopment of the area. This plan is presented at a public meeting, where initial feedback from the community can be assessed. In addition, members of the public and community organizations can sign up on an “interested parties” registry that the municipality will use to notify persons and organizations about the TIF process.
Next, the municipality will set a date and time for a formal public hearing, and will then notify each of the taxing bodies that levy taxes in the proposed district. Representatives from each of these taxing bodies meet as a “Joint Review Board,” to review the redevelopment plan and make a recommendation to the municipality. A public hearing is held next, at which time comments from the public are taken.
After that, the municipality can choose to enact tax increment financing. If TIF is adopted, the district may be in place up to 23 years. Each year, the municipality is required to account for revenues and expenditures to and from the TIF fund. Throughout the life of the TIF, the municipality can make improvements and offer incentives to encourage the redevelopment of the area according to the objectives of the redevelopment plan.
Citizens can take an active role by attending public hearings and meetings to voice their opinions on the TIF proposal. Notice of the availability of the plan and the date and time of a public hearing must be sent to all property owners within the proposed TIF District, as well as other interested parties.
What Is the Life of a TIF District?
The maximum life of a TIF District is 23 years. However, it can be shorter if the municipality determines that a shorter period is more appropriate. The municipality has the ability throughout the life of the TIF District to terminate the District at any time, subject to any contractual obligations that may exist.