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Tax Increment Financing (in Municipal Finance)

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PPGPortal > Home > Concept Dictionary > T, U, V > Tax Increment Financing (in Municipal Finance)
 
Tax Increment Financing (in Municipal Finance)

Tax increment financing (TIF) is a means of funding infrastructure development today using the promise of future tax revenues.

(Slack, Enid. Lecture. Institute on Municipal Finance and Governance, University of Toronto. Fall 2008.)

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Like a land value capture tax, TIFs use the promise of future revenue (assumed based on the expected rise in property values) as the basis for borrowing to fund investment today.

Public consultation are generally held, after which geographic boundaries are set to create a TIF district. Over a fixed period of time – generally 15-35 years – property tax revenues are frozen at a base level or indexed to the rate of inflation. During the investment period, the excess revenues generated as property values increase are used either to pay for development, or to pay off loans incurred to pay for development. After the investment period, revenues are returned to their original level.
TIFs offer a number of advantages. They are good means of financing long-term infrastructure investments. Municipalities in the US, where they are most frequently used, are often willing to incur the slightly higher interest rate because TIFs better allow those who enjoy the benefit for development to pay the cost. For heavily indebted municipalities, TIFs are also attractive because they are treated differently than conventional borrowing. TIFs can also be problematic in a number of ways. They can create liabilities if tax revenues do not increase as expected. They can deprive other services of much needed revenue increases over a long period of time. It has also been suggested that TIFs often simply speed up a development that would have occurred anyway at the expense of other public services. There can also be either positive or negative externalities for those living immediately outside the TIF district.

While TIFs are used extensively in the US, they have only recently been in use in Ontario on a pilot basis for two projects in the GTA
     
Tax Increment Financing (in Municipal Finance)

Tax increment financing (TIF) is a means of funding infrastructure development today using the promise of future tax revenues.

(Slack, Enid. Lecture. Institute on Municipal Finance and Governance, University of Toronto. Fall 2008.)

---------------------------------

Like a land value capture tax, TIFs use the promise of future revenue (assumed based on the expected rise in property values) as the basis for borrowing to fund investment today.

Public consultation are generally held, after which geographic boundaries are set to create a TIF district. Over a fixed period of time – generally 15-35 years – property tax revenues are frozen at a base level or indexed to the rate of inflation. During the investment period, the excess revenues generated as property values increase are used either to pay for development, or to pay off loans incurred to pay for development. After the investment period, revenues are returned to their original level.
TIFs offer a number of advantages. They are good means of financing long-term infrastructure investments. Municipalities in the US, where they are most frequently used, are often willing to incur the slightly higher interest rate because TIFs better allow those who enjoy the benefit for development to pay the cost. For heavily indebted municipalities, TIFs are also attractive because they are treated differently than conventional borrowing. TIFs can also be problematic in a number of ways. They can create liabilities if tax revenues do not increase as expected. They can deprive other services of much needed revenue increases over a long period of time. It has also been suggested that TIFs often simply speed up a development that would have occurred anyway at the expense of other public services. There can also be either positive or negative externalities for those living immediately outside the TIF district.

While TIFs are used extensively in the US, they have only recently been in use in Ontario on a pilot basis for two projects in the GTA.

Approved for glossaryposting by Ben Eisen on January 27, 2011


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© University of Toronto 2008
School of Public Policy and Governance