Understanding Tax Increment Financing

Tax Increment Financing (TIF) is a complicated topic to understand. Generally, there is not a great understanding of this economic development tool and how and why communities use it. I’m devoting my column this month to trying to help readers gain a better understanding. I hope this helps.

TIF began in California in the 1950’s. Indiana Implemented the tool in 1975. South Bend and Mishawaka were two of the early adopters. Today, there are thousands of districts across the Country, and every State uses the tool, except for the State of Arizona.  

TIF is a way for local governments to pay for improvements—like roads, water, sewer, fiber, brownfield remediation, downtown revitalization, or redevelopment—by using the future increase in property tax revenue that those improvements are expected to create.

To create a district, a taxing unit (City, Town, or County) designates a specific geographic area as a TIF district to support needed improvements. The existing property tax value within the district is established and remains at the baseline for a set period, typically up to 25 years from when debt is incurred for new districts.

Schools, libraries, and other taxing units continue to receive the same level of property tax revenue from the district as they did before the TIF was created. New development adds taxable value within the district, creating additional property tax revenue. The additional tax revenue above the original baseline is the “increment” and is reinvested to fund infrastructure and improvements within the TIF district.

Generally, you see two types of TIF districts. First, in areas with aging or underused assets, such as older buildings, vacant land, or outdated infrastructure. Common examples include downtowns or former industrial areas. Locally, think about the former Uniroyal area in Mishawaka or the Studebaker area in South Bend, and the two downtown areas.

Second, TIF’s are created in areas experiencing growth but lacking adequate infrastructure to support new development. Local examples include the AM General area, Blackthorn, Edison Lakes, the Indiana Enterprise Center, and St. Joe Farms.

Cities and Counties like the tool because it leverages future revenue without increasing taxes for existing residents, it supports long-term economic growth, and it supports infrastructure upgrades needed to attract private investment. Very few economic development projects in our community over the past 50 years have been located outside of a TIF District, and most of those projects would not have advanced without the infrastructure support provided by TIF funds.

TIF is one of the only economic development tools that a taxing unit has. Without a TIF district, the unit could bond for those necessary infrastructure projects. But with the general fund already stretched thin funding essential things like police officers, firefighters, parks, snowplow drivers, and all the everyday services residents rely on, there wouldn’t be much money left to provide bond repayments. Financing a large infrastructure project would crowd out basic services or require tax increases.

One of the criticisms of TIF is that taxing units don’t receive the increment during the TIF period. In recognition of this, many communities also voluntarily “pass through” some increment to schools or libraries when revenue allows, helping offset short‑term impacts. But taxing units benefit in other ways from the new people, jobs, and projects a TIF district attracts. Those districts would generate long-term gains once the TIF ends and the higher assessed values return to the full tax rolls.

We can’t TIF the whole county, but at the same time we need TIF districts to help fund critical infrastructure to attract new private investment, which won't happen without it. Communities have to strike a balance, and a coordinated effort is required amongst the taxing units as over time each of the taxing units need the opportunity to grow their tax base to keep up with the rising cost of delivering essential services.