NCPA - National Center for Policy Analysis

Tax Increment Financing Makes Sense

July 21, 2003

While many cities rely on general tax revenues to fund improvements, tax increment financing (TIF) is an increasingly viable solution to providing needed infrastructure, say researchers Jen Melby and Joshua C. Hall (Buckeye Institute).

Tax increment financing funds infrastructure improvements through a partnership between local government and a private developer or company. Here's how it works:

  • Expected growth in property tax revenues from a designated area are used to finance the bonds that pay for improvements in the TIF district.
  • Developers or companies would continue to pay real estate taxes on the value of the property prior to the creation of the TIF district.
  • As the improvements increase the value of their property, however, the new tax money is directed into a fund to pay for the improvements.
  • If a development is profitable, then the costs will be paid for in the growth of property tax revenues.
  • If the property fails to increase in value, the improvement costs fall back on the general taxpayer.

This risk makes some governments wary of employing TIFs. Such concern, while important, must be weighed against the alternative. Without the use of TIFs, cities must either use general tax revenues or have no improvements at all, according to the researchers.

Source: Jen Melby and Joshua C. Hall, "Tax Increment Financing: An Infrastructure Financing Solution," Buckeye Institute, July 11, 2003.


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