tax increment financing: overview

What is Tax Increment Financing (TIF)?

Tax increment financing (TIF) is a tool used by municipal governments in nearly all states (but not in Arizona) to stimulate economic development in a targeted geographical area. When a TIF district is established, the "base" amount of property tax revenue is recorded based on the status quo before improvements. To stimulate redevelopment within a designated tax increment district, the municipality then makes or funds a developer to make capital improvements, such as new roads, water, sewers, and other public amenities. To the extent such efforts are successful, property values rise, leading to an increase in actual property tax receipts above the base.

The "base" amount of property tax revenue continues to be used to fund city services but, over a set period of time, the increase in tax revenue above the base (i.e., the increment) is captured by the tax increment district as revenue, which is used to reimburse the community (or a partner developer) for the cost of the initial and subsequent improvements that spurred the rise in property values and tax revenue. Alternatively, municipalities can issue bonds, backed by the expected TIF revenue, in which case the TIF proceeds are used to pay back the bonds. The incremental increase in sales taxes in the district can also be either captured by the district as revenue or used to pay back the bonds.

How is TIF used for affordable housing?

There are three main ways in which TIF districts (TIFs) can be used to support affordable homes:

1. In some communities, TIFs are created expressly to fund investments in affordable homes. In such cases, affordable housing is the capital investment that is intended to fuel community revitalization. In Massachusetts, for example, the Department of Community Development and Housing's Urban Center Housing- Tax Increment Financing Program (UCH-TIF) authorizes local governments to use TIF financing for affordable housing in commercial centers that have a low population during non-business hours. [1] Municipalities must demonstrate the need for multifamily housing within the area they target under this program, and designate at least 25 percent of new housing units to be affordable.

2. In other communities, TIFs are set up principally to fund other investments -- roads, sewers, etc. -- that are intended to stimulate economic revitalization or growth in a community. Affordable housing is funded as a secondary activity using revenues generated from the primary capital improvements or bond proceeds raised in anticipation of those revenues. The logic of this use of TIF revenue is that, as property values increase over the lifespan of a TIF district, housing becomes less and less affordable. Over time, long-term residents may risk displacement due to higher taxes, escalating rents or home prices and communities may no longer be able to provide housing opportunities for families with a diverse range of incomes.

Because there is generally considerable competition for the expenditure of TIF revenue, a number of states and localities have passed legislation to require that a minimum portion of TIF revenue go towards affordable homes. For example, the State of Utah mandates that municipalities that have adopted TIF after May 2000 and generate $100,000 of annual tax increment must set aside at minimum 20 percent of the funds collected for affordable housing construction, retention, or development within TIF boundaries. An additional 20 percent of TIF revenues can be used to replace homes lost to urban renewal and to housing preservation efforts outside of the TIF project area.

Some communities are using TIF as a mechanism to invest in transit, using a portion of the increment for affordable housing near the station area.

3. Tax districts can also be created to preserve  affordable housing opportunities in neighborhoods poised for rapid increases in housing prices. While this use is not as common as the other two, and does not necessarily rely on public investment to create incremental property taxes, the city of Austin, Texas has adopted a policy along these lines and this approach appears to hold promise as a strategy for preserving affordable housing in the face of gentrification.

Solutions in Action
Phoenix Park
Photo courtesy of the Sacramento Housing and Redevelopment Authority
The City of Sacramento and Sacramento Redevelopment Agency purchased 116 formerly private four-plex buildings in south Sacramento and redeveloped them into 1-,2-,3-,4- bedroom rental apartments for low-income families and seniors. Funds set aside for housing from a TIF district contributed a significant portion of the financing for this project.

Prior to revitalization, over half of the original buildings were declared substandard because of years of neglect. The neighborhood was also one of the most crime-ridden in the city. City-wide concern about the physical and social deterioration of the area led to the Phoenix Park revitalization project, which began in 2001. The city implemented a multi-tiered strategy to address the multiple issues facing the neighborhood, including land acquisition for the rehabilitation of the housing units, a safety and security plan, and coordination of social services.

Tax increment financing revenues reserved for housing and other public monies contributed almost a quarter of the $84 million used to finance Phoenix Park. In addition to major improvements of the housing units, alleyways were converted into private backyards and a community center was developed. Since completion, crime has been reduced by almost 40 percent.

Click here to leave this website and learn more about Phoenix Park.
What problems are solved by Tax Increment Financing (TIF) policies?

TIF offers a strategy for municipalities to "self finance" a redevelopment project without having to raise or impose new taxes. In an environment of fiscal stress or a housing market downturn, communities that generate revenue for affordable housing through real estate transfer taxes or rely on low income housing tax credits for the development of new affordable homes can experience a loss of revenue or capital.  TIF is often one of the few means for municipalities to finance new development projects in a community. Moreover, once the TIF district expires, the municipality will receive the full benefit of the property taxes on a much higher property tax base than would otherwise have been present without the investments. TIF is increasingly popular as a tool to fund affordable homes because it can be an additional revenue stream to meet a community's housing needs and because an increased need for affordable housing is a virtually inevitable byproduct of a successful redevelopment strategy.

TIF is also emerging as a tool to manage and preserve the affordable housing stock in rapidly growing areas to help ensure the continued availability of affordable homes in those communities. Click here to learn about minimum requirements for TIF revenue to be spent on affordable housing.

Where are these policies most applicable?

Tax increment financing districts can be established in jurisdictions in 49 states and the District of Columbia if they meet a set of criteria as outlined by their state. Although guidelines vary in states with TIF laws, there are similarities across the board. Most states require that a TIF be targeted in areas of economic or physical distress and that any improvements to the district as part of the program serve the public interest.

In areas that do not conform to these conditions, some local governments also have authority to establish TIFs by determining that a development project would not have been financed "but-for" (without) the TIF. For example, in Madison, Wisconsin, TIF can only be used if the proposed development would not occur "but for" city assistance. [2] The "but for" option can be beneficial to jurisdictions that do not meet other state TIF criteria. TIF critics, however, argue that such loose criteria for using TIF enables government to divert needed tax revenue to subsidize projects that are not always vital to the public interest, such as golf courses, hotels, or big box stores. [3]

Since TIF operates within a set district, it is well suited for jurisdictions that have specific neighborhoods in need of redevelopment or large tracts of land to be developed. TIF can be used in the rehabilitation of older communities and the reconfiguration of buildings such as mills and factories for housing, as well as to fund new development.  In some states, TIFs are starting to be used as a mechanism to support affordable housing near transit investments.   

One Church StreetLearn more about tax increment financing

6 NorthGo back to learn about other policies that can be used to capitalize on market activity

The Center for Housing Policy gratefully acknowledges the input and feedback provided for this policy section by the following reviewer: Mark Tigan, Clark University - IDCE. Please note, however, that the views and opinions expressed on are those of the Center for Housing Policy alone.

[1] This section draws on information from the Massachusetts Department of Housing and Community Development, Community Services webpage on the Urban Center Housing-Tax Increment Financing program.

[2] See the Madison, Wisconsin Community & Economic Development Unit webpage on Tax Increment Financing.

[3] Tax Increment Financing Boosts Local Tax Base. 2000. By William Ant. Economic Development Digest 11(10). Washington, DC: National Association of Development Organizations.