tax increment financing: overview

What is Tax Increment Financing (TIF)?

Tax increment financing (TIF) is a method of financing costs associated with public improvements such as streets, sidewalks, sewer and water, and real estate development. This is accomplished by encouraging developers to construct buildings or make other private improvements. The TIF encourages developers to construct buildings and make other private improvements on a site that without the TIF funding would otherwise not be developed.

In Minnesota, when a TIF district is created, the county auditor certifies the current tax capacity of the properties in the district as the TIF district's "original tax capacity." Later as the properties in the district increase in value, increases beyond the original tax capacity are "captured." The law refers to this increase as the district's "captured tax capacity."

The county auditor also certifies an "original tax rate." The original tax rate is total property tax rate that applies in the district, i.e., the tax rates imposed by all of the local governments that levy taxes (the city/town, county, school district, and special taxing districts).

The "tax increment or increment" for the district is determined by multiplying the original tax rate by the captured tax capacity. This roughly equals the additional taxes paid by the captured tax capacity or the increase in taxes that occur as a result of the development.


How is TIF used for affordable housing?

In Minnesota TIF traditionally was used as a means of redeveloping urban areas that had old or worn-out buildings in need of replacement or rehabilitation. It was initiated as a tool to help with urban renewal (redeveloping "slums" and "blighted" areas). Its use has since spread to other purposes. TIF districts in Minnesota are generally used to:
  • Redevelop areas occupied with substandard buildings
  • Build housing for low-income and moderate-income families
  • Clean up pollution
  • Provide general economic development incentives
  • Finance public infrastructure, such as streets, sewer, water, sidewalks, and similar improvements associated with the development. (This is not an explicit purpose of TIF, but Minnesota cities frequently use it for this purpose.)

According to the Minnesota State Law, there are 6 permitted types of TIF districts, but for our purpose we are going to explore two of them, housing and redevelopment that are most widely used for mixed-use and mixed-income housing projects.


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, TIF is often one of the few means available for municipalities to
Solutions in Action
Golden Valley
Photo courtesy of Bonestroo

Golden Valley Town Square is a 13-acre redevelopment project that exhibits all the characteristics of how redevelopment can include affordable housing along with a variety of land uses. The project includes town homes, stacked condominiums, rental apartments, and 38,000 square feet of office and retail space.

The city stepped in with TIF funds to assist with demolition of the old building and for infrastructure around the site. The rental units are affordable through funding from the Metropolitan Council, Hennepin County, and tax credits from the Minnesota Housing Finance Agency.

For more information contact
Jeanne Andre, city of Golden Valley Department of Planning, Zoning, and Development
(763) 593-8014

Click here to view a Google Streetview of the Golden Valley Town Square development
finance new development projects within the 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 generate an additional revenue stream with which to meet a community's housing needs. It is especially helpful given that an increased need for affordable housing is a nearly inevitable byproduct of any successful redevelopment strategy.

TIF is also a tool to assist with brownfield redevelopment. Specifically, using tax increment financing for environmental remediation is permitted under enabling statutes in Minnesota with special laws (beyond the State's regular TIF law) dedicated to this purpose.

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 within jurisdictions in 49 states and the District of Columbia if they meet a set of criteria as defined by their respective states. Although guidelines vary in states with TIF laws, there are some similarities that across state lines. 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 must serve the public interest.

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 that need to be developed. TIF can be used in the rehabilitation of older communities and the reconfiguration and redevelopment of buildings such as mills and factories for housing, as well as to fund new development where there is an affordable housing shortage.

Click here [PDF] to learn more about local Minnesota TIF policies created to meet an affordable workforce housing need within the growing suburban community of Chaska.


One Church StreetClick here to leave the Minnesota Toolbox and learn more about tax increment financing on the national version of HousingPolicy.org




6 NorthGo back to learn about other policies that can be used to generate capital