TIF is a long-term approach to raising tax revenues to pay for the costs of public improvements within a district targeted for redevelopment or revitalization. The local government freezes the taxes collected on a tract of land at a base level and, as indicated in the yellow area of the graph below, uses any additional tax revenue raised above that base to finance the improvements made to that district. The lifespan of most TIF districts typically range from 20-30 years -- enough time for incremental property tax increases (due to increases in assessed property values) to pay off the initial improvements.


Graph courtesy of the San Antonio Housing and Neighborhood Services Department

There are two main ways that the upfront costs of TIF are covered:
  • Pay as you go: The local government or development authority invests in improvements upfront and relies on the tax base to increase on its own during the life of the tax increment district. The local government or development authority is reimbursed over the lifespan of the TIF designation as the increments become available
  • Bonding: Local governments issue TIF bonds as a quick way to cover the upfront costs of the TIF project. TIF bonds vary from general obligation bonds because as the tax revenue increases over time, the increment is used to pay off the bonds instead of a tax levy or appropriation.
Prior to implementation, the use of TIF requires careful consideration through feasibility studies, a strong development plan, public hearings, and stakeholder partnerships to support a development strategy. Creation of a TIF district needs to be approved by a city council, based on public support. Such planning can help to reduce the likelihood that TIFs fail to generate sufficient increases in property values to pay back the municipality for the initial improvements. Advance planning also can help jurisdictions put into place affordable housing policies that ensure that a mix of affordable housing options is preserved even as property values rise from successful redevelopment efforts.  Due to the current economic crisis, several commercial TIF districts in Milwaukee and other Wisconsin cities are facing declining property values, thus resulting in lower property tax revenues for the jurisdictions than anticipated.  Prior to May 2010, state law in Wisconsin capped the life of a TIF district at 27 years.  The new law extends TIF district designation to a maximum of 40 years in order to give troubled districts more time to pay off their debts. [1]

TIFs can be controversial for two reasons. Some argue that TIF revenue does not in fact represent "new" revenue on top of what the municipality would have received in the ordinary course of business, but instead represents the diversion of tax revenue from other needed uses. Click here for a discussion on the fiscal implications of TIF.

A second concern that is sometimes raised with TIFs is that if they succeed, they will spark gentrification and displacement of lower-income residents. Housing advocates in Chicago, IL have been critical of the city's use of TIF funds for this very reason.  According to one report, only 4 percent of TIF funds generated between 1995-2007 were targeted to affordable housing development. [2] One major way to address this concern is to ensure that a minimum percentage of TIF revenue is used to preserve and expand the availability of affordable homes. Sound planning is also essential to ensure that land is purchased within the district for affordable homes before it becomes too expensive.

Click on the links below to learn about three primary ways TIFs can be used to support affordable housing:

Affordable Housing TIFs are set up expressly to fund investments in affordable homes. Here, affordable housing is the capital investment that is intended to fuel community revitalization.

Bruner PlaceMinimum Requirements for TIF Revenue to be Spent on Affordable Homes
These are TIFs where the principal investment intended to spark redevelopment is a non-housing investment, such as roads or sewers, but jurisdictions or states require that a set percentage of TIF revenue be dedicated for affordable homes

Using TIFs to Preserve and Expand Affordable Housing Opportunities in Non-Blighted Neighborhoods
This is an emerging strategy for ensuring the continued availability of affordable homes in communities poised to experience rapid growth in home prices

Click here to view other resources on tax increment financing

[1] "Gov. Doyle signs bill extending life of troubled TIF districts". May 13, 2010. By Tom Daykin.  Milwaukee Wisconsin Journal Sentinel.
[2] Tax Increment Financing Funding and Affordable Housing: A analysis of current TIF resources and City of Chicago TIF-funded Housing 1995-2008. June 2009.  Chicago, IL: Sweet Home Chicago Coalition.