Case Study Source: The Joint U.S.-Brazil Initiative on Urban Sustainability, part of the U.S. Environmental Protection Agency.
As is evident in major cities around the United States, TIF can be a valuable public finance tool for redevelopment projects. Establishing a TIF program allows the city to invest selected new property tax dollars into the neighborhood from which they came, instead of into the city's General Fund, for a defined period (typically 20 years). TIF funds are used to leverage public funds to promote private sector activity in a targeted district or area. TIF districts are typically established in areas with redevelopment potential and enable municipalities to use anticipated growth to raise money to finance essential infrastructure improvements by leveraging public sector bonds based on future tax gains. In many cases, the municipality will continue to receive property tax revenues generated by existing properties in TIF districts as of the base year (the year in which the TIF district begins). However, tax revenues generated by increases in real property values following the TIF's establishment, referred to as the increment, are typically deposited into a trust fund and go to repay the bonds used to fund specific initiatives. Depending on the particular enabling legislation, tax increment revenues can be used immediately, saved for a particular project, or bonded to maximize available funds.
In the United States, state enabling legislation is required prior to implementation of a TIF strategy. Depending on the limitations of state statutes, TIF proceeds are not limited exclusively to public infrastructure investment, but public participation is considered an important part of the TIF designation process. One challenge on the implementation of a TIF district is if actual revenues fall short of projections, which can occur if the level of anticipated new development is not achieved or if property tax abatements or exemptions to induce development are implemented. To reduce these risks, a municipality can add other potential revenue sources such as parking into the mix, designate a larger area to spread risk more broadly, or allow joint financing that distributes the costs of improvements in one district across many TIF districts. Loan guarantees could also be provided by developers who would benefit from the public improvements made.
The widespread use of TIF reflects its success as a key tool to finance public improvements in cities across the United States. Chicago alone contains more than 150 TIF districts. Millennium Park was financed in this fashion, and its $340 million public investment is projected to yield $5 billion in private investment in the surrounding area in its first 10 years of operation. Similarly, Atlanta expects to earn a 20-fold return on the $1.66 billion bond that the city leveraged for its Beltline project.
EPA's Environmental Finance