Tax Increment Financing

August 15, 2019

By Kim Chaney-Bay

Tax Increment Financing (TIF) is an economic development tool used by local governments to pay for public infrastructure and other improvements related to a particular development project.

According to the Memphis Chamber of Commerce, “the process begins when the State of Tennessee authorizes local governments to establish TIF Districts within their communities. These are often areas that are blighted, abandoned, or otherwise in need of revitalization.  When a TIF District is established, companies who choose to locate in that area receive the benefit of having a portion of their property taxes allocated to improvements they would otherwise have had to cover themselves – including, but not at all limited to, things like sewer infrastructure, parking lot expansions, or street repaving”.  Following is a more detailed explanation of how it works.

In a TIF District, an initial property tax baseline is set when the District is established. As companies begin to locate within the District and property value increases, any additional tax revenue collected in excess of the baseline – a new tax increment – is kept separate. The tax increment is the difference in tax revenues generated by the project in the plan area after the projects has been completed, compared with the tax revenues generated in the plan areas before the development plan was adopted.  The differences in these tax revenues pays the costs of improvements to the public infrastructure serving the plan area.

During the lifetime of a TIF District (anywhere between seven and 30 years), that tax increment money is then divided based on percentages authorized by the State: one amount is distributed back to the government as normal taxes, and another amount is used for the improvements within the District that were established upon its founding. In Tennessee, by default, that second revenue stream can only be used for “public use” construction within the TIF District – the streets, sewers, and parking lots, among other things. But if a company wants to use those funds toward privately-owned assets, like repaying construction debt or creating a new asset on the property it must receive approval from local and state governments.