How to revitalize blighted areas without increasing taxes: TIF

Winnipeg’s city hall has used a funding device, common in the US, but virtually unknown in Canada, to develop housing, and is now looking at using the same device to improve streets around the MTS Centre and to support the development of a co-operative business centre, the Neechi Commons.

MTS Centre

Neechi Commons under construction                                                          

Artist’s conception of future Neechi Commons

The device, called tax increment financing (TIF for short) has been a standard development tool in the US for quite awhile, but it’s relatively new to Canada. Typically a TIF is used for the revival of blighted areas, but by no means does that necessarily imply that the benefits flow to low-income people or neighbourhoods. It could be and has been used to tear down such a neighbourhood and replace it with a commercial development.

How TIF works

1.  A sponsoring jurisdiction, generally a city, meets legal requirements and establishes the boundaries within which the TIF development will take place.

2.  The property tax base is frozen meaning that the total property value of the area is put on the record. From then on, the tax revenues on the recorded value remain part of regular city revenues, exactly as before. But the tax proceeds of any increase in property value – called the incremental valuation – will flow to the TIF fund.

3.  Borrowing. Assuming a successful project, this will create a revenue stream. So the agency managing the TIF puts forward its development proposal, and if it can convince lenders of its viability, it can borrow using the future revenue stream as collateral.

4.  The incremental valuation or increment is to be used for the project for which the TIF was created. Any part of the incremental valuation not so used is called the excess increment, and it flows into the city’s general revenues. The TIF is time-limited and, when it runs its course, revenues from the area once again all flow into the city’s general fund.

Advantages

TIF offers a way of financing projects that would not otherwise attract finance. If it’s successful, it can result, not only in an improvement to the TIF area, but in increased tax revenue that ultimately flows back into the city’s general revenue fund.

Disadvantages

From the viewpoint of the rest of the city, it can be seen as a “heads I win, tails you lose” proposition. If the project is successful, the benefits, at first, flow only to the TIF area. It it’s unsuccessful, and the TIF fails, the area goes back to being a problem for the city as a whole.

Potential pitfalls

The TIF might be used to finance a project that would have been financed anyway, in which case it becomes a simple tax give-away to a developer. The financing that the TIF provides would, in that case, be money the developer wouldn’t have to come up with, money she or he saves.

A second potential pitfall is that the return of TIF benefits to the city as a whole may be postponed, possibly indefinitely, by continually inventing new development projects and thereby avoiding either the payment of an excess increment, or the winding-down of the TIF, or both.