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Tax Increment Financing (TIF)

Eligible Businesses:
A municipality may choose to provide "financing" to any business that is making a significant capital investment within its borders. The source of the financing is taxes paid on new, real and personal property
Program Summary:
TIF is a local financing tool that permits a municipality to use some or all of the new property taxes that result from an investment project within a designated district to assist in that project's expenses. The municipality may disburse the tax increment directly to the investing business to help pay project costs, use it to retire bonds it issues as part of the project, or retain it for allowable economic development purposes.

TIF districts may be designated for up to 30 years. Bonds may be issued for up to 20 years. The community designation of a TIF district requires proper public notice, a public hearing, and a majority vote of the municipal legislative body.
Program Valuation Example:
A business plans to invest $4,000,000 to construct a state-of-the-art manufacturing facility on land presently valued at $200,000. The municipality's property tax mil rate is $18 per $1,000 of valuation, so the business will have a tax obligation of $75,600 per year once the investment is recorded on the tax rolls. Of this tax obligation, $72,000 is new, or "incremental," and therefore eligible to be included within a TIF development program. Two examples exist for financing this scenario:

Credit Enhancement Agreement . Once a municipality votes to financially support a business under the TIF program, the business may enter into a binding contract with the community called a "credit enhancement agreement." If the municipality agrees to "capture" 50% of the increased value in the TIF district for a period of ten years and return the new tax revenues to the business mentioned above to assist in financing the new building, then the business would receive $36,000 in the first year of the agreement. If all things remain constant, the business would receive approximately $360,000 in financing over the term of the TIF district.

Municipal Bond . Additionally, the municipality may float a bond to pay this cost. It could do so by issuing a 10-year general obligation bond in the amount of $150,000. If annual debt service on the bond is $20,000, the municipality could "capture" another 20% of the increased value in the TIF district for a period of ten years and pay down the debt on the TIF bond.

The remaining 30% of the new tax revenues from the increased assessed value could be deposited in the general fund for use on regular municipal expenses.

 

 



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