Since the 1970s, the following factors have led local governments (cities, towns, etc.) to consider funding tax increases: lobbying by developers, reducing federal funding for redevelopment activities (including increased spending), restrictions on municipal bonds (which are tax-exempt obligations), transferring municipal policy to local governments, State-imposed caps on municipal property tax revenues. and government limits on the amounts and types of municipal expenditures. Given these factors, many local governments have opted for FIT to strengthen their tax base, attract private investment and stimulate economic activity. One of the advantages of FIT as a source of funding is that it allows governments to invest in improvements without having to rely on other (more expensive) sources of funding, for example: intergovernmental transfers, capital reserves or tax increases. In addition, a FIT can facilitate the self-financing of a project with minimal negative tax impact. On the other hand, the timing of ITFs` provision of infrastructure funds in advance is more attractive than the timing of tax reductions or regulatory instruments. While FITs have been successfully used to boost urban renewal and positive fiscal impacts, this tool has also been misused, causing resistance. One criticism of ITFs as a financing tool is that some cities have used them for unnecessary investments, such as financial incentives to encourage companies to relocate. Another critical point is that some cities have drawn TIF districts so large that they generate revenue from areas that would have increased in value regardless of the TIF designation.

In Wisconsin, agricultural advocates denounced a TIF district created for a Walmart store in Baraboo to pave an apple orchard. But the low estimate of farmland meant a low base value and a large and consequent increase. This was not an unusual event: one scientist found that over a 14-year period, 54% of the newly annexed land in Badger state was TIF. That is, by definition, they were sprawling FIT neighborhoods on the outskirts of the city limits. In addition to favourable market conditions, certain institutional and regulatory structures need to be in place. When assessing the attractiveness of a TIF bond, potential bond investors will consider a city`s underlying creditworthiness, the marketability of the project, the good faith of the developer and any guarantor (possibly a higher-tier government entity). Investors expect certainty about the city`s ability to meet its contractual obligations. If there are significant risks, investors will want some form of third-party guarantee, which can increase the overall complexity and cost of the transaction.

The state`s enabling legislation gives local governments the power to designate districts to fund tax increases. The district typically takes 20 years or enough time to repay bonds issued to fund improvements. While regulations vary, it is common for a municipal government to assume the administrative role and make decisions about how and where the tool is applied. [39] In April 2012, it was proposed that the Government of Alberta amend the regulations so that the Community Revitalization Charge (CRF) could apply to remediation costs “incurred by a private developer.” [40]:18 Tax Increase Grants (TIFs) used for both state-subsidized economic development and municipal projects,[2]:2 have allowed cities and counties to obtain permission to rehabilitate abandoned land or public projects such as town halls, parks, libraries, etc. The definition of rot has taken a broad inclusion of almost all types of land, including agricultural land, which has drawn much of the criticism. [2]:2 Too often, states allow an area to be declared “spoiled” based on a long list of criteria. The area may need to meet only one or a few of these criteria, and some of the definitions may be vague and subjective. For this reason, we call FIT (and property tax cuts or other exemptions typically controlled by cities) “free interstate meal.” When a TIF district is created, the district auditor also certifies an “initial tax rate”. The initial tax rate is the total property tax rate that applies in the county, i.e. the tax rates levied by all local governments that collect taxes (city/town, county, school district, and special tax districts). Pay as You Go Another form of FIT funding is known as “pay as you go,” where the government reimburses a private developer if additional taxes are generated. This form of FIT requires a developer to assume some of the risk, as the developer must invest their own capital in infrastructure costs.

The proponent can only be reimbursed (an amount that usually includes interest) after the project has been delivered and absorbed by the contract. TIF bonds can be financed by several schemes. Many TIF bonds are a type of “private activity bond” or PAB. (Industrial development or tax obligations are another type of PAC.) FITs can also be funded through a “general obligation (or GO)”. That is, they are supported by the full confidence and recognition of the government that issues them. (School obligations and channel obligations are examples of GO obligations). The FIT allows local governments to invest in public infrastructure and other improvements from the outset. Local governments can pay for these investments later. They can do this by capturing the projected future increase in tax revenues generated by the project. This financing approach is possible if a new development is of sufficient scale and its completion is expected to result in a sufficiently significant increase in the value of surrounding properties that the additional local tax revenues resulting from the new project can support a bond issue. FIT bonds have been used to finance land acquisition, sewer and water improvements, environmental remediation, park and road construction, among others. In recent decades, two variants of FIT projects have developed in the United States: bond financing and pay-per-use.

Prior to 1986, municipal bonds were commonly used as part of FIT funding. These bonds were generally tax-exempt and offered a lower interest rate to the city and developers. The 1986 tax reform made it more difficult to issue tax-exempt bonds for this purpose. This has removed much of the incentive for local governments to borrow in anticipation of receiving tax increases. The practice in Minnesota often doesn`t use bonds, but expects developers to pay the cost and be reimbursed when increments become available. This approach (so-called “pay-as-you-go” financing) transfers the costs of “capitalized interest” to developers. In some cases, the city or development authority covers the costs by advancing its money (for example, from another municipal or government fund) until it can be reimbursed with the surcharges. If the city accepts lower or no interest on these advances, it uses these funds to support or subsidize development. But over time, that goal has been undermined. While some states have narrowly written their FIT targeting language to limit the FIT to areas that are clearly in difficulty, other states have not. And over time, some states with once well-aligned programs have deregulated their TIF licensing rules, so that, as we explain here, they can fuel urban sprawl and become costly fiscal headaches for school districts and county governments. Thousands of TIF districts have been established in cities of all sizes across the United States.

The strategy is often used by local governments to promote housing, economic development and redevelopment in established neighbourhoods. Although FIT has not been widely used to fund transportation infrastructure, some state laws explicitly allow the use of FIT for transportation purposes. Cities have the power to create TIFs, though tax evasion also tends to be to the detriment of school districts, county governments, and other local tax authorities. In typical revenue sharing, half of property taxes could go to schools, a quarter to a city, and a quarter to a county. But TIF redirect captures all these incremental streams and pours them into a small area for decades. In Minnesota, this is often not the case. The initial tax rate limits the increase to taxes generated by the tax rates that were in effect when the district was created. Thus, if local governments increase their tax rates (for example, to increase revenue or because of changes in the tax base), the increase in tax rates does not lead to further increases. In addition, in the Twin Cities metropolitan area and the Taconite Tax Relief Area, the gain can be reduced by contributing to the tax disparities for county real estate if the city chooses this option. In Georgia, TIF districts are called Tax Allocation Districts (TADs). As with the TIF, Georgia`s redevelopment law gives cities and counties the power to sell bonds to finance infrastructure and other sanitation costs under a TAD.

Tax increases, which are deposited into a special fund to repay bonds, can include property taxes, personal property and sales taxes. In general, only property tax increases are used and, as a result, local governments continue to receive new ADT revenues from growth in personal property values, new business licences and other sources. Currently, the second largest TIF project in America is located in Albuquerque, New Mexico: the $500 million Mesa del Sol development. Mesa del Sol is controversial in that the proposed development would be built on a “greenfield” site that currently generates little tax revenue, and any increase in tax revenue would be diverted to a tax increase financing fund.