Tax Increment Financing

It’s election time in Springfield, and we’re hearing lots about economic redevelopment. And when people talk about economic redevelopment in Springfield, you’ll almost inevitably here the word “TIF.” If you think that a TIF is a lover’s spat, this article is for you. And for those readers who know that TIF stands for tax increment financing, this column might also be of some assistance.

What is tax increment financing? TIFs were created over 20 years ago by our state legislature to give local municipalities a better chance at spurring development in certain areas. Generally, TIF funds are used to attract new business to a designated area via government funding of infrastructure improvements (such as roads and sewers) and other direct incentives. Almost all states offer some form of TIF financing.

TIFs are available only for geographical areas that meet certain criteria. Those areas, called TIF districts, usually have certain physical or economic problems. Although perhaps an unfortunate way of describing it, the most common TIF districts are known as “blighted” areas. Blighted areas must meet a certain number of criteria that make them “detrimental” to public safety, health or the welfare of the community or that impair growth. TIF districts can also be created for “conservation” areas that must satisfy different, but somewhat similar, standards.

Before an area can become a TIF district, the local municipality has to answer what seems like a simple question: Will private investment occur but for the incentives provided by TIF financing? If the answer is yes, then TIF financing is unavailable. If the answer is no, TIF financing is available. The process for creating a TIF district, and in the process answering that question, is very similar to how an ordinance is passed. Studies are conducted (known as a Redevelopment Plan), the public and local taxing bodies are invited to provide input, and then the proposal is put to a vote by the municipality. Significantly, the Redevelopment Plan also sets forth the budget for how to allocate the funds available to the TIF district. The whole process is governed by a state law known as the Illinois Tax Increment Allocation Redevelopment Act.

Under that law, TIF funds can be spent on a wide variety of incentives and improvements. Funds can be used to acquire or rehabilitate real property, to provide financing, to fund roads and sewers and other public works, to pay for professional services usually associated with development, to pay for job retraining, and even for day care.

Where do the funds come from to pay for all those costs? In short, those funds come from property tax revenues. True to its name, the funds come from something known as a “tax increment.” A tax increment is the difference between property tax revenues before creation of a TIF district and property tax revenue generated after a TIF district is designated. All property taxes that were collected prior to TIF designation continue to be collected and distributed according to law (generally to school districts, park districts and counties) as if the TIF were never created. However, one major assumption of a TIF district is that property values will increase due to new development and the businesses that will be attracted, and that increase in property values will translate into increased property tax revenue. Those property tax revenues resulting from enhanced real estate values are then available for use in the TIF district.

The funds are then made available, upon application to the municipality, to developers and businesses that plan to move to or do business in the TIF district. In Springfield, for instance, funds are directly available, among other things, for lease assistance to businesses who will rent property in the area and for building rehabilitation costs. And again, TIF funds may also be used directly by the municipality to fund infrastructure improvements. 

Because it can often take some time for those increased property taxes to materialize, state law allows municipalities to issue bonds. Revenues from the bonds are typically used to pay for “up front” development costs and incentives, with the bonds subsequently paid off with portions of the increased tax revenues.  In practice, however, the more recent TIF Districts in Springfield have eschewed the issuance of bonds.

By law, TIF districts must expire within twenty-three years. Upon expiration, all tax revenues, including the increases used to fund the TIF, become available to the taxing body. Also, if no redevelopment occurs within seven years of the creation of the TIF district, the TIF district must terminate by law.  

In Springfield, the former Fiat Allis TIF District terminated in 2012, while the Downtown Springfield TIF District is scheduled to terminate at the end of 2016.

Some of the more commonly known TIF Districts in Springfield include MacArthur Boulevard, Downtown, Jefferson Crossing and Enos Park.  But TIF financing, which is immensely popular, is prevalent all throughout the state. One report indicated that 30% of downtown Chicago is in a TIF district, while other news organizations have reported that there are in excess of 1000 TIF districts throughout the State.