Most cities have infrastructures and amenities that the government erects but have ever wondered how the government funds these projects? There are several ways the government finance projects; among them is Tax increment financing.
Tax increment financing (TIF) is a public financing method used by the local government to invest in private infrastructure. It has facilitated redevelopment, infrastructure, and other community improvements in many countries like the USA. TIF permits the municipalities to capture the incremental taxes from the property as it surges in value.
A portion of the tax paid by private proprietors is diverted for the development and progress of the public. Recent researches have proven that property value within the TIF district grows faster than other municipalities, hence promoting the development of the entire province.
Tax Increment Financing in Canada
In Canada, TIF is implemented in Calgary, Edmonton and Winnipeg, and other jurisdictions. Calgary was the first Canadian city to implement TIF; it was referred to as a community-revitalization levy (CRL).
This implementation resulted in rapid development in many fields, including renovation, downtowns, the health sector, and employment. The government of Ontario passed rules to use TIF, but no regulation implementing the scheme has been developed.
TIF is a flexible tool that has enabled the cities to direct and manage growth, fund infrastructure investments, and revitalize communities. Toronto’s Smart Track transit plan was a leading example of a municipality looking forward to using TIF for a significant investment. It enables infrastructure without worsening impacts of property taxation on assets.
For the proper functioning of TIF in Canadian cities, it is essential that the municipalities collaboratively establish an entity and clear, transparent policies that outline the scope of TIF.
How TIF Works
TIF focus on the underdeveloped areas which promise value in the future and can pay for redevelopment. The revenue is established only if the proposed project will generate a surge in tax revenue generated by the existing or non-existing use.
TIF is a tool designed for addressing economic blight and “but for” requirements. TIF focus on the underdeveloped areas which promise value in the future that can pay for redevelopment.
Blight has been initiated so that the TIF can finance the development of vacant or rural areas, thereby classifying them as commercial or industrial. As for “but for,” it is used for development that would not occur without TIF.
The local government or the investor bargains an area under private ownership that could benefit from redevelopment. The authorities estimate the tax revenue that they’ll receive once the developments are made. The new revenue is invested for public growth and to pay off the bonds. After the expiry of TIF, all future tax revenue flows to the municipality and state.
Pros of TIF
- TIF is used to fund constructions such as roads, libraries, central halls, parks, water upgrades, and sewer systems.
- It is an excellent source for extra tax. Development or renovation of one of the projects under TIF bonds can benefit the project and the surrounding area. These projects, in turn, will provide the local government additional tax. The revenue department receives the previous tax revenue plus the new tax revenue for the debt and redevelopment fund.
- TIF allows governments to invest without relying on other funds such as intergovernmental transfers, capital reserves, or tax increases. But this doesn’t mean TIF is an endless source of revenue; once the infrastructural bond is repaid, TIF is expired.
- Its emphasis on the subject that development can pay for itself.
Cons of TIF
- TIF may create competition between the urban areas and the government over funding. Cities can obtain revenue that would otherwise have flowed to overlying government levels.
- It causes troubles regarding how much an incremental gain in tax revenue relates to the TIF project.
- TIF lacks transparency, generating public suspicion.
- Politicians sometimes operate TIF to achieve legacy leading to violation of the TIF agreement.
- The development of a neighborhood to a certain extent makes it unaffordable for the residents.
- There can be a failure to attract the expected outcome.
TIF is one of the best tools to overcome economic challenges for underdeveloped areas lacking amenities. It is more efficient when the public and private sectors come together to work.
Although in certain provinces, there is a chance of exploitation of TIF due to its vulnerable design. However, the expected outcomes can be achieved by establishing both quantitative and qualitative guidelines.
Studies suggest TIF sometimes fails to deliver a successful outcome due to the lack of transparency and monitoring. Hence, if you plan to utilize TIF, it is advisable to review the strategies thoroughly to avoid well-documented pitfalls.