TIF 101Understanding Tax Increment Financing

Presented by:The Western Kennebec Economic Development Alliance

What does TIF stand for?

Tax Increment Financing

This is an empty field in Farmford, Maine:

Still empty….

Right now, Joe Smith owns this field. It’s 50 acres, and he pays $5,000 in property taxes every year to the Town of Farmford, Maine.

One day, Joe come up with a plan.

He decides to take his empty field…

…and turn it into a business.

Joe’s Precision Airplane Manufacturing

Remember, right now Joe pays $5,000 inproperty taxes every year to the Town of Farmford for his vacant field.

Once his field is developed, and the building is filled with

equipment, it’s estimated that Joe’s annual property and personal

tax bill will increase from $5,000 to $105,000.

Now that’s a pretty big jump…

$100,000 a year to be exact!

$5,000

$105,000

$100,000! That’s a lot of money for a little place like Farmford, Maine! What do you think they’ll do with that kind of revenue?

Farmford could always use the money to keep the lights on, buy a few new books for the library, and patch the sidewalks on Main Street—the normal day to day kind of things.

Or…..

Farmford can create a TIF district and capture all, or part of the $100,00 of added value.

Farmford can use a TIF to capture the added tax value of the developed land. Here’s how it works…

First, Farmford will develop a TIF or Municipal Development District. They do this the old fashioned way…with a map:

Capture the added value??? Huh???

TIF District

Property values inside of the TIF district boundaries, like Joe’s empty field, are frozen.

The difference between the frozen value and the new value of all property within the district is the captured value.

Total Tax Revenue - Frozen Tax Revenue = Captured Revenue

For Joe:

$105,000 - $5,000 = $100,000 of captured revenue

FREEZE!

Traditionally, the captured value can be used to support the project by channeling the funds directly toward infrastructure expansion. For example, a TIF can help Joe cover the costs of getting water, sewer, electricity and a road onto the field:

If Joe’s field doesn’t need any infrastructure development, the town might opt for a Credit Enhancement Agreement, or a CEA.

In this case, the captured money would be issued back to Joe a week or two after he pays his tax bill, and he can use the money to defray the cost of his developing his business.

HeatingSystem

Site Work

BuildingMaterials

But in every case, the captured value must be used for economic development purposes in the community. Things like:

Business Park Development and Maintenance

Downtown revitalization

Planning

Administrative and Professional Costs

The Advantages

TIFs help communities attract new businesses, spur positive growth, create jobs, and increase the vitality and vibrancy of a town. Some developers are only willing to consider towns with an established TIF district.

The captured value is ‘sheltered’ from a portion of county taxes and education appraisals that are based on state valuation.

The Limitations

TIF funds can only be used for economic development projects. The revenue can’t be used to pay for the town’s operating costs until the TIF expires, or unless the TIF is undone.

A few more things:

A TIF can be used to retire bonds associated with economic development.

The captured value is not included in the town’s state valuation, which shelters the municipality from reduced state aid in education and State-Municipal Revenue Sharing programs.

According to state law, the total area of a single TIF district can’t exceed 2% of the total acreage of the municipality; all TIF districts cannot exceed 5% of the municipality’s total acreage (exceptions exist); the property value of the district may not exceed 5% of the municipality’s state valuation; and the aggregate value of indebtedness of TIF districts in a single county may not exceed $50 million.

Captured value can be retained and set aside for allowable economic development purposes.

TIF districts may be designated for up to 30 years.

The community designation of a TIF district requires proper public notice, a public hearing, and a majority vote of the municipal legislative body.

Towns can set limits on the percentage of captured value that can be used in a project. For example, Portland sets the upper limit at 75%, while Unity sets it at 50%.