What is a TIF Tax?

JEDz taxes, PSD codes, locals - the business world is full of unique taxes.

Another prime example? Tax Increment Financing (TIF) taxes.

TIF subsidizes businesses for various community-improvement projects. Through TIF, companies divert future property tax revenue increases from a defined area toward an economic redevelopment project that ideally benefits from the community. TIF can also be used to acquire land and fund job training programs. California first used TIF in 1952, and by 2004 all 50 U.S. states had utilized the public financing method.

State and local governments authorize and administer TIF. Local government selects the area for redevelopment, and the state creates criteria that the area must meet to qualify for TIF. For example, areas with true property abandonment would qualify over areas that have one empty building that’s in between rental agreements. Areas where structures violate building codes also qualify.

When areas redevelop, property values rise. The city splits the property tax into two avenues. The first is set at a base rate - what the original property value was. This amount goes to school districts or services such as police and fire. The second has the additional tax money generated due to revitalizing the area or the 'tax increment.' This amount is kept solely for future development opportunities.

When the original net tax capacity of the property is defined, the developer of the TIF project begins its project and submits the TIF-eligible costs for the first year to the corresponding city or municipality. In the second year, a third party asses the market value of the property for payable taxes in year three. By year three, the developer pays the full taxes and the difference between the original net tax capacity and the net tax paid for the third year is the 'tax increment' paid back to the developer.

The process to apply for a TIF project depends on state to state.  Looking for more information on TIF taxes? Get a conversation starting with PayrollTalk!