Our next American import should be a tax system that pays for regeneration
Tax Increment Finance (TIF) is a mechanism that is estimated to be the most popular form of public infrastructure and community based financing in the US today. Why are we not using it in the UK?
TIF is a financing mechanism that enables local authorities to pay for large scale infrastructure improvements by raising debt finance that is paid for by the property tax (ie business rates and council tax) revenue generated by that improvement. When the debt has been paid off, the tax reverts to the local authority in the usual way.
TIFs are made by designating a geographic area for the TIF district and a plan for specific infrastructure improvements; arranging debt (TIF bonds) to pay for the improvements that stimulate higher property values and new development thereby resulting in higher property based taxes (ie business rates and council tax). It is these higher tax revenues over and above the level that existed before the TIF that service and pay off the debt.
TIFs can be good to kick-start the regeneration of sites that the private sector might not otherwise want to invest in without public sector support.
As an example of their potential, in Chicago, one of the leading proponents of TIF, one third of the city’s property taxes are generated from TIF. A similar level of usage by – for example Glasgow – would enable the city to raise around £150m per annum which could raise over £2bn for infrastructure if paid off over 30 years.
A range of benefits underpin the popularity of TIFs in the US. They do not require local governments to give up any existing revenues; tax revenues are not diverted away from other projects; and finally the existing tax paying base does not pay either – only those taxpayers whose properties rose in value as a result of the development or new ones attracted to the area by the improvements. This is a very attractive scenario for local politicians and government officers.
In the US TIF bond financing does not does not form part of municipal borrowing. This too is attractive to central government, particularly in the current spending climate. It is not yet clear whether it would form part of public borrowing here. Central government would have to devolve powers to local authorities in order to introduce TIFs. This would require legislation but they passed the measures necessary for Business Improvement Districts and this is the next step.
In some respects TIFs are even more relevant in the current economic climate as sites earmarked for build-out a year ago are showing lower levels of return and a TIF could help to get them started. But sites that would have been suitable for a TIF a year ago may now look more challenging.
A number of governmental studies are looking into this method of paying for infrastructure finance. One by King Sturge has recently reported strongly in favour of this methodology. A further study on behalf of the Core Cities Group will report shortly and is reputed to similarly strongly favour TIFs or a similar mechanism.
George Grace is a partner at King Sturge