What is a TIF?

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CAPTURING VALUE —   This diagram indicates how a TIF works: the base propert value is frozen and the value that is created due to additional development is captured by the municipality. By the time the TIF expires, the property value is higher.

STATE — Since the practice was legalized in the late 1970s, the phrase "TIFing" or "TIFed" has become common in Maine towns and cities.

It refers to Tax Increment Financing – a financial tool that allows towns to capture the increase in property values that comes with development.

TIFs are commonly used to entice commercial and other developers to invest in a municipality.

But what is a TIF exactly? How do they work? What happens to all that value?

Capturing value

A TIF allows a municipality to capture property tax value without local or state taxation.

That revenue can be invested in approved infrastructure development –  paying for things like roads, sewers and water lines.

It can also be re-invested into the development, essentially acting as a subsidy for the developer.

TIFing is particularly attractive to municipalities because it allows them to fund infrastructure developments without resorting tax increases or additional borrowing.

Development districts

A TIF model works like this –  a municipality determines the geographic boundaries of a development (TIF) district.

TIF districts are primarily meant to encourage development in areas of urban blight or rural areas that lack public infrastructure.

When the TIF is approved, the property tax base in that district is frozen for the TIF's lifetime – up to 30 years, under Maine law.

The original property tax continues to be collected normally, but new value is collected by the municipality and deposited in a special development program fund.

That money is then used to finance debt incurred from the development program, from helping a developer rehabilitate an unused building or constructing brand new roads.

When the TIF expires, the value of the new developments are included in the new tax base, presumably much higher than before.

Approval

Of course, towns and cities cannot begin  "TIFing" property left and right –  the size and value of a TIF district and how the captured value is spent is restricted and TIFs are regulated by the state.

TIF districts must be approved by the town's legislative body. That requires at least one public hearing and a chance for interested parties to offer testimony for or against the proposed development.

In addition to local approval, TIF districts need to be approved by the Maine Department of Economic and Community Development.

Restrictions

According to state law, at least 25 percent of a development district must be either blighted, in need of rehabilitation, or conservation or suitable for commercial or arts district use.

The scale of TIF districts is also limited – a single district cannot be more than 2 percent of total municipal acreage and the total area of all development districts cannot exceed 5 percent of total acreage.

In terms of value, a proposed TIF district, plus the property value of all existing TIF districts cannot exceed 5 percent of the total value of taxable property in the municipality, although there are some exceptions to the rule.

The municipality also has to formulate a development plan that outlines how it intends to use the TIF revenue. Is it going to reinvest the value with the developer? Build a sewer system? Or both? 

Other considerations, like environmental controls, relocation plans for people displaced by the development and proposed operation of the district after completion of the improvements must be included in the plan.

The financial plan has to include a cost estimate for the project, amount of public debt to be taken on, sources of anticipated revenues and an estimate of how much the district's value will increase, and how much of the captured TIF value will be applied to the development project.

When a municipality creates a TIF, it is limited to expending the tax increments for any development program in accordance with the financial plan. That means, once you start working on a development funded by a TIF, you're locked in.