University of Missouri Extension - Ste. Genevieve County

The purpose of tax increment financing, or "TIF," is to encourage the development of new businesses in an area where such projects would not happen otherwise. The idea is to provide an incentive for economic development or for the redevelopment of blighted or conservation areas without the community incurring out-of-pocket expenses. According to a recent article in the St. Louis Post-Dispatch by an attorney (Dec. 5, 1999), "Projects approved during the decade since Missouri law authorized TIF will generate more that 51,000 new jobs and nearly $4 billion in private investment." Nearly 40 states have some form of TIF.

Before TIF, local governments would have to use existing tax dollars to provide financial incentives to businesses, with hopes that some public benefit will one day result. TIF uses a portion of future tax revenues generated by a new project. The project developer is reimbursed for approved expenses, such as installing infrastructure (like roads, sewers, and other utilities). The developer pays for the initial costs with private funds, then is reimbursed only if the project generates the anticipated tax revenue, and even then the developer may be reimbursed from only a portion of the new taxes.

Communities trying to attract new industry (or keep the existing businesses) are competing with other areas, so it is common practice for communities to offer incentives to entice companies to locate locally (or not leave). Rural communities in particular find that they are competing with all the amenities a metropolitan area has to offer. TIF is one way of providing a financial incentive for companies to do local business projects without having to pay cash for them. To use TIF, cities are required to show that "but for" TIF, the project would not be built.

In addition to the economic development possibilities, TIF also allows a community to redevelop a "blighted" area (such as having infrastructure in poor condition) where redevelopment is unlikely to occur or that constitutes, "an economic or social liability or a menace to the public health, safety, morals, or welfare in its present condition and use. TIF can also be used for conservation areas, which are where at least half of the buildings are at least 35 years old. Conservation areas are not blighted but may become so.

An example best shows how TIF can be put into practice. Suppose a city has an area that has not been developed. The area is generating only $1,000 per year in property taxes. The area is in a good location and has potential for generating greater tax revenue. However, the property has not been developed because the cost of the needed improvements would prevent private developers from making a reasonable profit. Ordinarily in such cases, that piece of land would remain vacant because private developers would pursue profitable projects somewhere else.

Let's say that in this example the city council considers using tax increment financing as an incentive to development. As required by the TIF Act, the city council first comes to the official conclusion that the area is not likely to be developed without TIF. Then the city council decides exactly what the boundaries are of the area to be developed and adopts a plan for the development. The plan provides for reimbursing a developer for certain costs associated with development within the new TIF district. This reimbursement would come from new tax revenues generated by the development in the TIF district…the tax "increment."

Based on the TIF plan, the developer in our example agrees to develop the area. In return, the city agrees to issue TIF notes to the developer. These notes represent the city's limited obligation to reimburse the developer for approved costs. In our example, the proposed improvements are projected to generate an additional $10,000 in property taxes. During the life of the TIF notes (the obligation to the developer), the original $1000 per year property original taxes are not affected. Taxing jurisdictions, like school districts, continue to receive their share of these monies.

After the TIF notes expire, the TIF district is dissolved (having served its purpose), and the additional $10,000 per year in property taxes is distributed to the taxing jurisdictions as ordinary tax revenue.

This web site is provided as a service to help members of the public and their leadership begin to understand what TIF is and how it works. The information was compiled from material provided by private attorneys, the National Conference of State Legislators, the Missouri Department of Economic Development, and from the Missouri state statutes. It is not intended to be all-encompassing or complete. For more information, see these web sites or call your local regional planning commission:

An article in the September 2000 issue of the Economic Development Digest on TIF
http://www.nado.org/pubs/sept6.html
The article includes a brief description of a TIF project in St. Francois County


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		Ste. Genevieve County University of Missouri Extension Center stegenevieveco@missouri.edu Last revised: 06/10/08