Tax increment financing (TIF) is method local governments can use to pay for improvements that will draw private investment to an area. Tax increment financing isn’t a new tax; instead, it redirects some of the ad valorem tax from property in a geographic area designated as a Tax Increment Reinvestment Zone (TIRZ) to pay for improvements in the zone.
Future tax revenues from each participating taxing unit that levies taxes against a property are used to pay for the cost of improvements to an area. Each taxing unit may dedicate all, a portion of, or none of the tax revenue that is attributable to increased property values brought about by improvements within the reinvestment zone. The additional tax revenue received from the affected properties is referred to as the tax increment. Each taxing unit determines what percentage of its tax increment, if any, it will commit to repayment of the cost of financing the public improvements.
Only a city or county may initiate tax increment financing . Tax increment financing requires the governing body of a city to create a Tax Increment Reinvestment Zone (TIRZ). The governing body of a city by ordinance may: designate a contiguous or noncontiguous geographic area (a) within the corporate limits of a municipality; (b) in the extraterritorial jurisdiction of the municipality, or (c) in both to be a reinvestment zone. The designation of an area that is wholly or partly located in the extraterritorial jurisdiction of a municipality is not affected by a subsequent annexation of real property in the reinvestment zone by the municipality.
Once a city begins the process of establishing a tax increment financing reinvestment zone, other taxing units may consider participating in the zone.
Cities and counties may take any action that is necessary to implement the tax increment financing. They may acquire real property through purchase or condemnation, enter into necessary agreements, construct or enhance public works facilities and make other public improvements.
Frequently Asked Questions (FAQ)
What needs to be included in the ordinance that creates a TIRZ (Tax Increment Reinvestment Zone)?
The ordinance must:
- Describe the boundaries of the zone;
- Create a board of directors for the reinvestment zone and specify the number of directors on the board;
- Provide that the zone takes immediate effect upon passage of the ordinance;
- Provide the date when the zone is to be terminated;
- Assign a name to the zone using the format "Reinvestment Zone Number One (Two, etc.), City of (Name of City)";
- Establish a tax increment fund for the zone;
- Contain findings that improvements in the zone will significantly enhance the value of all the taxable real property in the zone and will be of general benefit to the city; and
- List the criteria the area meets for creating a reinvestment zone.
How much is the tax increment?
Each taxing unit's tax increment is the amount of ad valorem tax assessed or collected on the captured appraised value of property within the zone.
What is the captured appraised value?
The captured appraised value is the total value of all real property that is taxable within the zone minus the tax increment base.
What is the tax increment base?
The tax increment base is the total value of all real property that is taxable the year the zone is created.
How do these values work together?
Each year the appraisal district assigns a value to the taxable real property within the zone. The year the zone is created, that value is the tax increment base. Every following year, that value is the captured appraised value. The captured appraised value minus the tax increment base is the tax increment.
Does a taxing unit have to give its whole tax increment to the Reinvestment Zone project?
No. Each participating taxing unit chooses a percentage of its tax increment that will be deposited in the tax increment fund. If a taxing unit does not set the percentage when the zone is created or when it joins the TIF project, it defaults to 100 percent of the tax increment.
What public improvements can a city make in a Reinvestment Zone?
A city may acquire, construct, reconstruct or install public works, facilities or sites or other public improvements, including:
Water and sewer facilities;
Pedestrian malls and walkways;
Flood and drainage facilities; and
Can property in the zone be abated?
Yes, but only with the consent of the Board of Directors and the governing body of each taxing unit participating in the zone.