February 20, 2019

What is Tax Increment Financing (TIF)?

Tax increment financing is a financing and development tool that permits local governments to capture future increases in property and other taxes generated by new development within a specified development area. The captured value of the increase in tax revenues is used to attract private development or to finance public improvements for economic development projects.

A tax increment is the difference between the amount of occupational and property tax generated before creation of a development area and the amount of tax revenue generated after creation of a development area. Taxing districts continue to receive the base tax amount while tax increments are used to fund the public costs of development. In other words, growth is used to pay for growth.

TIF is primarily used to help a local government jumpstart improvements in declining or underperforming urban areas where development would not otherwise occur.

The “but for” test is often used to describe TIF-funded projects. "But for" the TIF-funded public improvements, development would not occur.

A local development area can be established for 30 years. At the end of the term, all new tax revenues belong to the usual taxing districts.

Examples of public costs that can be funded by tax increment financing include the following:

  • sewer expansion and repair
  • water supply, storm drainage
  • street construction
  • environmental remediation
  • park improvements
  • flood control
  • land acquisition
  • demolition and clearance work
  • utilities
  • landscaping
  • parking structures
  • street lighting, sidewalks
  • traffic control

Many states have successfully used tax increment financing to promote redevelopment through public/private partnerships. Kentucky’s tax increment financing statutes, KRS 65.7041 – 65.7083 and 154.30-010 - 154.30-090, establish guidelines for creation of development areas eligible for both local and state tax increments.

The discussion regarding TIF is located in the City Officials Legal Handbook.