Tax increment financing (TIF) is a form of land value capture financing based on the expected appreciation of land value. It assumes that once redevelopment projects are completed, land values will increase and, as a result, the taxation authority will receive higher tax revenue. The initial redevelopment is financed via upfront government resources or a bond, and it is typically the municipal government that borrows against future tax revenues.
TIF schemes are typically used as an incentive mechanism to encourage redevelopment or revitalization with a focus on public infrastructure and public structures such as roads, water, and sewer lines. These schemes could be used to finance natural infrastructure and climate change adaptation projects using the anticipation of future tax revenue resulting from new development. As a hypothetical example, the development of a new public green space as part of an urban cooling initiative may cause property values to rise and lead to an increase in property tax receipts. While the prior (or base) amount of the property tax revenue continues to fund the maintenance of the public green space, the increase in tax revenue is used to pay bonds and/or reimburse initial investors.
Current or potential adaptation-relevant sector applications:
- water supply (infrastructure) – water management;
- coastal and riverine protection and management – coastal defences or flood protection barriers; river flood protection measures;
- other built environment and infrastructure – urban development;
- transport infrastructure; and
- social infrastructure – education; health facilities.
Additional insights:
- This is a mature instrument. It has been used for over 50 years by municipal governments in the United States, with some application in Australia, Canada, Hong Kong, New Zealand, and the United Kingdom. Similar instruments have been considered in Europe.
Considerations for using TIF:
- Governments must have the capacity to tax and conduct the analysis and modelling required to set base and new tax rates.
- Governments should be able to issue the bonds or obtain other financing required to fund the investment before increased tax revenue flows.
- This scheme has high transaction costs, so it is only suitable for larger projects and for municipal governments that can take on debt.
- It requires robust real estate and economic conditions.
- It requires solid urban development projects, with long-term feasibility.
Adapted from the following sources:
Council of Development Finance Agencies. (n.d.). Tax increment finance resource center. https://www.cdfa.net/cdfa/cdfaweb.nsf/resourcecenters/tif.html
Schneider, B. (2019, October 24). Citylab University: Tax increment financing. Bloomberg. https://www.bloomberg.com/news/articles/2019-10-24/the-lowdown-on-tif-the-developer-s-friend