Tax Increment Financing (TIF)

Issues Addressed:

Housing Costs Infrastructure Redevelopment

A diagram of five drawings connect by one-way arrows. First, a drawing of yellow notes labeled "Municipal bond." Second an axonometric drawing of a street with the road and underground pipes showing, labeled "Infrastructure." Third a drawing of a building labeled "Private development." Fourth, a column chart showing a small column on the left in light green, and a large column on the right with a gray area equal in size to the first column and a green area above. The chart is labeled "Property taxes on increased values." Fifth and finally, a drawing of a $50 bill labeled "Bond payments."

What is it?

Tax Increment Financing (TIF) is an economic development tool meant to make private developments feasible at low upfront costs to the community. With TIFs, a municipality issues debt or otherwise agrees to pay to finance infrastructure or other public improvements in a specific area (the “TIF district”). Those improvements enable private development, which increases the value of TIF district properties and associated property tax revenue. Those increases to tax revenue (called the “tax increment”) are set aside to pay off the debt. Once the debt is repaid, all the property tax revenues go into the municipality’s general fund. The law permits municipalities to make investment decisions.

There are a number of misconceptions about TIF districts. A TIF does not increase or reduce taxes for anyone; it simply allocates how some tax revenue is spent. It does not change zoning requirements or affect property rights. Most importantly, it does not create a separate taxing authority. It is completely under the control of the local legislative body, which for towns is made up of voters at the annual town meeting.

TIFs are authorized by New Hampshire RSA 162-K, and a city must legally have adopted that statute in order to proceed with creating a TIF.

How can it help?

Tax Increment Financing can…

Encourage housing development where it would be otherwise impossible due to expensive brownfield cleanups, lack of infrastructure, or other constraints.
Provide workforce housing.
Finance public improvements that will help the whole community.
Subsize worthy projects without burdening current taxpayers.
Spur economic development in targeted areas when private investment is insufficient, such as the case in many downtowns.
Diversify the tax base.
Bring local jobs in targeted industries.
Improve infrastructure leads directly to higher property values.
Boost local tax revenues in the long-run when debt is repaid and in the short-term if property values exceed what was expected.

Getting Started

TIF adoption must follow specific guidelines set forth in RSA 162-K. These requirements are marked with an asterisk (*) in the list below. There are additional best practices included here that will increase the chances of success.

Recognize and promote TIFs’ impact on common master plan goals, such as increased housing options, economic development in downtowns and village centers, open space preservation, and historic preservation.
If undertaking a master plan, include adoption of TIF housing as a recommendation.
Assess your local infrastructure, real estate market, and development constraints that may be resolved by infrastructure development. Use this assessment to identify potential workable TIFs.
Talk with property owners and other stakeholders in potential TIF districts. Determine if infrastructure could unlock actual development opportunities with active interest from owners and developers.
Hold public engagement events to discuss, reassess, and build support for the idea of TIFs (if not yet authorized in your community) and specific potential TIF districts and TIF plans. It is important for local officials and the general public to understand how a proposed TIF might work. There should be a public outreach campaign to ensure awareness; a local economic development committee many times can be the champion of a TIF plan.
(*) Based on your assessments and the public input, develop a TIF plan, which must include the district boundaries, a development program, and a finance plan.
(*) If your community has not adopted RSA 162-K “Municipal Economic Development and Revitalization Districts,” you must legally do that before adopting. However, the process of holding hearings for the initial adoption of RSA 162-K and establishment of a specific TIF district may be held concurrently.
(*) The governing body (City Council, Board of Selectmen, etc.) must hold a hearing.
1. If your community has not adopted RSA 162-K, the hearing should be both on the adoption of that law enabling TIFs locally, and a specific TIF district.
2. If your community has already adopted RSA 162-K, the hearing can be specific to a proposed TIF district.
A clear and concise presentation explaining the plan, with examples, should be given at the city council or annual town meeting prior to a vote.
(*) Formal District Establishment:
1. If your community has already adopted RSA 162-K, the legislative body (City Council, Town Meeting, etc.) can vote on the establishment of a TIF district and the associated TIF plan.
2. If your community has not adopted RSA 162-K, the legislative body must first vote to adopt that statute, and can then vote on the establishment of a TIF district and the associated TIF plan.
(*) Establish a TIF Advisory Board.
1. The legislative body, in approving the TIF Plan, should also approve the number of members for a TIF district’s Advisory Board. The legislative body can place other restrictions as well, as long as they do not conflict with the statute.
2. The statute requires the majority of members be property owners or occupants in the community, and at least one member be a property owner or occupant in the TIF district. The law requires a balance between business and community interests on the board.
(*) File annual financial reports.
Continue to promote the TIF so that it can benefit your town or city. Developers won’t know about this incentive unless someone tells them.

Considerations

Many states require private developments to be financially infeasible “but for” the public’s TIF investment in infrastructure. New Hampshire does not have this requirement, but your community should still think about the “but for” test when assessing TIFs. You do not want to issue public debt if the developer could have paid for the infrastructure improvements themselves.
The municipality is on the hook for any debt payments if tax revenue generated does cover debt payments.
Keep the finance plan as flexible as possible. A reimbursement mechanism (where the municipality pays back the developer for infrastructure with the tax increment) may be preferable to issuing a bond. It decreases the risk to the municipality, and ensures the developer has “skin in the game” earlier.
Only issue debt once development is likely, and issue debt in phases if possible to avoid undue risks. Require development agreements and performance guarantees to minimize the risk for the municipality.
Make sure the process is transparent and follow the letter of the TIF law.
Note that tax relief programs, like the Community Revitalization Tax Relief Incentive (79-E) could limit tax increments available for TIF payments.