Tackling the Tiffs Over TIF Districtsby
Tax increment financing (TIF) is an economic development tool that has become increasingly complicated. In this article, Keith Staats, J.D., explains how TIF is used as a subsidy to invest in public infrastructure and how the law could be adjusted to enable TIF to reach its intended goals.
Tax increment financing (TIF) is a seemingly simple economic development tool that has become anything but—and it’s somewhat controversial in its use to promote improvements in certain city areas. Proponents contend that TIF provides necessary funding for cities to redevelop blighted properties and infrastructure, which can increase property value and even increase sales tax revenue. Opponents say that TIF can deprive taxing bodies such as local governments and school districts of much-needed funds, while failing to spur redevelopment. Let’s decode TIF with a high-level overview focusing on how it works in Illinois.
The Statutory Basis of TIF
TIF districts can be found across the nation, and Illinois adopted its TIF act, or Tax Increment Allocation Redevelopment Act, in 1977. The act is a portion of the municipal code, and Section 11-74.42 of the code sets forth the legislature's findings and intentions when passing the act.
The act provides that the basic purpose of TIF and the designation of TIF districts is to eliminate blighted areas, institute conservation measures and undertake redevelopment of such areas. The legislature found that successfully removing and alleviating adverse conditions in these areas requires actions that encourage private investment, which further restores and enhances the tax base of the taxing districts through development or redevelopment of the project areas.
As such, municipalities have the legal authority to designate TIF districts. A municipality is required to demonstrate that the proposed TIF area is either blighted or a “conservation area.” To determine if an area is blighted, the municipality must show proof of a combination of five or more of the factors in the statutory definition of “blighted area,” which are dilapidation, obsolescence, deterioration, structures below code, excessive vacancies and inadequate utilities. There is a different set of factors for determining blight if the redevelopment project area is vacant.
On the other hand, a conservation area is different than it sounds—it has nothing to do with conserving natural resources. Instead, a conservation area is an improved area within the boundaries of a redevelopment project in which 50 percent or more of the structures in the area are aged 35 years or more. The area is not yet a blighted area, but because of a combination of three or more statutory factors, the area is deemed detrimental to the public’s safety, health, morals or welfare and may become a blighted area if action isn’t taken. These factors include dilapidation, obsolescence, deterioration and the presence of structures below code.
To be designated as a TIF district, the municipality must demonstrate the existence of the statutory factors and that “but for” the establishment of the TIF district, the conditions in the district will not be addressed. In other words, without the TIF, development or redevelopment would not occur.
What Happens to Property Taxes When a TIF Is Established?
Once a TIF district is established, property taxes in the district aren’t frozen. Instead, the equalized assessed value (EAV) of the properties in the TIF district are determined at the time the TIF is established. This sets the base level EAV for the TIF district, and taxes on this base level are distributed to the taxing bodies for the duration of the TIF district designation. The increase in the EAV over the base is the “increment.” The property tax system continues under a TIF—taxing bodies set levies, and taxes continue to be assessed on fair cash value. However, taxes collected on the increment are diverted into a fund used to pay for public and private TIF-related projects in the TIF district.
By law, these increment funds can be spent only on “redevelopment project costs.” These costs include such things as the cost of the redevelopment planning, rehabilitation, reconstruction, repair, remodeling, public works and job training or retraining.
TIF district designation lasts 23 years and can be extended for an additional 12 years providing an agreement between the affected taxing bodies and the General Assembly, which must pass legislation to extend the TIF designation.
The 2019 TIF Review
A few years ago, the Illinois General Assembly’s Property Tax Relief Task Force had a subcommittee that reviewed TIF districts. The task force held a series of meetings but never issued a final report. Nevertheless, the subcommittee reached several conclusions and issued recommendations that became legislation just this year.
The TIF subcommittee identified several problems associated with TIF districts, including that TIF districts reduce funds to their taxing bodies because of the diversion of the increment. Some TIF designations have been in place for so long that they are no longer needed to pay for the initial economic development projects and, in such situations, the TIF district may be hoarding money for little or no public purpose that would otherwise go to local government.
The TIF subcommittee made three recommendations. First, shorten the timeframe for TIF districts, from 23 years to 10 to 15 years. This recommendation was based on data indicating that the benefits of a well-structured TIF district are typically realized with 10 years of its creation. Second, tighten the definition of “blighted” to incorporate objective standards, rather than leaving room for an open interpretation of the “but for” clause. The subcommittee found that the term “blighted” is used too broadly, while the “but for” too loosely. Finally, increase transparency around the impact of TIF districts on property tax collection processes. The subcommittee recommended that the impact on other taxing bodies should be documented and made public to taxpayers.
The recommendations have been introduced to the legislature as two bills, including one that would expand the requisite information to be reported to the Illinois comptroller and taxing districts. This bill was opposed by the Illinois Municipal League, but it passed the Illinois House despite the opposition and appears poised for passage at the time of this article's publishing.
The proposals in the second bill include decreasing the timeframe of TIF districts from 23 years to 10 years and modifying the definition of blighted areas. The Illinois Municipal League also opposed this legislation. The bill’s sponsor, state Sen. Ann Gillespie, agreed to not move the bill forward, but plans to establish a working group to examine and prepare possible changes to the TIF Act.
TIF districts have both positives and negatives, as well as proponents and opponents, but as legislation proposed this year in Illinois demonstrates, they’re deemed important to economic development. TIF districts are likely here to stay, so there are features of the law that can be modified to ensure that the primary goals of remediation and prevention of blighted areas can be realized.
This article originally appeared in the Illinois CPA Society's summer 2021 issue of INSIGHT Magazine and is available on its website.