How Tax Increment Financing works

Tax Increment Financing allows a local government to borrow a large sum of money to invest in something that is expected to improve property values. That could be something public (roads, parks, transit, museums) or a subsidy for a private development.

The idea is that the government investment will be repaid by the increase in property value that it generates. Thus, the government creates a zone (Tax Increment Reinvestment Zone) where the new investment is expected to make a difference. Any increase in the property values in this zone is the increment, and a certain percentage of it (the government decides how much) is dedicated to repaying the debt incurred for the new infrastructure.

The ‘but for’ test

TIF was originally designed as a tool to jumpstart blighted areas. Under state law, the city must be able to argue that the increase in property value would not occur “but for” the new investment.

However, in Austin, property values are growing every year no matter what, and in many cases the justification for TIF in Austin is the exact opposite of its intended use. Instead of using government investment to stimulate growth, we are counting on growth to pay for new investment.

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