Tax increment financing (TIF) for affordable housing

Evidence Rating  
Expert Opinion
Evidence rating: Expert Opinion

Strategies with this rating are recommended by credible, impartial experts but have limited research documenting effects; further research, often with stronger designs, is needed to confirm effects.

Health Factors  

Tax increment financing (TIF) districts define a district’s tax "base" by local property values before improvements are made and designate some or all tax revenue generated above the base rate to support affordable housing, utility upgrades, pedestrian and bicycle infrastructure improvements, and other infrastructure investments in the TIF district1, 2. Revenue from the tax base rate continues to support local school districts and local governments. Many states stipulate that TIF districts must be in areas suffering from blight, systematic resource deprivation, high concentrations of poverty, and declining property values3, 4. TIFs are often implemented with other programs that support affordable housing and economic development and can be tools to support privately and publicly funded development5, 6. TIF uses vary. In some states, TIF can subsidize other development as a way of promoting growth in the district7. Affordable housing reinvestments are most common in urban and suburban TIFs.

Expected Beneficial Outcomes (Rated)

  • Increased access to quality housing

  • Increased access to affordable housing

Other Potential Beneficial Outcomes

  • Improved neighborhood quality

  • Reduced blight

  • Increased economic development

Evidence of Effectiveness

Tax increment financing (TIF) is a suggested strategy to increase access to quality, affordable housing8, 9, 10, 11. Available evidence suggests that TIF districts may contribute to increased economic development, property values5, 12, 13, 14, 15, 16, and tax revenue1, 5, 14. Additional evidence is needed to confirm effects.

Economic modeling suggests TIF may increase access to affordable housing when TIF revenue is allocated for housing development and when TIF supports housing market changes such as adjustments to zoning restrictions8. Some researchers suggest TIF projects can be especially beneficial if focused on reducing blight3; blight and severe blight are most prevalent in communities of color17. TIF definitions of blight, however, vary greatly and some of the predominantly white communities that are approved for TIF may not meet most definitions17.

Partnerships between public entities and private developers or investors may increase TIF districts’ likelihood of raising property values and generating community benefits5. TIF districts with single-family homes and walkable neighborhoods including well-connected sidewalks, parks, and frequent destinations for food, shopping, recreation, or services appear to maintain their value more than single-family homes in unwalkable neighborhoods18. During economic downturns, houses in TIF districts with public infrastructure supported by TIF funds may maintain their value more than homes in other areas, even if the neighborhoods are not walkable18.

A Chicago-based study suggests TIF districts in communities of color experiencing severe blight have greater success increasing property values than TIF districts in predominantly white neighborhoods experiencing less blight17. Although property values may increase in these districts, families with low incomes may still struggle to pay higher rents without new economic opportunities17. Blight also remains an issue even in high performing TIF districts, which suggests additional policies are needed to reduce blight. When implemented carefully and in conjunction with other economic support policies, TIF can be used to reduce racial residential segregation, invest in neighborhoods experiencing severe blight, and reduce the racial wealth gap by increasing property values for Black homeowners17, 19. However, without purposeful eligibility requirements and careful implementation, TIF dollars may increase disparities19.

TIF effectiveness varies depending on local goals and implementation7, 12, 13. Successful TIF projects develop clear goals, maintain transparency, report uses of TIF funds, and document progress on projects7. In addition to increased affordable housing supply, TIF projects may include goals such as increased neighborhood development, economic growth, or employment opportunities. Available evidence suggests TIF is more effective for increasing property values and less effective at increasing employment opportunities12. Experts suggest TIF will be most effective as part of a comprehensive, regional economic development plan and TIF housing gains should be prioritized for neighborhoods with the most inadequate housing stock9.

An Indiana-based study suggests that if not implemented carefully, TIF districts may capture existing growth in property values rather than create new growth20. Studies in Chicago and St. Louis suggest TIF is often used improperly to attract and subsidize private development in areas that should not qualify, such as higher income suburban or thriving downtown areas, which diverts funds away from disadvantaged neighborhoods21. Experts suggest that land used in TIF districts for housing reduces the land available for businesses, which may increase rents for businesses and eventually encourage them to locate elsewhere9. Even successful TIF developments can have unintended negative impacts on property values of homes or businesses through increased traffic, noise pollution, or crime7.

TIFs that are not specifically designed to increase affordable housing can still reserve a percentage of revenue for affordable housing development; for example, in Portland, the minimum TIF reserve is set at 45%22.

Equity Analysis

Potential to decrease disparities: Suggested by expert opinion

Tax increment financing (TIF) is a suggested strategy to reduce disparities in access to quality, affordable housing between households with low incomes and those with high incomes. TIF projects may be especially beneficial if focused on reducing blight3; blight and severe blight are most prevalent in communities of color17. A Chicago-based study suggests TIF districts in communities of color experiencing severe blight have greater success at increasing property values than TIF districts in predominantly white neighborhoods experiencing less blight. However, families with low incomes may struggle to pay higher rents in areas with increased property values without new economic opportunities or financial support17. When implemented carefully and in conjunction with other economic support policies, TIF can be used to reduce racial residential segregation, invest in neighborhoods experiencing severe blight, and reduce the racial wealth gap by increasing property values for Black homeowners17, 19. However, without purposeful eligibility requirements and careful implementation, TIF dollars may increase housing disparities19.

Historical Context

In 1952, the first tax increment financing (TIF) program was established in California to address blight and improve depressed city centers29. Paired with the federal government’s Urban Renewal Program, local governments used TIF to raise matching funds for blight remediation29, 30. Programs were created across the country in the late 1970s into the early 1980s29, 30, especially in the Midwest, notably Illinois, Minnesota, and Wisconsin31. TIF was particularly appealing at this time, with federal and state funding cuts for local economic development and new laws restricting local governments’ authority to impose taxes without voter support29, 32.

Over the years, the criteria for TIF districts expanded to include economic development, housing, environmental remediation, mixed-use projects31, 32, and conservation areas at a higher risk of developing blight33. Every state also defines blight differently and the authority of local governments varies, so the potential for TIF to be misused has increased32. In response, many state and local governments added a requirement that a minimum percentage of TIF funds be used to develop and preserve affordable housing23, 28. The 2008 financial crisis and the subsequent recession prompted state and local governments to re-evaluate their use of TIF30. In 2012, California discontinued TIF after local governments’ use of TIF districts appeared to redirect property tax revenue away from public schools30. In 2017, nine states approved legislation to modify TIF programs in order to protect school funding, clarify the definition of blight, and require transparent reporting of TIF funding allocations and activities31. Currently, TIF is the most used incentive program for economic development by local governments across the US7, 29, 30.

Equity Considerations

  • Who benefits from tax increment financing (TIF) programs in your community? How are the neighborhoods most in need of investment, economic development, and affordable housing improvements prioritized?
  • What progress has your local government made in advancing TIF funding goals around developing and expanding affordable housing? How are they documenting progress and spending? What additional steps can TIF programs take to increase transparency?
  • How can local governments prevent displacement and gentrification once additional affordable housing is created?
  • How are residents and community partners influencing how local governments use TIF funds in neighborhoods with blight and severe blight?
  • What other solutions can local governments implement to address historical drivers of inadequate or unaffordable housing, blight, and lack of economic development in communities with primarily residents of color?

Implementation Examples

As of 2019, Washington, DC and every state except for Arizona has some form of tax increment financing (TIF) program. Some states use different terminology, for example, Georgia’s “Tax Allocation Districts”7. Many state and local laws ensure that a minimum percentage of TIF generated funds are used to build or preserve affordable housing23. The Maine State Housing Authority’s Affordable Housing Tax Increment Financing program sets out key eligibility requirements for residential development within TIF districts to ensure housing goes to families with low incomes, that rental units remain affordable for at least 30 years, and owner-occupied units are affordable for at least 10 years24.

TIF programs may be implemented on the county level, for example in Cook County, IL25 or by cities, as in Chicago, IL and San Antonio, TX26, 27. Implementation and affordable housing-specific components vary by area.

New York City used TIF funds to build the 34th St.-Hudson Yards subway station. Experts from this project offer a series of five questions that can help determine if other projects are appropriate within a TIF district. These questions may be helpful for projects that focus on transportation, housing, or commercial development21.

Local Housing Solutions, a collaboration between the New York University Furman Center and Abt Associates, offers numerous resources for implementing TIF districts, including information about district sizing, development options (e.g., residential, commercial, industrial), eligibility requirements (e.g., blighted areas, the “but for” test, development timeframes), community success stories, and links to external resources28.

Implementation Resources

CDFA-TIF - Council of Development Finance Agencies (CDFA), International Council of Shopping Centers (ICSC). Tax increment finance best practices reference guide. Columbus: Council of Development Finance Agencies (CDFA), International Council of Shopping Center (ICSC); 2007.

ChangeLab-Housing toolkit - ChangeLab Solutions. Preserving, protecting, and expanding affordable housing: A policy toolkit for public health. 2015.

MO DOR-TIF - Missouri Department of Revenue (MO DOR). Local Tax Increment Financing (TIF).

Montana-TIF - Montana.gov. Montana Transportation and Land Use: Development exactions and incentives -- Tax Increment Financing (TIF) resources.

Vermont-TIF - Vermont Agency of Commerce and Community Development. Tax Increment Financing (TIF). General information on TIFS and program explanations for current districts.

LISC-Affordable housing - Local Initiatives Support Corporation (LISC). Helping neighbors build communities: Affordable housing.

LHS-TIF - Local Housing Solutions (LHS). Tax Increment Financing (TIF). New York University, Furman Center and Abt Associates, Inc.

LHS-COVID-19 response - Local Housing Solutions (LHS). Housing issues: COVID-19. New York University, Furman Center and Abt Associates, Inc.

MN House Research-TIF - Minnesota House Research Department (MN House Research). How TIF works: Basic mechanics. Minnesota Legislature. 2009.

Footnotes

* Journal subscription may be required for access.

1 Skidmore 2010* - Skidmore M, Kashian R. On the relationship between tax increment finance and property taxation. Regional Science and Urban Economics. 2010;40(6):407-414.

2 Miller 2018* - Miller S, Coutts C. A multiple case study of local & creative financing of bicycle and pedestrian infrastructure. Case Studies on Transport Policy. 2018;6(2):257-264.

3 Nguyen-Hoang 2021* - Nguyen-Hoang P. Is tax increment financing a fiscal bane or boon? Journal of Planning Education and Research. 2021;41(1):94-105.

4 Dye 2000* - Dye RF, Merriman DF. The effects of tax increment financing on economic development. Journal of Urban Economics. 2000;47(2):306-328.

5 Bland 2016* - Bland RL, Overton M. Assessing the contributions of collaborators in public-private partnerships: Evidence from Tax Increment Financing. The American Review of Public Administration. 2016:1-18.

6 CDFA-TIF - Council of Development Finance Agencies (CDFA), International Council of Shopping Centers (ICSC). Tax increment finance best practices reference guide. Columbus: Council of Development Finance Agencies (CDFA), International Council of Shopping Center (ICSC); 2007.

7 Merriman 2019 - Merriman D. Improving tax increment financing (TIF) for economic development. Cambridge, MA: Lincoln Institute of Land Policy; 2019.

8 Luque 2020* - Luque J. Assessing the role of TIF and LIHTC in an equilibrium model of affordable housing development. Regional Science and Urban Economics. 2020;80:103377.

9 Funderburg 2019* - Funderburg R. Regional employment and housing impacts of tax increment financing districts. Regional Studies. 2019;53(6):874-886.

10 NNC-Arigoni 2001 - Arigoni D. Affordable housing and Smart Growth: Making the connection. Washington, DC: National Neighborhood Coalition (NNC); 2001.

11 CHP-Lubell 2007 - Lubell J. Increasing the availability of affordable homes: A handbook of high-impact state and local solutions. Washington, DC: Homes for Working Families, Center for Housing Policy (CHP); 2007.

12 Yadavalli 2017* - Yadavalli A, Landers J. Tax increment financing: A propensity score approach. Economic Development Quarterly. 2017;31(4):312-325.

13 He 2020* - He C, Azizi SS. The impact of tax increment financing on property value. International Journal of Housing Markets and Analysis. 2020;13(5):689-711.

14 Hicks 2015 - Hicks MJ, Faulk D, Quirin P. Some economic effects of tax increment financing in Indiana. Muncie: Ball State University Center for Business and Economic Research; 2015.

15 Carroll 2008* - Carroll DA. Tax increment financing and property value: An examination of business property using panel data. Urban Affairs Review. 2008;43(4):520-552.

16 Byrne 2006* - Byrne PF. Determinants of property value growth for tax increment financing districts. Economic Development Quarterly. 2006;20(4):317-329.

17 Blackmond Larnell 2019* - Blackmond Larnell T, Downey DC. Tax increment financing in Chicago: The perplexing relationship between blight, race, and property values. Economic Development Quarterly. 2019;33(4):316-330.

18 Xu 2018* - Xu M, Yu CY, Lee C, Frank LD. Single-family housing value resilience of walkable versus unwalkable neighborhoods during a market downturn: Causal evidence and policy implications. American Journal of Health Promotion. 2018;32(8):1714-1722.

19 Knight 2016* - Knight JF. Is tax increment financing racist? Chicago’s racially disparate TIF spending. Iowa Law Review. 2016;101(4):1681-1717.

20 Hicks 2019* - Hicks MJ, Faulk D, Devaraj S. Tax increment financing: Capturing or creating growth? Growth and Change. 2019;50(2):672-688.

21 Campion 2017 - Campion S. Tax increment financing: A primer. New York: Citizens Budget Commission (CBCNY); 2017.

22 Portland-TIF - Portland Housing Bureau. Tax Increment Financing (TIF) set-aside policy for affordable housing.

23 NEXUS-TIF - NEXUS: The NHC Housing Policy Guide. How TIFs can be used for affordable housing. Washington, DC: National Housing Conference.

24 MaineHousing-AHTIF - The Maine State Housing Authority (MaineHousing). Affordable Housing Tax Increment Financing program (AHTIF).

25 Cook County-TIF - Cook County Clerk. Tax Increment Financing Districts (TIF) resources. Chicago, IL.

26 Chicago-TIF - City of Chicago. What we do: Tax Increment Financing (TIF). Information on individual TIF districts, including plans, annual reports, redevelopment agreements, and recent news.

27 San Antonio-TIF - City of San Antonio. Department of Planning and Community Development: Tax Increment Financing (TIF). Program policies, FAQ's, and Tax Increment Reinvestment Zones (TIRZ).

28 LHS-TIF - Local Housing Solutions (LHS). Tax Increment Financing (TIF). New York University, Furman Center and Abt Associates, Inc.

29 The New School-Fisher 2020 - Fisher B, Leite F, Moe L. Insights Blog: What is tax increment financing (TIF)? New York: The New School for Social Research, Schwartz Center for Economic Policy Analysis; 2020.

30 CSLF-Layton 2019 - Layton D. Effects of the great recession on tax increment financing in the United States, Georgia and Atlanta. Center for State and Local Finance (CSLF) at ScholarWorks at Georgia State University. 2019: Working Paper 5.

31 Flint 2018 - Flint A. The hidden costs of TIF: Reconsidering a vaunted economic development tool. Land Lines. Cambridge, MA: Lincoln Institute of Land Policy; 2018.

32 Luque 2019 - Luque JP, Ikromov N, Noseworthy WB. Chapter 4: The tax increment financing (TIF) program. In: Affordable Housing Development. Springer; 2019:51-64.

33 Bernskoetter 2019 - Bernskoetter J. Be there in a TIF: What is TIF and Missouri's need of reform. Business, Entrepreneurship & Tax Law Review. 2019;3(2):300-312.

Date Last Updated