Tax-increment financing, an alternative to tax abatement, captures a percentage of the real property taxes paid by the property owner due to an increase in site value. However, captured tax revenue, referred to as tax increments, does not flow into the general revenue stream of the municipality, county or township within which the TIF is located.
Tax increments remain in the district to be used at the discretion of local economic development commissions to finance public or private projects.
Essentially, a TIF is borrowing based on expected increases in property tax revenue. When a project is completed and bonds repaid, a particular TIF is expected to expire and all property taxes redirected to local government.
Local government officials, confronted with municipal bond restrictions, state-imposed caps on property taxes, reduced federal funding and aggressive lobbying by private developers find such incremental tax financing attractive. California has discontinued incremental tax financing, but Indiana and all other states, with the exceptions of Arizona and Wyoming, have legislation enabling TIFs.
TIFs are sometimes viewed more favorably than tax abatements because property owners actually pay taxes on increased property values. However, when the cost of basic government services increases, the result is a general revenue shortfall paid from sources outside the TIF district. Meanwhile, incremental tax revenue is allocated by commission members who are not necessarily elected representatives.
Forty percent of the city of South Bend’s geographical area is located within tax-increment financing districts. In addition, St. Joseph County, in which South Bend is located, has three TIF districts and is considering another two. It is conceivable that some TIFs, whether successful or otherwise, will never be dissolved and additional tax revenues never flow into general funds to provide essential services.
It is the case that incremental taxes in some TIF districts could be made available in the future for police, fire and other essential government operations. For example, existing funds derived from South Bend’s Erskine Village TIF are sufficient to retire all remaining debt and close 20 years ahead of schedule. However, the commission must notify the state if any funds are either used for early payment of bonded debt or dispersed outside the TIF into general local government revenue.