Tax Increment Financing

Northern cities are scrambling for ways to retain existing industries and to attract new ones that otherwise might locate in the Sunbelt. The core cities are searching for ways to make their old, built-up neighborhoods as attractive as suburban locations. Rural communities are trying to attract new industry (or just keep existing industries) which otherwise would locate in metropolitan areas. In this scramble to establish a "comparative advantage," even small differences between locations can take on great importance. The problem is that many of the incentives for attracting business and industry carry real costs, often fairly large ones, which cannot be financed from the already impoverished tax base. After all, if the cities had that kind of money they would not be competing so desperately.

The trick is to find ways to provide incentives for businesses without having to pay cash for them. Some incentives (like conditional use permits) carry no costs; others (like providing staff assistance to develop an environmental assessment) carry in-kind (non-cash) costs. Tax increment financing provides a means for providing incentives which carry real costs, but paying those costs from the increased tax revenues generated by the project itself. In other words, it is a means of borrowing against the speculative gain a project should bring.

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© 1996 A.J.Filipovitch
Revised 11 March 2005