Committee reviews project‑based tax increment financing proposal to spur housing infrastructure

Legislative Council staff reviewed a draft of S.127 that would create a project‑based tax increment financing (TIF) program, dubbed the Community and Housing Infrastructure Program, to help pay for infrastructure aimed at producing housing.

The briefing, led by John Grayoff and Cameron Wood of the Legislative Council, described a program that differs from existing TIF districts by tying increment capture to a single, narrowly defined “housing development site” and to a specific housing development rather than to a broad geographical district. Under the draft, a municipality, a developer, or a third‑party sponsor that meets state lending standards could be the sponsor that backs project financing.

Why it matters: Backers say the approach is intended to unlock financing for infrastructure investments — utilities, broadband, transportation, remediation, parking and related site work — that would stimulate construction of primary residences. Committee members and staff repeatedly raised questions about who can sponsor debt, the timeline for incurring indebtedness, and the allocation and limits on captured taxes.

Key features discussed

- Project scope and geography: The program would be project‑based. A “housing development site” is the parcel or parcels encompassing the proposed housing development and immediately contiguous parcels; it is narrower than a typical TIF district. The housing development must include construction of buildings that contain housing (the draft’s definition uses the word “vertical construction”).

- Sponsors and financing: Unlike standard municipal TIF districts, the draft contemplates three possible sponsors: the municipality, a private developer, or an independent state‑level sponsor that meets lending standards. If a non‑municipal sponsor finances the project, the legislative briefing noted, the public vote requirements that apply when a municipality issues debt may not be triggered.

- Uses of increment and types of improvements: Tax increments could be used to pay debt service, interest, and related costs for infrastructure improvements. The definition of “improvements” in the draft covers utilities, broadband/digital infrastructure, transportation, public recreation, parking, public facilities and amenities, land acquisition, demolition, site preparation and flood remediation — a list that explicitly adds digital infrastructure and flood remediation relative to existing TIF language.

- Early years and debt‑service support: The draft permits use of financing to cover debt service interest payments for up to four years from the date debt is first incurred (staff contrasted that with the two‑year provision that appears in existing TIF law). That provision is intended to help projects through early years when incremental revenue may be low.

- Timing windows: A municipality may incur indebtedness for approved projects during a five‑year debt incurrence period measured from the April 1 that follows state approval; a one‑time extension of up to three years is allowed, creating a possible eight‑year window in which to incur eligible debt.

- Tax allocation and caps: The draft would allow retention of up to 80% of the statewide education property tax increment associated with the housing development site (higher than the 70% cap used in some existing TIFs) for up to 20 years beginning the first year in which debt is incurred. The municipality must make available its municipal tax increment (the draft requires the municipality’s full municipal increment be applied as pledged for the project). Committee staff noted municipal increments are already treated differently from statewide education increments in existing statute.

- Application and oversight: Municipalities would create a housing infrastructure project and housing development site, hold public hearings, prepare a housing infrastructure agreement (governing municipality, developer and sponsor), and then apply to the Vermont Economic Progress Council (VEPC) for authorization to use the statewide education tax increment. VEPC would review applications against process, project and location criteria and may approve applications submitted on or before Dec. 31, 2035 (the draft contains a 10‑year sunset on new applications).

Questions and concerns raised in the briefing

- Sponsor liability and bond mechanics: Committee members asked how allowing a non‑municipal sponsor (for example a developer) to be the financial obligor would work in practice, given the way municipal bonds are currently issued through the state bond bank and the role of municipal assurances. Staff recommended the committee consult bond‑bank staff and the state’s bond bank rules.

- Scope of “housing development”: Several members noted the draft’s requirement that the housing development include vertical construction could exclude projects that create subsidized lots for owner‑built homes, tiny houses, or subdivision‑only approaches that municipalities might want to encourage.

- Affordability criterion removed: Earlier drafts had included an affordability requirement (a share of housing dedicated to lower or moderate income households); that language was struck from the current draft because staff and sponsors worried many projects would not pencil out with a strict affordability threshold.

- Increment capture and unrelated appreciation: Members queried whether, and how, increment captured many years after construction could reflect factors unrelated to the project (for example, general market appreciation) and whether multiple bond issuances across time could capture value gains not caused by the project.

- Public vote and transparency: Staff noted that if the municipality itself is the bond issuer, voters must approve indebtedness; if the sponsor is not the municipality, the process could proceed without a binding public vote though public hearings and reporting requirements remain. Members asked for clearer guardrails and public‑notice provisions in the housing infrastructure agreement and application process.

Next steps noted by staff

Legislative Council staff said they will provide additional drafting options and answers to technical questions raised about bond issuance mechanics, the treatment of municipal versus state bond obligations, and the program’s interaction with existing bond‑bank practice and assessor procedures. Staff also flagged reporting and auditing requirements in the draft that would require annual project reporting to VEPC, the Department of Taxes and the legislature if the program is adopted.

Ending

Committee members asked staff to return with more detail on sponsor liability, bond bank procedures, and possible adjustments to definitions (including whether the housing requirement should allow non‑vertical development). Staff said the draft is intentionally narrower and project‑focused and that more technical follow‑up is planned.