Bill would let developers or towns finance infrastructure with project-based tax-increment financing to spur housing

John Gray, Office of the Legislative Council, outlined a plan in S.127 to let towns or private sponsors finance infrastructure for a single housing project and be repaid from the property tax increment the project produces.

The proposal—described in the bill as a Community and Housing Infrastructure Program (CHIP)—would allow a municipality to create a narrowly defined housing development site, authorize infrastructure improvements tied to that site and retain a portion of the future property-tax increase (the increment) to repay financing for up to 20 years.

Why it matters: Supporters said CHIP could unlock projects that currently stall because small towns lack water, sewer or road extensions and cannot afford large up-front public investments. Critics warned the move risks diverting education fund revenues, could expose towns to new financial complexity and needs clearer safeguards and rulemaking before it is widely used.

Key features of the draft bill and debate

- Project focus: Unlike traditional TIF (tax-increment financing) districts that cover broad areas, CHIP would be project-based. A housing development site can be a single parcel and adjoining lots where the infrastructure is intended to stimulate housing construction. John Gray said the intent is to tie the increment to a specific project so there is no “background growth” issue typical of larger TIF districts.

- Who can finance: A “sponsor” may be the municipality, a private developer or a third-party lender. The sponsor finances the infrastructure and is repaid only from the tax increment generated by the housing development site. John Gray said the sponsor concept is a “really key distinctive piece.”

- Affordable-housing requirement: Applications to the Vermont Economic Progress Council (VEPC) must show the proposed housing development “includes” affordable housing. CHIP’s draft defines affordability as housing costs that do not exceed 30% of gross income for households at 50% of area median income for both owner and renter units; the bill does not set a required share of units that must be affordable, meaning one unit could meet the threshold as written.

- Tax-retention limits and timeline: The bill would permit retention of up to 80% of the education property-tax increment for up to 20 years and require municipalities to retain a substantial municipal share (draft language references retaining at least the same municipal effort as current law). The debt-incurrence (borrowing) period is proposed at 5 years, with VEPC allowed to extend that incurrence window by up to 3 years. Sponsors must segregate retained increments in a special account until financing is repaid.

- Public process and agreements: Municipalities must adopt a housing development plan, map the site, hold public hearings and execute a “housing infrastructure agreement” among municipality, sponsor and developer. The agreement must identify the sponsor and obligate tax increments only to repay financing and related costs; it also must provide for “performance assurances.” If municipal borrowing is used, public votes would be required for each issuance; if a private sponsor finances the project, the statute as drafted would not require a municipal bond vote but does require public notice and VEPC review.

Debate and concerns raised

- Auditor’s view: An auditor testifying to the committee warned the draft “is a direct transfer from taxpayers to the developer” and urged a means test and stronger documentation of need. The auditor also flagged uncertainty about whether municipally issued tax-exempt debt could be applied to privately owned property in every case and urged rulemaking and fiscal analysis before adoption.

- Risk and default: Committee members asked what happens if a private sponsor defaults after building public infrastructure. Proponents said the statute and the housing infrastructure agreement are designed to allocate risk and that tax-increment liens are senior; they also stressed the municipality would not be on the hook if the sponsor carries the debt. John Gray and witnesses emphasized the agreement can include protections and performance assurances and that lenders and municipalities could choose the financing route that best suits the project.

- Scope and standards: Several lawmakers said they want stronger guardrails so CHIP does not subsidize high-end housing or projects with minimal affordable units. Proponents argued that requiring at least some affordable housing and limiting the program to specific project sites, plus VEPC oversight and rulemaking, strikes a balance between enabling projects and protecting public interest.

Evidence of use and precedent

Proponents pointed to other states that allow project-level sponsor financing and to local examples where infrastructure costs (water, sewer, pump stations, roads) that run tens of thousands per unit make modest housing projects infeasible without a financing tool. David White, a housing and economic development consultant, said the project approach reduces administrative burdens for small towns and helps capture only the increment generated by that site rather than background grand-list growth.

What would happen next

Committee members and witnesses asked VEPC (referred to in testimony as Vepsy/VEPC) to write rules and for the fiscal office to produce more analysis on likely impacts to the education fund. Multiple speakers said they want stronger rulemaking and clearer performance assurances before the bill is finalized. The chair signaled willingness to keep working on the bill rather than rush a final passage.

Ending

Proponents described CHIP as a narrowly tailored tool to accelerate small and medium-sized housing development by making the necessary infrastructure financeable. Auditors and some legislators urged stronger safeguards, clearer affordability targets, and formal rulemaking authority to limit fiscal exposure to the education fund.