House Research explains mechanics, limits and 'but-for' test for tax increment financing (TIF)

Justin Cope, legislative analyst, House Research, briefed the House Tax Committee on tax increment financing (TIF), its mechanics and statutory limits.

Cope said local governments adopt a TIF plan and request county certification of the district’s original net tax capacity and local tax rate. Each year the auditor subtracts the original net tax capacity from current net tax capacity in the district to calculate captured net tax capacity; increment delivered to the local unit equals the captured net tax capacity multiplied by the lesser of the current local tax rate or the original local tax rate. Cope walked the committee through illustrative tables showing how, without TIF, taxing units see proportional revenue increases as property values rise, and how, with TIF, most new incremental revenue can be captured by the city or TIF‑sponsoring unit while schools, counties and special districts continue to receive the original revenue stream.

Cope described statutory restrictions: jurisdictions must adopt findings that the district passes the “but‑for” test (i.e., the development would not occur but for the use of TIF). Most TIF types also require findings that statutory criteria are met—blight findings for redevelopment districts, for example. Cope emphasized increment is earmarked by the TIF Act for project uses tied to the district’s purpose (housing increment for housing districts, redevelopment uses for redevelopment districts) and generally cannot be spent for general government purposes; most increment must be spent within the TIF district.

Chair Davids and members discussed the tendency for cities to propose creative uses and cautioned to keep projects within statutory bounds. Cope concluded by noting the TIF presentation closed the session’s planned briefing topics.