How Tax Increment Financing Can Spur Downtown Revitalization

May 5, 2017

Tax Increment Financing – also known as TIF – has been used to help pay for public infrastructure projects across Vermont, from the Burlington Waterfront to Newport’s industrial park. But how, exactly, does TIF work? And if it’s so successful, why does the state limit its use?

Some towns have TIF districts, other towns want them, and the state doesn’t want to allow too many of them.

The Legislature capped the number of TIF districts allowed in Vermont, and that cap has been met. Raising the cap is one of the discussions that’s going down to the wire this legislative session.

Real estate consultant David White is a big believer in the power of TIF as a downtown revitalization tool. He’s been hired by a group of seven cities and towns to lobby the Legislature to raise the cap so new communities can utilize TIF. So I asked him, "What, exactly, is TIF?"

"Tax Increment Financing, also known as TIF, basically is a means by which a municipality can invest in public infrastructure, without tapping into current, existing tax dollars," White explains.

To make that happen, a city or town designates a specific area to be a TIF district. White says it’s typically a subsection of the downtown.

"You identify an area where you think there’s potential for private investment to occur, but where there’s need for new public infrastructure," he says. "And without that public infrastructure, the private investment’s not likely to come."

Montpelier is one of the communities that White is representing, along with Bennington, Brattleboro, Newport, Rutland, St. Johnsbury and Springfield.

Mike Miller, Montpelier’s planning director, says TIF is a tool the city would love to have available, but not for any one specific project.

"We don’t know exactly where we’re going to use it yet, but we’ve seen how powerful it is," he says. "We’ve seen it in Barre and we’ve seen it in St. Albans and a number of other communities. And it’s such a strong tool. And we’d really just like to have the access to it so we can try some new projects."

A crowd gathered on Main Street in St. Albans to celebrate completion of a streetscape project in September 2013. The project was funded using tax increment financing.
Credit Annie Russell / VPR

David White worked with St. Albans on its downtown revitalization. There, TIF financing was used to clean up brownfield contamination, redesign the streetscape and build a public parking garage.

"TIF was critical in St. Albans," says White. "There’s no question that, but for TIF, we would not have the results that we’ve had. And if you look at it, it’s extraordinary. In four years we have added over 40 percent to the grand list within their TIF district ... That’s over $40 million of new grand list value in downtown St. Albans."

But how does it work?

White explains, "What happens when you establish a TIF district is that you look at what the existing taxable value – the existing grand list value – is in the TIF district on the day you establish it. And that value gets frozen. All of the taxes generated by that value continue to go where they’ve always gone."

That means, no matter what happens to the property values, the same property taxes are paid to the municipality and into the state education tax fund.

"But for investment of the public infrastructure the private investment wouldn't have occurred, and thus you wouldn't have those tax dollars." — David White

Typically, the city or town will take out a bond to pay for public improvements to the property. And White says those improvements will entice private investors to the TIF district. And that will drive up the property values.

"Whatever that increase in value from the private investment, you take no more than 75 percent of the new taxes – generated by only the new value – and you use that first to pay the debt service for the cost of the public improvements that occurred," says White.

So the taxes generated by the incremental property value increases are used to pay off the public debt. And those are the "increments" in tax increment financing.

And that also explains why the state limits the use of TIF. It taps into taxes that would otherwise be flowing into the state education coffers.

But White argues, without TIF, the private investments that boost property values wouldn’t happen in the first place.

"But for investment of the public infrastructure," he says, "the private investment wouldn’t have occurred, and thus you wouldn’t have those tax dollars."

And that’s one reason White says TIF is a powerful tool for revitalizing Vermont’s downtowns.