GAFL 6510 · Public & Nonprofit Finance

Tax Increment Financing

How cities borrow against the future — and what happens when the future doesn’t cooperate.

90-minute session · Fels Institute of Government

TIF

What we’re covering today

Part 1 The basic idea — what is a tax increment? 20 min

Part 2 How TIF financing works in practice 20 min

Part 3 When TIF works — a success story 15 min

Part 4 When TIF fails — and why 20 min

Part 5 TIF as policy — tradeoffs & reform 15 min

Before we begin

TIF sounds like free money — the city pays for development using money that didn’t exist before. But is it really free? Who bears the risk? And who decides?

Part 1 of 5

The basic idea: What is a tax increment?

Before we get to financing, we need to understand the tax system TIF is built on.

Start here: how property taxes work

Every property in a jurisdiction has an assessed value. The government applies a tax rate to that value and collects revenue.

Tax owed = Assessed Value × Tax Rate (mills)

Example: $200,000 home × 30 mills (0.030) = $6,000/year

Who collects it

City, county, and school district each levy their own rate on the same assessed value. Most jurisdictions have multiple overlapping taxing bodies.

What it pays for

Schools, police, fire, parks, roads — the core services of local government that cannot be funded with federal or state transfers alone.

When a property’s assessed value rises, it generates more tax revenue without a rate increase. That growth — the difference between the old revenue and the new — is the increment.

What exactly is the “increment”?

The increment is the increase in property tax revenue above a frozen baseline — the extra money generated when development raises assessed values in a district.

Base value (frozen)

Revenue continues to flow to schools, city, and county at the original assessed value — as if development never happened.

→ taxing districts keep this

Increment (new growth)

Additional revenue above the base, generated by rising assessed values, is captured by the TIF authority to service bond debt.

→ TIF authority captures this

The frozen base is what the neighborhood was worth before. The increment is what it’s worth because of the investment. TIF redirects that new value toward paying off the investment that created it.

Simulation: the increment over time

The chart shows annual tax revenue in dollars — what each party actually collects each year. Move any slider and the chart updates immediately.

Simulation 1 — Annual Tax Revenue by Party

Base assessed value $5M

Annual growth rate 4%

Tax rate (mills) 30 mills

—

Year 10 Increment Value

—

Total TIF Revenue (Yrs 1–10)

—

Taxing District Frozen Share/yr

Base assessment

TIF increment (captured)

Districts recapture

■ Blue area — the frozen base

This is the district’s assessed value on the day the TIF was created. It never changes on this chart. Schools, the city, and the county keep collecting taxes on this amount every single year — the TIF does not touch it.

■ Green area — the increment (TIF captures this)

As property values grow above the frozen base, the extra tax revenue is the increment. The TIF authority captures it to pay off the bonds. Taxing districts receive none of this money until the TIF expires at year 10.

■ Purple area — districts recapture

Once the TIF expires, the full assessed value — base plus all growth — flows to every taxing district. The purple area is what schools and the city were waiting for. A steeper growth rate makes this payoff much larger.

▴ What the sliders do

Base value shifts the whole chart up — a larger district generates more revenue even at the same rate. Growth rate steepens the slope; higher growth means a larger green increment and a bigger purple payoff for schools. Tax rate (mills) scales every bar proportionally — doubling the rate doubles the revenue for all three parties simultaneously.

Part 2 of 5

How TIF financing works in practice

The increment is the revenue stream. Financing is how you borrow against it before the money exists.

The six-step TIF process

1

Designate the district — City declares TIF district; typically requires finding of “blight” or “but for”

2

Freeze the base — Assessed value at designation becomes frozen baseline; taxing districts keep revenue on base only

3

Issue bonds — Redevelopment authority borrows money, pledging future increment as repayment

4

Fund the project — Bond proceeds pay for infrastructure, cleanup, or developer subsidies

5

Capture the increment — As values rise, increment services bond debt

6

Expiration & release — TIF ends; full assessed value flows to all taxing districts

The “but for” test — the hinge of the whole argument

“But for” requirement

Development would NOT occur without the TIF subsidy.

When it works

Contaminated brownfield. No private capital. TIF covers cleanup → development → increment pays bonds → schools get full value at expiration.

When it doesn’t

Hot downtown neighborhood. Developer would have built anyway. TIF created, increment captured — schools lose a decade of revenue.

The hard truth

The “but for” assumption is almost impossible to verify in advance. Developers have every incentive to argue they need it. This information asymmetry is where TIF breaks down.

Simulation: debt service risk

Simulation 2 — Debt Service Coverage

Bond amount $4M

Bond interest rate 5%

Projected increment growth 6%

Actual increment growth 2%

—

Annual Debt Service

—

Cumulative Shortfall (10 yr)

—

First Year Increment Covers Debt

$300k

Starting Increment (Year 1) — fixed assumption

Projected increment

Actual increment

Shortfall

Debt service

■ Gray bars — projected increment

This is what the city assumed when it issued the bonds — a steady growth path for property tax revenue above the frozen base. The bond terms were set based on this projection. If actual growth matches it, there is no problem.

■ Green bars — actual increment

This is how much increment the district actually generates each year. When it falls below the debt service line, the TIF cannot cover its own bond payments. The gap between projected and actual is where TIF deals go wrong — and it is usually not discovered until the bonds are already issued.

■ Coral bars & line — shortfall & debt service

The flat coral line is the annual debt service — the fixed amount the city must pay every year to service the bond, regardless of how much increment arrives. The coral bars show the shortfall: how much of that payment is not covered by the actual increment. Someone still has to pay — usually the general fund.

▴ What the controls do

Bond amount and interest rate together set the flat debt service line — a bigger or costlier bond raises the hurdle every bar must clear. Projected growth shows what was promised; actual growth shows what happens. The scenario buttons jump to three canonical cases: Optimistic (growth nearly meets projections), Realistic (a modest gap), and Stressed (actual growth far below projections, sustained shortfall).

Part 3 of 5

When TIF works

A successful TIF genuinely adds development that would not have occurred — and its increment covers the bond.

Case study: Millennium Park, Chicago

Grant Park rail yard prior to redevelopment

Millennium Park, City of Chicago

Chicago, Illinois · 1999–2024 Success

A contaminated rail yard becomes a $2.3 billion civic asset

The area north of the Loop was abandoned rail infrastructure on public land. No private developer was touching it. The city used TIF to fund infrastructure that made the site developable, then leveraged private philanthropy for the park itself. Surrounding property values exploded.

✓

Genuine “but for”

✓

Increment materialized

✓

Public asset created

$270M

TIF financing

$2.3B

Estimated economic impact

Why it worked

The “but for” was real, the project was a public good, and the increment was genuine new growth — not diverted appreciation.

Part 4 of 5

When TIF fails — and why

The same tool that revitalizes a brownfield can become a slush fund, a school defunding mechanism, or a debt trap.

Chicago: TIF as a shadow budget

Source: TIF Illumination Project, 2011

136

Active districts (peak)

⅓

Of city land area in TIFs

$841M

Annual TIF capture (2018)

“But for” ignored

Districts created in prosperous neighborhoods; increment was diverted appreciation, not new growth.

Schools starved

CPS receives ~55% of property tax; every TIF dollar was effectively taken from schools. CTU called it a “$1 billion slush fund.”

Opacity & patronage

Spending controlled by mayor’s office, limited council oversight. No line item in the city budget.

“For too long, the City’s TIF spending decisions have occurred in the shadows.” — Mayor Lori Lightfoot, 2019

Detroit: when the increment never materializes

Source: Detroit Blight Removal Task Force / New York Times, 2014

Detroit illustrates a different failure mode: TIF districts in deeply distressed areas where population loss meant the increment simply never grew.

The structural problem

Property values were falling, not rising. There was no increment — only base value declining year over year.

Debt without revenue

Bonds came due with no increment to service them. Detroit filed for Chapter 9 bankruptcy in 2013 — the largest municipal bankruptcy in U.S. history.

TIF is procyclical in distressed markets. It works best when development momentum already exists. When used as a substitute for economic fundamentals that aren’t there, the debt comes due and the city pays.

Source: Macerich/Fashion District Philadelphia developer rendering, c. 2015

Philadelphia · Market East / Fashion District · 2015 Mixed

The city controller challenged the “but for” before the ink dried

$55M TIF proposed for The Gallery renovation. Philadelphia’s own Controller questioned whether Macerich — a major S&P 500 REIT — actually needed a public subsidy in an improving retail market. The project proceeded. The “but for” was never independently verified.

Why TIF fails: the structural reasons

Optimistic projections

Lincoln Institute research: most TIFs fail to meet their increment projections. The numbers that justify creation rarely materialize in full.

Displacement, not creation

TIF often moves development from one neighborhood to another rather than creating net new economic activity in the city.

Extended terms

Standard 20–35 year terms, with extensions common. Schools lose revenue for a generation or more.

No seat at the table

School districts have no formal vote on TIF creation — yet they bear the largest revenue cost as the primary property tax recipient.

Opacity

TIF spending occurs outside normal budget processes, making accountability and comparison nearly impossible.

“In most cases, TIF has not accomplished the goal of promoting economic development.” — David Merriman, Lincoln Institute (2018)

Part 5 of 5

TIF as policy: tradeoffs & reform

TIF is authorized in 49 states. It’s not going away. The question is how to use it responsibly.

The honest balance sheet

Arguments for TIF

Catalyzes genuinely distressed areas that private capital ignores
Revenue-neutral in theory — only new growth is captured
Aligns incentives: the city profits only if development succeeds
Flexible tool adaptable to local needs and market conditions
Off-balance-sheet financing that doesn’t require a referendum

Arguments against TIF

Diverts school district revenue for 20–35 years
“But for” is fundamentally unverifiable — information asymmetry favors developers
Often used in prosperous areas that didn’t need a subsidy
Optimistic projections create long-term debt liability
Opaque — outside normal democratic budget oversight
Shifts development, doesn’t create it

The practitioner’s lens

TIF is a tool. Your job as a public administrator is to ask whether this specific use meets the test — right problem, right safeguards, right transparency.

A five-point checklist for responsible TIF use

1

Rigorous “but for” analysis — Independent third-party review, not the developer’s consultant

2

Conservative increment projections — Stress-test downside; can debt service be covered at 50% of projected increment?

3

Affected taxing bodies must have a voice — School districts need formal input before TIF creation

4

Annual public reporting — Actual vs. projected increment, debt service coverage, projects funded — accessible, not buried in a CAFR

5

Sunset discipline — Extensions require a new public finding; no automatic renewals

The bottom line

TIF is a bet. The city bets that development will happen, values will rise, and increment will cover the debt. Sometimes it pays off. Often it doesn’t.

When it works: contaminated land becomes a park, a brownfield becomes a neighborhood, a genuine “but for” triggers real new growth.

When it fails: schools lose a generation of revenue, bonds come due without increment to cover them, and taxpayers pick up the tab.

“Your job isn’t to be for or against TIF. It’s to ask the right questions before the city bets with public money.”

END