Tax Increment Financing: An Infrastructure Financing Solution
Congested freeways, abundant potholes, inadequate water supply -- Ohio’s cities continually face infrastructure problems. The only way to keep the cities running smoothly, aside from privatization, is to spend money on improvements. While many cities rely on general tax revenues to fund improvements, tax increment financing (TIF) is an increasingly viable solution to providing needed infrastructure.
Tax increment financing funds infrastructure improvements through a partnership between local government and a private developer or company. Expected growth in property tax revenues from a designated area are used to finance the bonds that pay for improvements in the TIF district.
Under tax increment financing, developers or companies continue to pay real estate taxes on the value of the property prior to the creation of the TIF district. As the improvements increase the value of their property, however, the new tax money is directed into a fund to pay for the improvements.
The TIF system relies on the appreciation in value of the land and buildings in a TIF district. If a development is profitable, then the costs will be paid for in the growth of property tax revenues. If the property fails to increase in value, the improvement costs fall back on the general taxpayer.
This risk makes some governments wary of employing TIFs. Such concern, while important, must be weighed against the alternative. Without the use of TIFs, cities must either use general tax revenues or have no improvements at all. In light of this, the decision to use tax increment financing for improvements is really the difference between the possibility of taxpayer responsibility and the assurance.
Tax increment financing has been used throughout Ohio to encourage private investment in certain areas. Two major developments in Columbus, Easton Town Center and Polaris Fashion Place, employed tax increment financing to help fund the necessary infrastructure improvements.
The case of the Fox Run Industrial Park in Defiance, Ohio, provides insight into another potentially important function of a TIF. When public infrastructure is needed to support economic development or private investment, TIF’s can ensure those benefiting from the improvements pay the tab.
Fox Run used a TIF to finance the expansion of public utilities and roads that made the industrial park viable. Fox Run soon became a regional high-tech manufacturing center when two successful local companies, Northwest Controls and Koester Metals, located within the park.
Unfortunately, a new infrastructure problem has emerged that threatens to close Fox Run. Another TIF could be the solution.
Currently, the Ohio Dept. of Transportation is converting US 24 from a two-lane state road to a limited access highway. ODOT officials have determined that insufficient traffic exists to justify the public expense of building an on/off ramp at the current intersection. Without access to the highway, however, the industrial park and surrounding businesses will likely relocate or close.
While it is not certain that ODOT will accept a tax-increment financing proposal, this may be the best option for saving the industrial park—let the current property owners shoulder the burden of paying for the new on-off ramp.
Fox Run’s problem is likely not unique. Dozens of communities across the state are faced with the challenge of providing core infrastructure to promote economic development while lacking the general funds to pay for it. A well-managed system of infrastructure is necessary to retain residents and businesses and to sustain future growth. Wherever possible, state and local officials may be able to utilize tax increment financing to help provide infrastructure improvements.
Jen Melby is a former research intern with The Buckeye Institute and Joshua C. Hall is a Senior Fellow at The Buckeye Institute.
